An update on FirstEnergy’s all-electric rates

The Public Utilities Commission of Ohio (PUCO) issued a ruling on Wednesday that takes another step toward attempting to resolve the issue of rate discounts for certain residential customers of FirstEnergy who had special “all-electric” rates prior to 2009.  See John Funk’s article in the Plain Dealer for more information: PUCO rules it has jurisdiction.

In response to the recent uproar by special rate customers, FirstEnergy, with the approval of the PUCO, restored some discounts for these customers.  These temporary discounts are accruing a debt of about $80 million per year.

No decision was made about who would pay for these discounts.  The PUCO directed its staff to recommend a long-term solution and provide a range of options regarding the recovery of the utility’s revenue shortfall due to the discounts.  The staff has issued a report with some alternative solutions that would involve shifting the cost of the discounts to FirstEnergy’s residential customers who pay the standard rates.

In our opinion, any solution should include energy efficiency incentives.

For two years, we have voiced our concerns that China controls more than 90% of the rare-earth metals which are needed for wind turbines, solar panels and electric car batteries.   It comes as no surprise to us that China is restricting exports of those metals in order to drive down costs for its own clean-energy industry.   This is naturally driving up the costs in the United States.  We are concerned about the impact of these actions on the cost of renewable energy mandates in Ohio.  You can read more about it in this article from the Detroit Free Press: China blocks minerals shipping, or in this Financial Sense article: China’s rare earth revenge.

The New York Mercantile Exchange (NYMEX) month-end settlement price for October was $3.292 per Mcf, down from $3.837 at the end of September.  Note that this is just the price for the gas; there will also be charges for basis and delivery.

The NYMEX 12-month strip (the average price of futures contracts for the next 12 months) on October 27^th was about $4.  It hasn’t been that low since December 2002.

For residential customers, Dominion East Ohio’s variable Standard Choice Offer (SCO) rate will decrease from $5.037 per Mcf for the month beginning on October 16 to $4.492 per Mcf for the month beginning on November 16.  Variable rates still appear to be the way to go this winter.  Please check your natural gas bill to make sure you aren’t on a high fixed rate contract.  If you prefer a fixed rate contract, you may look for options at the PUCO website.

On October 20, the first of six wholesale auctions was held to determine FirstEnergy’s default generation rates for the period from June 1, 2011 through May 31, 2014.  The auction resulted in the following prices:

• 5.455 cents per kilowatt hour (kWh) for the period from June 1, 2011 to May 31, 2012
• 5.410 cents per kWh for the period from June 1, 2011 to May 31, 2013
• 5.658 cents per kWh for the period from June 1, 2011 to May 31, 2014

The average of these prices, 5.505 cents per kWh, will be weighted 50% in determining the price for the year beginning next June.  A second auction will be held in January, and the prices from that auction will be blended with these prices to determine the default generation price for the period from June 1, 2011 to May 31, 2012.  Additional auctions will be held in October 2011, January 2012, October 2012, and January 2013 to establish the default generation prices for the following two years.

Note that FirstEnergy’s current default charges cover both generation and transmission services.  After May of 2011, the default charges and alternative supplier charges will be for generation only.  The transmission charges will be passed through to the customer.  We estimate that these will be in the range of 0.3 to 0.6 cents per kWh, depending upon load profile.  Thus, any price quotes from alternative suppliers for periods after May of 2011 cannot be compared directly to current rates.

You may read more about this in John Funk’s recent article in the Plain Dealer: Lower power prices.

John Funk had the following article in the Plain Dealer last week about the U.S. Department of Energy’s (DOE) predictions on winter heat costs: Oil, propane costs to rise, natural gas only slightly.

The DOE predicts that homes that heat with oil and propane will see increases of 11% or more over last winter, while homes that heat with natural gas will pay only slightly more this winter than they did last winter.  Natural gas prices have been falling this week.  The NYMEX settled yesterday at $3.43.  Next Wednesday, we will learn the month-end settlement price that will determine Dominion East Ohio’s rate for the month beginning on November15th.   For now, we recommend that Dominion East Ohio residential customers stick with the default variable rates.  If you want to control your risk, we think an alternative supplier’s fixed-price offer should be under $6 before we would consider locking into a contract.

The New York Mercantile Exchange (NYMEX) month-end settlement price for September was $3.837 per Mcf, up slightly from $3.651 at the end of August.  Note that this is just the price for the gas; there will also be charges for basis and delivery.  You may read more about the impact on northern Ohio’s residential customers in John Funk’s article in today’s Plain Dealer: Some consumers will pay a bit more for natural gas

Energy prices can be expected to increase in the future.  Now is the time for homeowners to do what they can to become more energy efficient.  John Funk had a second article in today’s Plain Dealer about how Dominion East Ohio and Columbia Gas of Ohio are helping customers conserve: Natural gas companies have to help you conserve

More than 200 people attended the 5th Annual Northern Ohio Energy Management Conference in Akron on Wednesday, September 29th.   The key themes centered around the expectation that energy prices will go higher in the future and companies must become more energy efficient to remain competitive.  Workshop speakers included our own Mike and Matt Brakey.  You may read more about it in John Funk’s article from today’s Plain Dealer: Manufacturers try to ready for increase in energy costs

Earlier this year, there was a significant backlash regarding the change in FirstEnergy’s electric rates for all-electric residential customers.  All-electric customers consuming 5,000 kWh per month saw their electric bills double when their subsidized rates of 5.5¢/kWh jumped to 11¢/kWh on the standard residential rate.

In response to the uproar by all-electric customers, FirstEnergy, with the approval of the Public Utilities Commission of Ohio (PUCO), restored some discounts for these customers.  But, this was just a temporary fix and no decision was made about who would pay for these discounts.  There was some talk about increasing rates for small businesses to cover the shortfall.  The PUCO directed its staff to recommend a long-term solution and provide a range of options regarding the recovery of the utility’s revenue shortfall due to the discounts.

On September 24, the PUCO staff issued its report and recommendations.  You may read more about it in John Funk’s article from today’s Plain Dealer: All-electric customers’ rates

We had hoped that any long-term solution would be in keeping with the spirit of the new state law requiring utilities to reduce peak demand and electric consumption while also encouraging the use of renewable energy technologies.  Unfortunately, it appears the PUCO staff may have ignored this possibility!  For example, under one of the staff proposals, all residential customers would pay a larger fixed monthly meter charge and a lower delivery charge per kilowatt hour (kWh).  Doesn’t this discourage energy efficiency and demand reduction?

As I see it, due to FirstEnergy’s commitment to all-electric customers, we have one of two options.  We either force the rest of the residential customer base to continue subsidizing these all-electric customers or financially support them in acquiring energy efficiency technologies that can cut their electric bills by at least 50%!  Where would the funds come from?

Under Senate Bill 221, the state of Ohio has written a law requiring that 24.4% of energy consumed in Ohio by 2024 come from renewable sources (solar, wind, geothermal, etc.)  Over the same time period, the law also requires Ohio utilities to reduce peak demand and consumption by 22.2%.  To begin generating funds for these critical tasks, the PUCO encouraged FirstEnergy to create two additional energy riders that will initially collect over $100 million annually. The “Alternative Energy Resource” (AER) Rider and the “Demand Side Management and Energy Efficiency”  (DSE) Rider, will collect more than a half a penny per kilowatt-hour on approximately 20 billion kWh per year consumed by residential customers.  I estimate that amounts to over $100 million a year.

If I had been a PUCO staffer, I would have championed a proposal that would have included a three-year term that gradually transitions all-electric residential customers to the standard residential rates.  At the same time, I would propose that the half penny per kilowatt-hour that will be charged for these two energy riders be used to aid all-electric customers in cutting their consumption by more than 50%. For examples of ways homeowners can reduce their electric consumption see our reports: Pursuit of a Net Zero Energy-efficient Home October 1 2010 and LED Lighting Project.  This would be a win-win for all concerned.  Pro-active all-electric customers can transition to standard residential rate schedules and become more energy efficient.  Of course, all-electric customers have the right to take no action, but after three years the utilities and general population as a whole, should not continue to subsidize them.

Mike Brakey

Last week, shareholders of FirstEnergy and Allegheny Energy approved a merger that has been in the works for months.  The merger will create the country’s largest electric utility, headquartered in Akron, Ohio.  To learn more, you may read the following article in the Akron Beacon Journal: FirstEnergy, Allegheny shareholders approve merger

Ohio’s Senate Bill 221 (SB 221) placed aggressive energy efficiency mandates on Ohio’s electric distribution utilities.  The costs associated with FirstEnergy meeting these mandates will be socialized among their customers through a charge under the Demand Side Management and Energy Efficiency (DSE) Rider, called the DSE2 charge.  This charge is currently zero, but is expected to grow over time as the efficiency benchmarks step up annually and the cost of compliance increases.

Under SB 221, mercantile customers (i.e., non-residential customers who use more than 700,000 kilowatt hour per year or are part of a national account) can achieve exemption from the DSE2 charge if they can offer up energy efficiency projects to FirstEnergy to count toward their mandate.  The Public Utilities Commission of Ohio (PUCO) has been slow to approve the applications of mercantile customers for exemption from the DSE2 charge.  Recently, the PUCO suggested that a project would need a payback period of at least one year in order to be counted, even though this requirement was not part of SB 221.  We are concerned that this policy discriminates against energy efficiency projects that have the biggest “bang for the buck”.

To learn more about this issue, you may read our discussion paper: Growing Concerns about Higher DSE2 Rider Costs