Electricity costs could go lower by summer

Natural gas supplies are up, price down

October 15, 2006|By Paul Adams | Paul Adams,Sun reporter

Cheaper electricity rates might be in store for Maryland residents next summer, thanks to the same decline in natural gas prices that promises to lower home heating bills this winter.

The Energy Department reported last week that natural gas supplies - a key driver of electricity and home heating costs - hit an all-time record in the United States, thanks primarily to uncommonly friendly forces of nature. Last year's mild winter followed by a mild summer and a relatively placid Atlantic hurricane season have sent natural gas futures steadily falling in recent months.

Healthy supplies are lowering prices so much that BGE said last week that its residential natural gas customers - more than 600,000 households - could expect a 15 percent reduction in heating costs this winter.

But it's the potential impact on BGE electricity rates that has some utility executives excited after a year of feuding with lawmakers over how best to lower a 72 percent rate increase that went into effect in July. The wholesale electricity market - where BGE must go to purchase portions of its power annually - is heavily influenced by movements in the natural gas market.

If natural gas prices remain low for the next several months, future electricity prices should come down. That would allow Maryland's largest utility - with 1.1 million residential customers - to lock in lower prices when it goes into the market again this winter to purchase half of its expected power load for the coming year. It was a similar power purchase last winter after Hurricanes Katrina and Rita that led to last summer's rate increase.

Fresh competition

The cheaper prices should also give competing power suppliers an opportunity to lock in costs lower than BGE can provide, helping to stimulate competition as 1999 legislation deregulating the industry envisioned. That competition has until recently been slow to materialize because six years of rate caps kept BGE's rates too low for competitors to beat.

The expiration of those caps coincided with BGE's 72 percent rate increase, creating opportunities for other suppliers, which are taking advantage of the lower gas prices to lock in cheaper electricity. Washington Gas and Ohms Energy, for example, are offering discounts off BGE's rates by taking advantage of declining power prices.

BGE should get some relief when it begins soliciting bids for 50 percent of its expected power load for 2007-2008 starting in December. The other half is under two- and three-year contracts, which will remain frozen at the uncomfortably high rates.

Electricity rates should drop some beginning in July, assuming that BGE is able to lock in cheaper power costs. Until then, consumers pay the higher rate set earlier this year. Legislation passed in June temporarily limited the increase to 15 percent, with the deferred amount to be paid back over the next 10 years.

"We should have a beneficial impact on the price of electricity when we go out [to the market] the next time, assuming gas prices stay where they are today," said Wayne Harbaugh, BGE's manager of pricing and regulatory services.

Combined with falling oil and gasoline prices, the benefits could spill over to manufacturers and other industries that rely on the fuel to heat their businesses or to make cheap plastics, industrial chemicals and other products derived from natural gas. That should translate into lower costs and help reduce the inflationary pressures that have vexed Federal Reserve board members, who have been reluctant to lower interest rates in the face of rising consumer prices.

"It is weather," said Evan Smith, an energy analyst and co-manager of Texas-based U.S. Global Investors. "If we have a mild winter as predicted ... that would continue to be bearish for natural gas prices, and that would be good for consumers."

A bad year

The 2006 winter energy outlook stands in stark contrast to a year ago, when the hurricanes plowed through the Gulf Coast, taking down natural gas and oil rigs, as well as the pipelines that help feed the economies of the Northeast.

Natural gas futures soared in December to more than $15 per million British thermal units, a standard industry measure, as a result of the supply disruptions. By comparison, futures prices slipped to just under $6 per BTU as stockpiles reached a new record last week.

They briefly dropped to slightly more than $4 per BTU in late September before rebounding - a level well below pre-Katrina levels last summer. Benchmark futures are down 48 percent this year, and gas in storage in preparation for the winter season stands at 14 percent above year-ago levels.

"Supply right now is looking pretty good, and at the same time you have a cooling down of the American economy, and you have the China and India [economies] not going nuts anymore," said Skip Trimble, a senior energy consultant with South River Consulting, an energy consulting firm in Baltimore. "Overall right now the supply side is winning, and that's good for the consumer."

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