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The Impact on Rate Cases of Moving from Coal to Gas for Power Generation

There has been considerable publicity about the shift in electricity generation away from coal-fired plants to those that use natural gas. Will this impact the frequency of electric utility rate cases? In an otherwise static and theoretical world, a shift away from coal to less capital intensive gas-fired generation might slow the frequency of increases from rate cases, or might possibly reduce their size somewhat. However, the reality is that coal-to-gas will have little net impact upon the outlook for rate cases and the rate changes that result from these proceedings.

For example, to the extent new gas fired generation is installed, the associated investment must be recognize in rates. This investment can often exceed the depreciated investment in older coal plants that are shut down.

Many utilities (e.g., AEP, Dominion and Georgia Power) are reluctant to place too many eggs in the natural gas basket pursuant to the fuel’s historical price volatility. Pollution control investments in coal plants that remain in service will be quite considerable, and will continue to contribute to rate increases. Oklahoma Gas & Electric’s pollution control expenditures may exceed $1 billion through 2017. If so, it would approximate nearly one-third of the utility’s current total investment in electric assets.

Fundamentally, there has been a shift in electric utility strategy over the last decade or so. Most are now focused primarily, if not entirely, on growing earnings through rate cases. This emphasis on increasing the levels of regulated rates has been induced by the failures of many unregulated enterprises owned by utility holding companies. The volume of rate cases has very roughly tripled since early last decade.

An electric utility may desire to file a rate case, but such a filing must be justified. In addition to pollution control, utilities are growing their regulated investment in other ways. One is the replacement of aging infrastructure. As an example, Pepco Holdings, which does not own any generation assets, plans to grow its investment (upon which regulators will allow it to earn a return) at a compounded annual growth rate of 10% over 2011-2016. This is doubled the growth rate in its regulated assets during 2006-2011. The new assets in Pepco Holdings’ three utilities will be dedicated primarily for the replacement and hardening of transmission and distribution systems. It is no small coincidence that Pepco is now boosting its regulated investment; it divested its unregulated generation assets in 2010. Pepco plans to file rate cases annually in the foreseeable future.

Customer conservation is also driving electric rate increases. Power consumption growth has slowed markedly, and during the past several years has been less than twenty percent of what it was during 1975-2000. This means that the full recovery of costs incurred by the average electric utility has become more problematic with existing rates, and raises the likelihood of a rate case filing.

Renewable energy projects are also boosting rates. These are often mandated by state renewable portfolio standards. Such projects tend to be capital intensive. The burgeoning investment in smart meters is also a contributor to higher rates. Many utilities are busy upgrading their customer service, which also increases costs subject to regulated rate recovery.

Finally, while interest rates are at historic lows, it is just a matter of time before they rise. This will induce a multitude of rate cases as utilities seek to obtain a higher allowed cost of capital to apply against their regulated investment. Also, higher interest rates will probably be indicative of greater inflation. This will accelerate increases in utility expenses that must be recovered via higher rates.

It is clear that the regulatory arena will continue to be quite active despite developments in the price relationship between coal and natural gas. The frequency of utility rate cases is correlated directly with the number of changes to tariff menus. Therefore, the expectation of numerous cases will tend to enhance the rate savings opportunities that Procurian Energy (UAI) will be able to discern and implement on behalf of its customers.

Ken Eisdorfer

Since 1986, UAI, now Procurian Energy, has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI/Procurian’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI/Procurian’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Procurian Energy or Utilities Analyses, Inc., visit www.utilitiesanalyses.com

Man vs. Machine: Can Utility Rate Optimization be Mechanized?

Rate optimization is dedicated to minimizing payments by customers for electric, gas, water and sewer services provided by utilities. It is sometimes postulated by those who are not practitioners that rate optimization can be mechanized. Specifically, it is sometimes assumed by laymen that a computerized “rate engine” can discern utility rate savings opportunities. This is an inappropriate supposition for numerous reasons.

Even if a rate engine could scan a utility’s tariff menu and apply the rates contained therein to a customer’s consumption characteristics in a computationally correct manner (dubious given the numerous rate forms in electric tariffs), the notion that this would constitute rate optimization is fallacious. Reasons include:

  •  A rate engine cannot be programmed to comprehend availability provisions contained in utility tariffs. Tariffs often contain rates that from a myopic computational perspective would yield lower costs relative to the current tariff under which a customer’s facility is billed. However, the facility may not qualify due to size, voltage level, customer type (e.g., commercial, industrial, municipal), and character of consumption such as an all-electric rate. Also, a superficially beneficial rate may be closed to additional customers. Furthermore, a rate engine cannot discern that charge levels are lower due to a lower quality of service (e.g., interruptible service) that a customer is unwilling to accept.
  •  A rate engine cannot discern how billing demands are determined. Quite often they do not simply equal the highest measured demand during a month. Rather, several factors can be employed to determine billing demands. These include tariff provisions pertaining to ratchets, minimum demand levels, the incorporation of contract demands, and seasonal factors.
  • Time-of-use rates are very common. A rate engine is incapable of properly assigning overall energy consumption to time-of-use periods to determine if such a rate is preferable vis-à-vis the non-time differentiated rate under which a facility is currently billed. Knowledge of a customer’s business operations is required for a proper analysis.
  • When negotiation opportunities are presented relating to rate levels and/or terms and conditions of service, a rate engine cannot represent a customer during negotiations with a utility.
  • A rate engine cannot discern savings opportunities from economic development riders, or tax avoidance.
  • A rate engine cannot provide customers with market intelligence pertaining to how rates may change due to regulatory actions, nor emerging savings opportunities associated with new programs.
  • A rate engine cannot provide guidance to a customer with regard to where a new or expanded facility should be located from a utility cost perspective.
  • A rate engine cannot interact with customers to learn if consumption characteristics at facilities will be changing, thereby impacting appropriate rate selection.
  • A rate engine is incapable of evaluating and giving guidance to customers about demand response programs.

Utility rates are multi-dimensional, and are infused with subtleties. In order to maximize results for customers, the rate optimization expert must be a highly dedicated professional with very extensive experience. Utilities Analyses’ personnel possesses these attributes, and as a result the firm has a very successful rate optimization practice, which spans the business spectrum.

Ken Eisdorfer

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

The Two Overarching Issues in Utility Rate Cases

Every utility rate case is concerned with answering two fundamental questions: First, what is the amount of revenue that the utility should be allowed to recover in aggregate from its customers? This is known as the utility’s revenue requirement. Second, how should the revenue requirement be recovered from customers?

The common thread that runs through the two issues is cost. Cost incurrence is basic to the determination of both the allowed overall revenue requirement, and its recovery from ratepayers. A utility’s annual revenue requirement is equal to the summation of its yearly operating expenses and the allowed return on its rate base. Although rate base has several components, it can be thought of as being essentially equal to a utility’s undepreciated investment in plant.[1] More specifically, a utility’s revenue requirement equals:

 Rate Base x Rate of Return + Operating & Maintenance Expenses + Depreciation + Taxes.

 In a rate case proceeding, the determination of the allowed rate of return on rate base along with permissible levels of operating and maintenance expenses are issues that usually engender substantial controversy.

After a utility regulatory commission has determined the allowed revenue requirement for a utility, it is compared to the current level of revenues. The difference is the overall revenue adjustment that is granted in a rate case (usually an increase).

The second rate case issue, the determination of how the revenue requirement should be recovered from customers, also generates great controversy. Often much of the debate centers around how to determine the cost incurred by the utility in serving different types of customers. In other words, how should plant investment and expenses be apportioned to different ratepayers? Wouldn’t it be easier, equitable and less contentious to simply divide the overall allowed revenue requirement by the amount of energy provided by the utility, thereby producing the same rate for each customer? This question will be addressed in a subsequent post.

UAI is expert at discerning specific rate case issues, evaluating their potential impact on clients, and providing guidance with regard to how clients should approach specific proceedings before regulators. We would be happy to discuss these services in detail with you.

Ken Eisdorfer

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com


[1] Growth in utility plant has been the prime motivator for filings of rate cases by electric utilities during the past several years. Many utilities have substantial construction programs including Ameren, Arizona Public Service, Dominion, Entergy, and Southern Company (which includes Alabama Power, Georgia Power, Gulf Power, and Mississippi Power),

Will Low Prices for Natural Gas Cause Gas Utilities to File for Rate Cases?

The sharp and sustained drop in the level of natural gas prices has caused a significant decline in utility rates. However, the levels of gas utility revenues have also declined. Will reduced revenues from low natural gas prices engender more gas utility rate cases? The answer is no; indeed low natural gas prices will tend to lessen the frequency of cases.

What accounts for this counterintuitive conclusion? The reality is that lower revenues induced by the decline in gas prices generally do not impact the earnings of gas utilities. Changes in the price of the gas commodity are passed along dollar-for-dollar to customers via gas adjustment clauses. Therefore, reduced revenues from lower gas prices do not impact a utility’s gross margin (i.e., revenues minus the cost of gas obtained by a utility for its customers). Since gross margins are unaffected by changes in gas prices, the earnings of gas utilities are similarly insulated.

However, margins and by consequence earnings are very much affected by the number of customers a gas utility serves. This is because profits are derived from the act of delivering volumes of gas to customers, not from the price of the commodity. Low gas prices are causing residential and commercial customers to convert away from more expensive energy forms, particularly fuel oil. Conversions to gas produced over 8,000 new National Grid customers in New England during that utility’s recently concluded fiscal year. This was a 61% increase from the prior year. UGI in Pennsylvania has been adding roughly 1,000 new customers per month from conversions, up fifty percent from its last fiscal year. Conversions at Boston’s NStar have tripled during the past three years.

Conversions tend to be quite profitable for utilities. This is because these customers are usually located in close proximity to existing gas mains, thereby mitigating the incremental investment for connections. New Jersey Natural Gas, for example, realizes about $400 in additional gross margin per year for each residence that it converts to natural gas. During the first six months of the current fiscal year, this utility converted 2,048 customers, up from 1,360 in last year’s comparable period. Indeed, vibrant customer growth is a major reason why the utility has no plans to file a rate case in the foreseeable future.

Industrial customers are also turning to natural gas. NiSource, which serves major portions of the Midwest, delivered ten percent more gas to industry during the first quarter of 2012 relative to the year-ago period. Lower gas prices were a major factor. Last year, Piedmont Natural Gas in North Carolina acquired 28 large customers via conversions away from oil and propane. Several major industrial concerns in Northwest Natural Gas’ service territory recently converted to natural gas.

A specific example of an industrial conversion from fuel oil to natural gas is provided by a major chemical plant in New England with a workforce of nearly one-hundred. The owner ran a pipeline from the local gas utility to the plant. When completed last November, the $1 million project was expected to have a very attractive payback of one-year. However, in the ensuing months, the price ratio of oil to natural gas has steadily widened, and is now near historic levels. This has yielded enhanced savings for the project, producing a payback expectation that is now outstanding. Besides helping to ensure the plant’s ongoing competitiveness, the project has reduced emissions by thirty percent. Utilities Analyses, Inc. recommended the switch to natural gas, and provided assistance that was instrumental to the project coming to fruition.

Lower utility bills produce a drop in bad debts. This is another benefit to gas utilities from reduced gas prices that in turn decreases the likelihood of a rate case filing.

The favorable implications for utility earnings from lower natural gas prices has lowered the likelihood of upward adjustments in gas utility rates. To the extent that rate increases can be avoided or moderated, customers of gas utilities will benefit accordingly. The advantages conferred by low gas prices are multi-dimensional and pervasive. It is in the interest of customers to capitalize fully on the low natural gas price environment by retaining experts who can optimize the sourcing and usage of this energy resource.

Ken Eisdorfer

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

The Impact of Natural Gas Fracking on Prices for Electric Power

The development of extraction methods for natural gas from shale has induced a tremendous rise in the commodity’s production. As a result of its abundance, the current price of natural gas is about 2% that of oil, a historic low. However, despite the price attractiveness of gas, there are environmental concerns relating to the hydraulic fracturing of shale. Proponents contend that the “fracking” process is environmentally safe, and that exploration and production companies are diligent in using best practices to ensure that their operations are conducted responsibly. Other entities decry the use of fracking, claiming that it is a threat to the environment. In response, The White House recently announced the formation of an interagency task force to “promote sensible cost effective approaches” for the development of natural gas resources, and to also look into the economic and national security benefits of robust gas production while safeguarding the environment.

UAI does not take a position with regard to whether fracking is environmentally responsible. However, we would like to explore the implications of low natural gas prices on electric rates. The impact to date has been dramatic in those parts of the country that now rely heavily on natural gas to generate electricity (e.g., the Northeast and Texas). Wholesale power prices in New England, for example, have declined markedly since 2008, the year in which gas prices peaked. During the first three months of 2012, gas prices were roughly one-third of those in the first quarter of 2008. New England’s on-peak power prices for January-March, 2012 averaged 39% of those that prevailed during the identical period in 2008. (On-peak prices pertain to roughly one-half of the hours during a month.) Similarly, wholesale power prices in Texas declined by about 36% during the four years. Accordingly, utilities have been announcing major rate decreases that have been driven by reduced gas prices. Western Massachusetts Electric lowered business rates by 24% this month. In March, Entergy Texas implemented a rate decrease of roughly 29%. Customers of other utilities in these regions (e.g., AEP, Connecticut Light & Power, El Paso Electric, NSTAR, and Xcel Energy) can be reasonably expected to benefit from lower electric rates in the future. Also, reduced wholesale power prices have enabled suppliers in unregulated markets (e.g., Constellation, Direct Energy and Noble Americas) to offer prices for electric power that are lower than those that prevailed a few years ago.

What of utilities that are predominately coal-fired? Many are getting attuned to the prospect of increasing their use of natural gas to generate electricity. Rocky Mountain Power announced recently that it plans to convert a portion of a power plant in Wyoming to gas. This is eye-raising because Wyoming produces 40% of the nation’s coal, and its coal is renowned for being relatively low in both cost and sulfur content. Georgia Power is building three gas-fired plants to replace coal-fired units, and is considering converting power plants from coal to gas. Oklahoma Gas and Electric is using its gas plants much more extensively in order to displace power generated from coal. As a result, the utility plans to lower customer rates this summer. Assuming that gas prices remain low by historical standards, the impact of a shift away from coal will be reduced electric rates for utility customers.

It seems apparent that if natural gas fracking can clear hurdles presented by environmental concerns, the implication for electric power rates and the nation’s economic well-being will be quite positive. Fracking’s ability to boost greatly natural gas volumes stands to be the single largest factor to impact the price of electricity in the immediate future.  Large energy customers and others concerned about electricity and natural gas prices will do well to pay close attention to developments relating to fracking when they plan their upcoming energy spend.

Ken Eisdorfer 04/17/2012

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

6 Easy Energy Reduction Tips

You’ve hired an energy management consulting firm, put an energy management system in place and have implemented a utility tracking system for data analysis.  Now you can sit back and watch the savings roll in, right?  Wrong!

Beyond these very important measures, there are some things that your organization can be doing to reduce energy demand in general.  Here are a few suggestions that should be considered part of an overall energy reduction strategy.

1.   Perform a maintenance review

What good is an energy management plan if there are significant sources of energy loss in your building?  By simply checking and sealing all window openings, making sure that relevant pipework is insulated and that lenses on light fittings are cleaned regularly will go a long way in reducing energy loss.

2.    Perform a heating and cooling review

  • Establish a preventative maintenance program for your heating, venting and air conditioning (HVAC) equipment and systems. Ensure that you regularly:
  • Change or clean all air filters, preferably every month.
  • Clean all heat exchanger surfaces, water and refrigerant coils, condensers and evaporators.
  • Repair leaks in piping, air ducts, coils, fittings and at the unit(s).
  • Replace defective equipment insulation, ducting and piping.
  • When replacing air conditioning units of five tons or greater, purchase units with a high energy efficiency ratio (EER) of 10.5 or more to reduce operating costs for the life of the unit. Be sure to select the proper sized system based on your building load characteristics and specific occupancy needs.
  • Reviewing base and peak load information will identify patterns of actual use and allow for any anomalies in your system to be rectified. (i.e., air-conditioning coming on unnecessarily at 2 am or in the middle of winter.

3.     Review your temperature controls

  • In winter, set office thermostat offices to 65-68 degrees during the day/business hours and 60-65 degrees during unoccupied times.
  • In summer, set thermostats to 78-80 degrees during the day/business hours, and above 80 degrees during unoccupied hours.
  • Adjust thermostats higher when cooling and lower when heating an occupied building or unoccupied areas within a building (e.g., during weekends and non-working hours).
  • During summer months, adjusting your thermostat setting up one degree typically can save 2%-3% on cooling costs.
  • Consider installing locking devices on thermostats to maintain desired temperature settings.
  • Install programmable thermostats that automatically adjust temperature settings based on the time of day and day of the week.
  1. Check your office equipment
  • To conserve energy and reduce internal heat gain, turn off computers, monitors, printers and copiers during non-business hours.
  • To save energy during periods of inactivity, ensure that the built-in power management system for your office equipment is active.
  • Ensure your screen saver is compatible with the computer’s power management features and that the setup allows the system to go into power saver mode.
  • Studies show that using laptops instead of desk-tops can save 80-90% in electrical costs.
  • When purchasing new office equipment, look for ENERGY STAR. The ENERGY STAR office equipment program promotes energy-efficient computers, monitors, printers, fax machines, scanners, copiers and multi-function devices that automatically power down during extended inactivity. Energy saving of 50% or more is possible.   This same rule goes for vending machines.
  • Install plug load controllers in cubicles to control multiple loads like monitors, task lights and fans. These devises use a motion sensor that is incorporated with a plug load surge suppressor. Inactive equipment can be shut down when the cubicle is unoccupied.
  1. Lighting  review
  • Turn off lights when not needed. It’s a myth that turning lights on and off uses more electricity than leaving the lights on.
  • Reduce or replace inefficient, outdated or excessive lighting within your building. When replacing equipment, evaluate new technologies that may need fewer fixtures and/or fewer lamps within existing fixtures.
  • Where practical, replace incandescent lamps with compact fluorescent lamps (CFLs). Ensure you install compatible dimming technology if CFLs are used along with a dimming system.
  • When fluorescent T-12 lamps burn out, consider retrofitting fixtures with T-8 lamps and changing from magnetic ballast to electronic.
  • Replace incandescent “EXIT” signs with LED signs. LEDs use about one-tenth the wattage and last 50 times longer than incandescent-lamp signs.
  • Install lighting occupancy sensors that automatically turn lights on or off, depending on occupancy. These sensors work well in areas such as conference rooms, break rooms or individual offices that are not occupied continuously.
  • Take advantage of natural daylight.  Turn off or dim electric lighting when adequate sunlight is available to illuminate interior space.
  • Ensure outdoor lighting is off during daytime.
  1. Educate employees

             Educate and encourage employees to be energy-conscious and to offer ideas about how energy   can be saved. Employee buy-in and involvement can make or break your company’s efforts to conserve energy.  Consider designating a “responsible party” to promote good energy practices for the organization and/or facility.

This certainly isn’t an exhaustive list.  We’d love to hear how you’re reducing energy costs in your building.

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

A Way to Enhance Renewable Energy Development

Earlier this month, a blog was posted on this website that discussed a potential dimming in the outlook for renewable energy development. Although the drags on renewable energy projects mentioned have not dissipated, Utah has just enacted a law (Senate Bill 12) that may partially offset them. Specifically, beginning this summer Utah will permit electric utility retail customers to purchase power directly from renewable energy projects. The state’s electric utilities will deliver the green power to customers.

Other states with fully regulated electricity markets should consider permitting retail access of renewable energy. Enabling customers to purchase green power directly from producers rather than restricting access to indirect procurement through utilities should increase interest in project development. A key driver for this would likely be the ability of customers to enter into direct long-term purchase power agreements with producers. The price certainty associated with these agreements would effectively allow green energy procurement to acquire an energy risk management dimension. As direct access to power generated from renewable resources increases, the share of electricity generated from alternative energy projects should rise accordingly.

Utah is to be saluted for its proactive stance towards green power, and the flexibility that it has bestowed upon retail customers. It would be wise for other states to consider similar legislation.

 Ken Eisdorfer 03/28/2012

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com