The State of Electricity Competition for Ohio Businesses

On Wednesday, September 28^th, we attended and participated in the 6^th Annual Northern Ohio Energy Management Conference in Akron.  The luncheon keynote address was given by Tony Banks, Vice President Competitive Market Policies for FirstEnergy Solutions.  He commented that:

• The deregulation of electric utilities that began in 1999 in Ohio has resulted in competition that is working.
  • About 1.6 million residential and business customers are buying generation from competitive suppliers and finding cost
    savings.
  • FirstEnergy customers have saved over $100 million annually.
• AEP-Ohio’s current rate proposal includes hurdles to generation shopping that, if approved by the PUCO, would limit competition for their customers

John Funk had an interesting article in Thursday’s Plain Dealer about Tony Bank’s speech: FirstEnergy exec says utilties’ competition has lowered costs.  Mr. Funk states that “…the 70 percent who are taking advantage of competition to get a lower price are buying from FirstEnergy Solutions.  They get a 6 percent discount on the price of power charged by CEI, Ohio Edison and Toledo Edison”.  However, our experience has been better:

• We have helped our commercial and industrial clients contract about 180 accounts with FirstEnergy Solutions.  Over the past 12 months, their average savings were 13% off the entire electric bill as opposed to a 6% discount off the generation portion of the bill!
• We have a few clients who have contracted with other generation suppliers, such as Constellation NewEnergy, Duke Energy Retail and Glacial Energy.  However, these suppliers were not ready to go when competition fully opened up in 2009.  In addition, the terms of their contracts are not right for every customer.

These savings have helped our clients, who are served by FirstEnergy’s distribution utilities, reduce their electric costs and remain competitive in the global marketplace.  We expect to have the same success with companies who are served by AEP-Ohio, depending upon the outcome of AEP’s rate proposal.

On Wednesday, September 28^th, we attended and participated in the 6^th Annual Northern Ohio Energy Management Conference in Akron.  The morning’s keynote address was made by Andy Weissman, a partner in the Wall Street firm of Carter, Ledyard & Millburn LLP and Editor-in-Chief and Publisher of Energy Business Watch .  He drove home the following key points about the impact of shale gas on energy costs:

• The vast new natural gas supplies from North American shale plays (including in Ohio) are causing a paradigm shift.
  • The natural gas crisis of the past decade has ended.
  • There is the potential that U.S. shale production could be one and one-half times Saudi oil production.
  • It provides a high value in BTU’s of energy with relatively low energy costs for drilling.
  • There is enough supply to meet U.S. needs for at least 50 to 100 years.
• The concerns over hydraulic fracturing are greatly overblown.
• There are huge opportunities for U.S. manufacturers who can switch processes from electricity to natural gas.

Mike Brakey remembers a time in the early ‘80’s when natural gas prices were low in comparison to electric prices for the same unit of energy.  While cutting energy consumption from 240 billion BTU’s per year to 160 billion BTU’s over a 4-year period, he helped the Johnson Rubber Company shift 40 billion BTU’s of the remaining energy from electricity to natural gas.  They switched some heat process production from $25/mmBtu electricity to $5/mmBtu natural gas.  This fuel switching strategy saved the company over $800 thousand per year between 1986 and 2002.

With the recent discoveries of natural gas in eastern Ohio, Pennsylvania and West Virginia, prices might remain under $4 per mmBTU for several decades.  We are prepared to help our clients analyze their situation and determine if it make senses to take advantage of the increased supply of natural gas at relatively low prices.

AEP-Ohio has proposed new rate plans to be effective on January 1, 2012.  We have been following the ongoing settlement talks regarding thses proposals.  The Columbus Dispatch had a recent article with an update on the case: AEP’s Plan

For many years, the standard rates offered by AEP’s two Ohio utilities, Columbus Southern Power and Ohio Power, were lower than market rates.  The opportunities to switch to a retail electric supplier and save money have been limited.  A key issue with AEP’s rate proposal is that it is trying to limit the savings opportunities going forward while also raising rates.  IEU-Ohio and other stakeholders are working to make sure that AEP customers have the opportunity to select an alternative electric supplier, as required by Ohio law.

Mike Brakey will be attending Governor Kasich’s Energy & Economic Summit in Columbus, Ohio on September 21 and 22.  Mike believes that it is good whenever Ohio businesses become more energy efficient, but he is hoping to get rid of Ohio’s renewable energy mandates that don’t make economic sense at this time.  John Funk had an interesting article in Saturday’s Plain Dealer that mentioned not only the energy summit, but also a recent survey of Ohio voters about energy policy:   Poll: Ohioans support energy-efficient products

The 6th Annual Northern Ohio Energy Management Conference will be held on Wednesday, September 28th at the John S. Knight Convention Center, 77 East Mill Street, Akron, Ohio.  Matt and Mike Brakey will be among the presenters at this informative conference. See MEC Seminars for more information or to register.

For many years, the standard rates offered by AEP-Ohio’s two operating companies, Columbus Southern Power (CSP) and Ohio Power (OP), were some of the lowest in the country, let alone Ohio.  The opportunities for AEP customers to switch to a retail electric supplier for generation services and save money were limited.  There was no reason for customers to consider switching.  However, as a result of dramatic rate increases since 2004, CSP and some OP customers may now be able to save money by switching suppliers.

While market competition has stabilized and lowered costs for FirstEnergy customers in Ohio in the last decade, AEP’s standard rates have skyrocketed unchecked due to barriers to competition.  Since 2004, using the GS-3 rate schedule as an example, CSP rates have increased about 64% and OP rates have increased about 74%.

Both CSP and OP have proposed new rate plans to be effective on January 1, 2012.  These proposals are pending at the Public Utilities Commission of Ohio (PUCO).  OP’s rates are expected to increase by at least 1 penny per kilowatt hour to recover its full fuel costs.  If this happens, more OP customers may be able to save money by switching suppliers.

For certain rate schedules, AEP requires a 90-day notice to switch to a retail electric supplier.  In order to switch on January 1, 2012, you would need to notify AEP by October 3rd.  If you are a commercial or industrial customer who is not already shopping for generation, we can facilitate obtaining price quotes from retail electric suppliers and help you with the process.  Contact us for more information.

The NYMEX settlement price at the end of August was $3.857 per thousand cubic feet (MCF), down 12% from $4.370 per MCF at the end of July.  For Dominion East Ohio customers, the price to beat is NYMEX plus $1, or $4.857 per MCF in September.  Now is a good time to review your natural gas contract in preparation for the winter heating season.

Commercial and residential customers who are buying their natural gas from Dominion East Ohio (DEO) or Columbia Gas of Ohio (CGO) pay the New York Mercantile Exchange (NYMEX) month-end commodity price plus a “retail adder”.  The NYMEX settlement price at the end of July was $4.37 per thousand cubic feet (Mcf), up slightly from $4.357 at the end of June.

DEO’s “retail  adder” is $1.00 per Mcf.  DEO’s variable Standard Choice Offer (SCO) rate will increase from $5.357 per Mcf to $5.37 per Mcf for the month beginning on August 11^th.  CGO’s “retail adder”is $0.188 per hundred cubic feet (CCF). CGO’s Standard Service Offer (SSO) variable rate for August is $0.625 per hundred cubic feet (CCF), up from $0.6237 per CCF for July.

Even with this slight-up-tick in the NYMEX, natural gas prices are low and expected to remain low, as discussed in this John Funk article from Saturday’s Plain Dealer: Fixed natural-gas rate may be pricier choice this winter.  A key reason for this is the abundance of natural gas reserves that have been found in the shale, as discussed in this article from Saturday’s Plain Dealer:  Gov. Kasich touts oil and gas reserves .  We agree with John Funk’s recommendation that buying natural gas from the utility’s variable rate plan is usually the best deal.

The costs associated with FirstEnergy meeting Ohio’s energy efficiency mandates are socialized amongst their customers, by rate class, through the DSE2 charge under the Energy Efficiency Rider.  This charge became effective for service on and after May 18^th.  Then, on June 1^st, FirstEnergy filed for changes in the DSE 1 and DSE2 rates that will take effect on July 1^st.  The attached file shows the rate changes by utility and rate schedule:  DSE Riders 07012011 Note that we expect the DSE2 rates will increase in future years as the utility’s cost of compliance increases.

Mercantile customers (defined as non-residential customers who use more than 700,000 kWh per year or are part of a national account) who are able to offer up energy efficiency projects to FirstEnergy have the ability to become exempt from the DSE2 charge.  In addition, on April 11, FirstEnergy launched several new energy efficiency rebate programs for commercial and industrial customers.  This first set of programs provides rebates for lighting and motor projects.  However, a mercantile customer cannot use the same project for both the rebate program and exemption from the DSE2 charge under the energy efficiency rider.  Mercantile customers should weigh the pros and cons of a rebate versus rider exemption.

In a recent Plain Dealer article, John Funk discusses the savings that have resulted from Ohio’s energy efficiency mandates: State rules helped Ohio consumers save $56 million.  We share the concern mentioned in the article about the difficulty of meeting the ever increasing mandates, especially for renewable energy.

What are the most cost effective ways to become more energy efficient?  If you ignore government subsidies, we have found that typically:

• Insulation and energy efficient lighting have pay back periods of less than 4 years

• Geothermal heating and cooling has a payback period of less than 10 years

• Wind energy has a payback period of about 35 years

• Solar energy has a payback period of more than 50 years.

Government subsidies have been masking the expense of wind and solar technologies, and somebody has to pay for those subsidies.  We continue to encourage our clients to first look to insulate and upgrade to energy efficient lighting.