Utilities Soaring Prices -- and the Consequences
High energy prices are creating a heavy energy burden for U.S. households. And with winter right around the corner, utilities and the regulators who oversee them are bracing for lots of second-guessing about whether they've done enough to protect the public against price increases.
Current prices are "very scary," says Jeanne Fox, president of the New Jersey Board of Public Utilities.
THE JOURNAL REPORT
See the full Trends report.With deregulation of the electricity and natural-gas industries nearing its third decade, officials have fewer tools for controlling the commodity cost increases. State utility commissions still regulate retail markets, but the Federal Energy Regulatory Commission has jurisdiction over wholesale natural-gas and electricity markets. And increases in wholesale prices can be passed on to consumers without the states having much ability to stop it.
Many energy companies that were expected to report strong third-quarter earnings actually showed they are having as much difficulty as retail consumers managing the risks of volatile prices. Some utilities didn't have enough electricity under contract or available from their own generating plants to meet their consumers' needs and had to go onto the open market to buy extra electricity at extremely high prices. Others got slapped with unexpectedly high fuel bills to run their power plants, or made mistakes trying to hedge against rising prices by entering special contracts. Such hiccups are expected to continue, with the added costs eventually working their way to the consumer.
"I'm very concerned about the impact of high energy prices on the economy," says Joel Staff, chief executive of Houston-based Reliant Energy Inc., a power generator that reported problems with its hedging program. "I don't think it's something the economy can sustain for very long."
Among the trends:
1 > HOT, HOT GAS PRICES
Surging natural-gas prices are expected to cost the average U.S. household 48% more this winter -- $350 more for heating homes, water and food, according to the U.S. Energy Information Administration. Gas costs have doubled over the past year to about $13 per million BTUs.
Pricey gas also drives up the cost of the roughly 20% of the nation's supply of electricity that's made by burning natural gas. High gas costs hurt gas utilities as well, since consumers likely will cut back on usage, reducing revenues.
Utilities this winter are expected to agitate at state utility commissions for new rate structures that change the way they're compensated. Instead of volume-based fees that produce more dollars the more gas is consumed, utilities want to collect a fee of several dollars a month for each meter served. A shift to flat fees would make it more likely gas companies would support conservation programs instead of fearing them.
2 > HIGH VOLTAGE
In some states, periods of frozen rates that accompanied a move to deregulated markets are ending soon. Utilities are out in the market trying to buy electricity for coming years, and the high prices they're being offered, as a result of higher natural-gas prices, are causing customers heartburn.
Commonwealth Edison, a unit of Chicago-based Exelon Corp., bought electricity for its Chicago-area customers under a 10-year, fixed-price contract that ends late next year. ComEd has proposed to buy electricity through a wholesale auction after that. But many elected officials are opposed, fearing it would mean a windfall profit to ComEd's sister company, which owns a fleet of nuclear-power plants and would bid into that auction. That would translate into high prices for ComEd customers and big Exelon profits.
"The underlying question is this: Was ComEd's generation truly deregulated back in 1997?" asks John Rowe, chairman and CEO of Exelon. He thinks the state needs to hold to its end of the bargain and let ComEd buy power at market prices from all suppliers, including its unregulated affiliate, Exelon Generation.
Many similar dust-ups are likely as regulators try to undo aspects of deregulation deals that now look onerous to consumers. This could erode investor confidence and lead to lawsuits.
3 > SOME RELIEF
Funding for a federal program to help low-income people pay their utility and heating bills has been stuck at about $1.8 billion for years. Now, with energy prices high, there's momentum in Congress to raise the funding so more people can be helped. Nearly half the Senate is calling for an extra $1.28 billion in funding for the federal Low Income Home Energy Assistance Program.
Separately, hundreds of so-called "fuel funds" that distribute money from the federal assistance program and state programs are working harder this year to get direct donations from the public as well. The funds hope the federal government will increase its funding. They're also getting more donations from utilities, since shutoffs generate bad publicity and increase uncollectible debt.
4 > RENEWABLES FLOURISH
High natural-gas prices are proving good for alternative fuels, especially the wind industry. In some places like Colorado and parts of Texas, it's now cheaper for consumers to sign up for green energy programs giving them electricity from wind turbines than it is to buy electricity from gas-fired and coal-fired units.
"Some things are starting to line up that put us on the verge of some exciting times," says Douglas Faulkner, assistant U.S. energy secretary.
The price-competitiveness of renewable power will put more momentum behind state laws that mandate a certain proportion of a state's energy supply must come from non-fossil-fuel sources.
For the first time in two decades, big California utilities also are getting behind the development of utility-scale solar installations. Two are proposed for Southern California. If the plan works, the solar dish technology probably will be picked up elsewhere in the Southwest.
5 > GETTING TOGETHER
Now that the recent energy bill rescinded a Depression-era law that set restrictions on utility mergers, it is easier than at any time since the 1920s to put together big utility companies.
Most industry watchers expect more mergers, though state utility commissions still can prevent a transaction if they decide it's not in the public interest. So far, commissions have been cool to proposals involving private investment from groups such as Texas Pacific Group and Kohlberg Kravis Roberts & Co. But commissions are thought to be amenable to interests that pledge to buy and hold.
The biggest combinations pending are between Exelon and Public Service Enterprise Group Inc. of Newark, N.J.; Duke Energy Corp. of Charlotte, N.C., and Cinergy Corp., of Cincinnati; and PacifiCorp, the Portland, Ore., unit of ScottishPower PLC, and Des Moines, Iowa-based MidAmerican Energy Holdings Inc., itself a unit of Berkshire Hathaway Inc., of Omaha, Neb.
Many industry advisers believe consolidation is good in a period of rising commodity prices. "State regulators should be fully supporting consolidation, even requiring it, as a way to reduce rate increases," through the sharing of merger savings, says George Bilicic, an investment banker for Lazard Freres & Co. State officials often fear consolidation will mean job cuts, less reliability and erosion in local accountability.
6 > FOXHOLE CONSERVATIONISTS
High energy prices can make a conservationist out of anyone. Customer-funded rebate programs will offer more money to encourage purchases of energy-efficient appliances, insulation, thermal-paned windows and the like. Many new gizmos will be road-tested, too.
Utilities in California are considering installing millions of advanced meters that would track household energy usage throughout the day, making variable rates possible that would reward conservation when it was especially needed, like on hot summer days.
7 > PAY MORE LATER?
Regulators and utilities may work out deals where some utility costs get deferred for collection in future years. Used wisely, this can be a good thing to shield consumers from rising costs.
But in some cases, the companies could run up big tabs that are hidden from customers. It might amount to a "have-your-cake-and-eat-it-too" scenario for utilities, in which customers continue to consume an expensive commodity because they don't see the higher price in their current bills, and utilities later would be reimbursed the full cost, with interest.
8 > TRANSMISSION CRITICAL
Most experts agree that more transmission lines are needed around the nation to let electricity move more freely. In general, the larger the effective market area, the lower the cost to consumers.
The most glaring example of poor interstate connectedness is Texas, where the state's biggest utilities formed their own mini-grid decades ago. The effect today is that it keeps cheaper power outside Texas from coming in. The state historically has favored this setup because it keeps retail and wholesale electricity markets under state control. But the status quo could come under attack if Texans get tired of paying higher prices than they see friends and relatives paying outside the state.
9 > LOSING POWER
In many places, independent generators still are on the ropes, burdened with heavy debt loads. Few new plants are being built because generators say they can't get financing for projects based on speculative needs -- and many experts fear shortages of electricity if that doesn't change soon. California experienced blackouts this summer, and other states could follow as demand rises.
One proposed solution is for power buyers to make "capacity payments" that compensate generators for having plants standing by. Generators could use the extra funds to build new plants, even if all the capacity weren't immediately needed.
This is already being done in New York, and capacity markets are being considered in New England, the Mid-Atlantic region and California. But opponents -- who far outnumber supporters -- say the payments would cost billions of dollars and wouldn't guarantee that any new plants got built.
10 > LINES THAT TALK
Modern electronics are reshaping the industry. Advanced transmission systems employ sensors that give grid operators a lot more information about what's happening on the network -- and give them more ability to take corrective action when things start going wrong.
New kinds of power lines also enable utilities to move more electricity. Composite Technology Corp., Irvine, Calif., has developed a cable with a composite core that can move far more electricity than conventional cable of the same diameter. That means it can be strung on existing towers, increasing the throughput.
Some technical innovations could lead to whole new businesses for utilities, such as broadband over power lines, or BPL, in which high-voltage power lines carry voice communications and Internet services. A home served by BPL lets consumers get instant Internet access from any wall socket. But the potential goes way beyond that simple use: Any piece of equipment that plugs into an electric outlet could become a two-way communications device. Imagine Coke vending machines that automatically send alerts to the local distributor when they're running low on cans.
"There are huge ramifications," says Ray Blair, a vice president at International Business Machines Corp. who's working on a broadband initiative. "Every plug in a building could talk to every plug in any other building." But for the technology to take off, he says, regulators "have to get behind it."
So far, Texas and California have done the most to remove regulatory barriers to BPL.
