Economics

Gas & Electric Rates

 

Recently, energy rates have changed dramatically and will undergo even more change in the next few years.

Natural gas, on the one hand, is largely deregulated and its price follows the laws of supply and demand. Electricity, on the other hand, is largely not deregulated at the retail level. This means the wide fluctuations in the price of energy results in losses for the regulated electric utility, for now, and does not affect your bottom line except when rate increases are approved or power quality and reliability issues surface because the utility is losing money.

In the grand scheme of gas costs, the amount you as a customer pays to the regulated gas utility have gone from about 10% of the total cost a few years ago, to less than 5% today. In fact, the dramatic commodity price changes ahead for natural gas need to be understood and factored into your purchase decisions.

Natural Gas prices (NYMEX — Select Markets -> Future Options -> Henry Hub -> Quotes) show commodity pricing moving substantially lower from the highs of the winter of 2001.

The latest energy prices are available from the following sources:

henry_hub_nat_gas

On the other hand, electric rates are most unclear as there is very limited data regarding the publicly traded electron commodity. The PJM “Pennsylvania, New Jersey and Maryland” ISO “Independent Systems Operator” (NYMEX — Select Markets -> Future Options -> PJM Electricity -> Quotes) wholesale price is currently being traded on the NYMEX, but data ends in mid-2002 when the PJM is planning retail for deregulation.

pjm_electricity

The bottom line predictor that we have to date, has been the San Diego experience for deregulated electricity with the following results:

California businesses and residents paid $10.9 billion more for electricity last summer than the year before, with much of the money flowing to out-of-state energy firms. When the first heat wave of the new millennium hit, in May. Californians cranked up air-conditioners. Demand for electricity rose. Prices climbed. A kilowatt-hour is about enough electricity to operate a computer and monitor for seven hours. On April 29, it cost 2.7 cents to buy that much electricity at a time of peak demand. Two weeks later, it cost 3.5 cents, and two weeks after that it was 5.7 cents. By June 15, it cost 46 cents; two weeks later, even on a day with less demand, it cost 52 cents.

What becomes clear is that peak and mid-range electric prices will increase with deregulation and will likely produce crease an economic situation where natural gas engine-driven air compressors will be advantageous to operate. Off peak it will clearly be advantageous to operate electric motor-driven air compressors.

“If you believe in markets,” said Bill Eastlake, an economist with the Idaho Public Utilities Commission, “you can’t blanch at the sight of victims.”


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