Ex-girlfriends and hot meals

It has been a tough time for US power suppliers, especially those in the hurricane-battered Gulf coast areas. The name-list of hurricanes that have struck in the last 15 months is so long, you could almost be forgiven for mistaking it for a list of ex-girlfriends. It certainly has been a painful period – one that looks set to leave its mark for some time to come.

The hurricanes challenged utilities logistically in terms of repairs after outages. TXU Electric Delivery, for example, had to mobilize more than 2600 workers to rebuild transmission and distribution systems damaged by 50-75 miles per hour winds. Although this was a tremendous challenge, it was short term and may turn out to be less painful than the long term effects on the revenues and credit worthiness of these utilities.

The challenge for the foreseeable future is how generators will survive under the spectre of spiralling fuel costs. In truth fuel prices, particularly gas, have been climbing for the past year and the recent hurricanes, Katrina and Rita, are only partly responsible for the current high prices. In September last year Henry Hub natural gas spot prices were about $6/million Btu. This climbed steadily to about $9/million Btu. In September this year, following Katrina and Rita, prices rocketed to over $15/million Btu.

For many, generating power has suddenly become a very expensive business. Florida Power & Light’s fuel costs for 2005 are expected to be $965 million more than it forecast in 2004.

Cases like this have raised concerns with Standard & Poor’s (S&P), the credit ratings agency, about the ability of utilities to absorb the financial pressure of the fuel price increases. Suzanne Smith, an analyst with S&P noted: “It varies from entity to entity. Companies with frozen prices in general are hit harder. Broadly speaking we haven’t taken any action to downgrade the credit worthiness of electric utilities but that doesn’t mean companies are not grappling with [fuel] prices. In a high gas price environment, companies will need more liquidity. We don’t see a crisis but we are concerned. We are checking with companies about the adequacy of their liquidity. We want to understand what their regulators are likely to do. This is something that will be monitored closely, especially over the winter heating season.”

To combat the problem, some companies are passing on the effect of higher fuel prices to customers through electricity rate increases. TXU, for example, in September secured permission from the Texas Public Utility Commission to raise electricity rates to recover costs. Rates will go up by 12 per cent from November and TXU is pushing for a further 12 per cent from 1 January, 2006. This means that a home customer with a monthly bill of $180 could expect to pay more than $200 for electricity in November and December and even more in January.

Meanwhile in Florida, Progress Energy is requesting about a 12 per cent increase, while FPL is requesting about a 16 per cent rise. These requests have not been granted and may not be approved as expected. For example, the Commission may request that the recovery occurs over a longer period of time in order to lower the monthly impact on consumers.

It is difficult to analyse what the actual pass-through costs should be to the consumer. One consideration is that gas companies with gas stored from before the recent hurricanes, are not entirely dependent on the gas spot market and will not immediately feel the full effect of increased commodity prices. Further, some utilities have active hedging programmes which can reduce overall costs to the consumer.

Another important point is that, depending on the generating portfolio, some generators will be hit harder than others. In the merchant segment of the industry, where wholesale electricity market prices are naturally increasing, the generators are not being too badly squeezed. In fact, there are situations where some generators will profit from the high gas prices. Generators that have coal and in particular nuclear in their portfolio, will benefit in a high gas price environment where gas generation sets the system marginal price.

What generators should be charging in the current climate will always be contentious. But some consumers can, if they wish, change companies. Where possible, it’s a lot less drastic than the ‘strategy’ of one Texan lady. Ms Betty Banks chose to cut back on her ‘beloved’ hobby – cooking. In the Dallas Morning News she was reported as saying: “I hardly ever cook anymore. I eat a lot of easy to fix stuff from the deli and saladsࢀ¦I used to cook three meals a day. I cook maybe twice a month now.” I am not convinced. But what I am sure of, is that if the list of ‘ex-girlfriends’ gets any longer, there will be even fewer hot meals on the table.

Junior Isles
Publisher & Editorial Director

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