The Broad Impact of Fuel Price Hikes

You feel it at the gas pump every day – the cost of fuel continues to rise. These increases impact the price of many products, including other fuels — and electricity, which impacts every business, large and small.

Understanding why the price of electricity fluctuates — and is currently rising — doesn’t ease the pain, but it will give business owners some important perspective, and perhaps an appreciation of how the energy business has changed over the past several years.

With the utility industry deregulated and electricity now being purchased in the competitive market as any other commodity, customers are more exposed to market volatility. As with other commodities, various factors can impact the price consumers will pay for electricity supply. Global impacts, such as the war in Iraq, the death of Saudi Arabia’s King Fahd, or threats of terrorism, will impact the market. Weather also plays a large role in pricing – clearly evident in the wake of Hurricane Katrina.
Here in New England, fuel is the biggest driver of electricity pricing. Much of New England’s generating plants are powered by oil or natural gas. As these fuel prices rise and the cost to generate electricity increases, the cost for that electricity supply will also increase.

To illustrate the impact all these factors have on pricing: on August 15, electricity supply on the market was priced at 9.8 cents per kilowatt hour (kWh). The following day saw a slight dip in supply price – 9.7 cents per kWh. Two weeks later, the day Hurricane Katrina hit, the market price started out in the morning at 10.8 cents per kWh. By the day’s end, the price had increased to 11.1 cents per kWh.

Unfortunately, these factors not only play a role in pricing, but can impact the financial success, competitiveness, and economic development of our business community. Western Mass. Electric Co. (WMECO) customers who are not on competitive supply will see an impact by this market volatility in the fourth quarter pricing. Beginning Oct. 1, medium/large commercial and industrial customers (rate classes G-2, T-4, T-2, I-1, I-3, PR and Contracts) will see a fixed rate of 9.715 cents per kWh, up from a third quarter price of $7.625.

There are options to battler these rising prices, starting with conservation. WMECO can provide businesses with experience and expertise to reduce their energy usage, lower costs, and improve productivity and overall competitiveness. Through these conservation programs, the utility can also offer a variety of incentives for the installation of cost-effective, energy saving measures – in some cases, with no investment on the business’s part. From lighting upgrades to new construction, WMECO encourages its customers to contact us for more information about these programs (800-835 2707) or on the Web at www.wmeco.com and click on “How to Save Energy.”

Businesses also have option of choosing a supplier. WMECO encourages you to educate yourself on choosing a supplier, then contact the licensed suppliers in Massachusetts and evaluate the rates they are able to offer you.

As prices vary with each customer, it is often difficult to predict whether or a specific business will be able to obtain a lower price. However, suppliers may be able to offer a longer-term contract which can help companies better manage their budget and operating costs. Information to help choose a supplier and negotiate a contract as well as a list of licensed suppliers is available on the WMECO Web site, as well as through through the Department of Telecommunications and Energywww.mass.gov/dte) and the Division of Energy Resources;www.mass.gov/thepower.
While WMECO — or any utility — cannot control nor predict what occurs in the competitive market, it does make every effort to mitigate the price volatility. The utility conducts several competitive bid processes throughout the year to secure the lowest possible price available on the market at the time of bid, and it purchases blocks of supply at various times throughout the year to minimize the price impact.

The utility has also committed to keeping its distribution rates stable through 2006. For more information on WMECO rates, visit the “Basic Service Pricing” section ofwww. wmeco.com.

Rodney O. Powell is president and chief operating officer of Western Mass. Electric Co.; (413) 787-9293.