Income Guarantees Approved for FirstEnergy and AEP – Customers to Pay More for Power

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In December, EPCO took a stand against the power purchase agreements that FirstEnergy and AEP presented before the Public Utilities Commission of Ohio (PUCO). Over the last several months additional hearings were held, and experts testified for each side, regarding the viability and potential consumer costs of the proposals. On March 31, the PUCO issued their ruling in favor of the power purchase agreements for both FirstEnergy and AEP. The complete order with opinions from the PUCO can be read here.

The PUCO has given FirstEnergy and AEP approval for an eight year rate plan. This plan will go into effect over the summer, following a set of auctions on pricing later this spring. Simply put, the customers in these territories will be subsidizing FirstEnergy and AEP to ensure they turn a profit through 2024. FirstEnergy has argued that over the eight year term, the rates consumers pay will be lower in aggregate (projected at $256 million), following an initial increase in the first couple years.

However, many in opposition including the Ohio Consumers Council believe this deal will cost consumers at least $3 billion over the eight year term. Some estimates have even put the cost to consumers at nearly $6 billion. There is clearly a stark contrast regarding the potential cost to consumers. This divide is due in large part to differing assumptions regarding where the natural gas market, and state of renewable energy, will be in the future.

To understand this argument better, let’s take a brief step back to evaluate how we got here. Historically, most electricity in Ohio has been produced from coal fired plants. But over the past five years, half the large coal fired plants in the state have been retired.  During that time, generation from coal dropped from 82 percent throughout Ohio to 59 percent.

There are two significant reasons why this shift has occurred. First, the influx of natural gas in the market has provided a less expensive and cleaner alternative to coal fired generation. In just the past couple of years, the price for natural gas is down roughly 60 percent and trading below $2 on the stock exchange. The second issue is the increased cost of compliance due to additional federal and state regulations levied on coal and nuclear plants.

The utilities were able to successfully argue to the PUCO that their coal fired and nuclear plants are unable to compete in this changing market. As more natural gas fired plants come online, and additional regulations are issued, it has become exceedingly difficult for FirstEnergy and AEP to compete. In order to ensure that their plants stay active and produce the necessary power for the regional grid, they required a subsidy from the consumer in the form of an income guarantee.

The utilities have argued that natural gas pricing is going to dramatically increase to bolster their claims that rates will precipitously rise in the future. According to their logic, once rates increase their plants become more competitive. The utilities added that the need for the income guarantee is short term until the market turns in their favor.

The only problem with this argument is there is nothing to support the utilities claims. To the contrary, a great deal of research, data, and market analysis has shown the opposite trends have, and will continue, to occur. The current freeze on the Ohio renewable energy portfolio is likely to expire by the end of the year. Even Governor Kasich has come out strongly opposed to any continued freeze.  Once this current legislation expires, private investment in renewable energy will continue at an increasing pace. Furthermore, many of the projections that FirstEnergy has cited have already been proven wildly incorrect. Natural gas prices continue to plummet to historic lows and show absolutely no signs of significant increase over time.

Groups such as the Ohio Consumers Council have vowed to challenge these rulings at the state level, while others seek appeals through the Federal Energy Regulatory Commission (FERC). Despite claims to the contrary, it is unlikely to change the outcome of the PUCO ruling. At this time, EPCO is warning clients that rates will be increasing in the near future. The PUCO ruling will result an increased cost of doing business that ultimately will adversely affect business growth and development in Ohio. As such, the best course of action to take is reducing the amount of electric consumption at your facility through a comprehensive set of energy efficiency measures. Be sure to consult your energy advisor on what your next steps should be.

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4 Proven Steps to Get the Best Electric Utility Rate

electric-utility-dealOhio’s SB3 deregulated the electric market in 1999, and by 2001, commercial and industrial businesses were able to select their own electric generation suppliers. However, by 2008, 90% of the market still acquired their generation from their utility directly. The intent behind deregulation was to increase competition through “shopping” and ultimately drive down pricing for the consumer.

Today, many businesses are seeing the benefit of shopping beyond their utility to service their electric generation. Despite this, most clients I work with haven’t fully taken advantage of the increased competitive landscape. In my experience, mid-market businesses shop similarly (if not identically) to the small commercial and residential markets. Mid-market businesses typically field offers from brokers and suppliers; evaluate a fixed rate option versus a variable rate option; and consider one, two or three year terms.

This method of shopping will certainly get a deal done, but leaves substantial savings on the table for larger energy intensive businesses. Let’s evaluate this concept further using two examples.

Example 1:  A local hardware store is in need of a new electric generation contract. They use 28,000 kWh annually and approach a broker about a potential deal. The broker fields a few offers in the market and returns with the best option. A two-year fixed rate deal at 6.85 cents per kWh. Over the course of the agreement, our hardware store owner will pay a total of $3,836 for their electric generation.

Perhaps if they had used an energy advisor, they may have saved 2/10 of a penny per kWh. That a savings of about $112 or nearly $5 per month. In truth, that’s probably not enough savings for our hardware store owner to fret over. Shopping on their own would likely work just as effectively. But for larger energy intensive businesses, the difference of a few tenths of a penny could be substantial.

Example 2: A mid-sized manufacturer that consumes 6 million kWh annually is looking for a new electric contract. The facility director for the plant approaches a broker and inquiries about what electric contract would be best for the business. The broker then evaluates a few options and returns with the best deal. As a larger user, the manufacturer has increased purchasing power. As such, they receive a more favorable rate of 6.55 cents per kWh for a two-year fixed rate contract. Over the term of the agreement, our manufacturer will pay $786,000.

However, had they utilized a knowledgeable energy advisor, they could conceivably have secured a deal that was 3/10 of a penny less per kWh. Over the course of a two-year agreement, that amounts to a savings of $36,000 or $1,500 per month. Almost all my clients would consider that a savings worth pursuing.

The logical question our manufacturer would now ask is how they can take advantage of that better pricing. Below are some helpful tips to get the best deal possible for your business’ unique energy portfolio.

  1. Explore shopping through an auction platform. Suppliers will offer only one price while brokers may provide two or three. On an auction platform, you have access to every potential supplier in the market bidding for your business.
  2. Most businesses choose between a fixed rate and variable rate option. Consider a blend of both, where you capitalize on rates when they are low while insulating yourself against potential market volatility.
  3. Do not wait to shop until a month or two prior to your existing contract expiration. The closer to expiration, the higher the pricing will be. Begin exploring options at least six month beforehand.
  4. Try to buy when pricing trends lower during the winter months. As demand declines during the cold season, so too does the pricing in the market.

Be sure to work with your energy advisor to understand the complexities of shopping for an electric contract and securing the best option for you and your business.

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