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When Opening The Electric Bill Rates Jump in Many States As Utilities Pass On Surges In Costs of Coal, Natural Gas

Article as it appeared on
May 7, 2008
By Rebecca Smith | Wall Street Journal

Surging fuel costs are about to inflict more pain on consumers, this time in the form of rapidly rising electricity bills.

Power prices are being pushed up across the U.S., with increases sometimes soaring into double digits, due to costlier coal and natural gas, the fuels used to make 70% of the nation's electricity.


What's pushing up electricity rates:
• Soaring costs of coal and natural gas.
• Increase in equipment purchases by utilities.
• Deregulated markets that allow greater profits.
• Regulations that allow utilities to pass through costs quickly.

It usually takes awhile for fuel-price swings to show up in electricity bills because utilities typically buy most of what they need under long-term arrangements. As older contracts expire, though, utilities are facing the reality of higher costs.

Proposed electricity-rate increases are cropping up all over the country. Potomac Edison Co., a unit of Allegheny Energy Inc., is asking Virginia regulators for permission to raise rates in July by 29%. In its rate request, the utility cited higher fuel and purchased-power costs.

In Oregon, Portland General Electric Co. is seeking a 9% rate increase effective in January 2009, about a third of which is attributable to higher fuel costs. "There's huge push-back against this rate increase," said Bob Jenks, executive director of the Citizens' Utility Board of Oregon, a group that represents consumers. The increase would come on top of a 10% overall increase since January 2007, and he said customers fear rate "pancaking" in which small increases add up to big jumps.

Company spokesman Steve Corson said Portland General pursues "many, many small measures" to control expenses but can't do much about fuel increases.
[power chart]

More than 90% of coal burned in the U.S. goes for electricity production, and fuel is the industry's largest single expense. Appalachian coal, which on Tuesday closed at $99.50 a ton, costs more than twice as much as it did in the first months of 2007 when it fetched about $45 a ton. Natural gas, closing at $11.15 on Tuesday, costs 45% more than it did early in 2007.

Rising global demand for coal and supply disruptions in Indonesia and Australia are also contributing to price pressures.

In the state of Washington, one retailer -- worried about double-digit increases in energy costs -- has upped its investment in renewable power and energy efficiency for its roughly 100 stores and distribution centers. Recreational Equipment Inc., Kent, Wash., has saved $100,000 in the past year -- far more than it expected -- because it's better protected against rising fossil-fuel costs, said Kevin Hagen, the company's director of corporate social responsibility. Its newest distribution center in Bedford, Pa., for example, has efficient lighting and ventilation.

Electricity Auctions

Recent electricity auctions in Maryland and New Jersey -- in which utilities buy electricity from deregulated generation companies -- are exerting upward pressure on retail rates, and it's likely to continue in coming months, indicating the worst is yet to come.

In Maryland, for example, residential customers of Baltimore Gas & Electric Co., a unit of Constellation Energy Group Inc., will see a 7.6% increase in their bills in June as a result of the latest wholesale auction conducted in April. (Under the state's deregulation law, utilities sold their plants to competitive suppliers and now get power off the open market.)

An average home bill will jump $137 a year to about $1,800 annually, said the Maryland Public Service Commission. Commercial customers will be hit even harder, with 27% to 41% price increases for the June through August period, versus prices a year earlier.

In New Jersey, an energy auction in February resulted in power prices based on natural-gas costs of about $8.50 per million British thermal units, said Ralph Izzo, chief executive of Public Service Enterprise Group Inc., a big utility company. But natural-gas prices projected for early next year are about 30% higher, or roughly $11 a unit, showing more increases could lie ahead.

Mr. Izzo said he thinks utility regulators will apply more pressure on utilities to cut costs they can control and will take a hard look at profit levels. "Regulators respond to social pressures and public forces," he said. "Regulators will be hard-pressed to allow the same returns on equity [for utilities] as in the past."

Atlanta coal-burning utility Southern Co. said its fuel costs jumped 12% in the first quarter, versus the first quarter of 2007. Southern's utilities buy fuel under contracts as long as five years to minimize the impact of any single year. Southern's biggest utility, Georgia Power Co., is seeking a $222 million rate increase but may increase that number as fuel prices continue to soar.

The impact of higher fossil fuel prices is felt beyond just the price of electricity. It is also provoking states to explore expansion of nuclear power plants and renewable energy, such as wind and solar power, to break the grip of fossil fuels.

Last week, Ohio became the latest state to take a tentative step away from fossil fuels. Democratic Gov. Ted Strickland signed legislation requiring electric utilities to satisfy one quarter of their customers' energy needs, by 2025, through such means as renewable energy, new nuclear reactors and energy efficiency measures.

"There's definitely interplay between fuel costs going up and the willingness of states to invest in other sorts of resources," said Mr. Strickland.

Some Profits Seen

Of course, it follows that high costs, for some, could result in higher profits, for others.

The companies that appear to be doing the best, so far this earnings season, are those firms in deregulated power markets, where price increases in raw materials can be readily passed on to consumers and where generators with the highest costs set overall market prices.

Duke Energy Corp.'s commercial power unit, for example, earned $146 million for the first quarter, versus $13 million a year ago, an increase the company credited to several things, including successful hedging and better profit from its gas-fired generating plants in the Midwest. Power production also increased.

FPL Group Inc. in Juno Beach, Fla., last week reported that its deregulated power plants gleaned nearly four times as much profit in the first quarter of 2008 as a year earlier. Meanwhile, Potomac's parent company, Allegheny Energy, reported a 24% increase in net income for the first quarter, crediting part of the boost on higher prices for wholesale electricity sales.

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