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EnergyWindow MarketElert TM - December 2005
www.energywindow.com
December Elerts
FPL and Constellation to Merge -
FPL Group Inc. has announced its intention to buy Constellation Energy Group Inc. (parent of Baltimore Gas & Electric Co. and Constellation NewEnergy among others) for about $11 billion. This would give FPL a major presence in the unregulated power supply business, as well as the position of third-largest operator of nuclear power plants and one of the largest regulated electric utilities in the United States. See FPL-Constellation Merger Release.
Retail Prices on the Rise -
Texas Prices to Beat will move up approximately 35% in January. National Grid's Massachusetts proposed rates for Feb-April represent an increase of 93% year to year, following increases of more than 100% year to year by all major Mass utilities. National Grid Rhode Island has filed for an increase in their standard offer rate from 8.2 cents/kwh to 10.2 cents/kwh.
DTE Decision Rendered -
Detroit Edison's request for a fuel factor increase of better than $8.00/MWH has been reduced by the Michigan PSC in an order rendered December 22nd. The PSCR will change quarterly and range from $.38 to $7.98/MWH throughout the year. DTE's de-skewing and unbundling plans have been approved with changes. They now have until January 10, 2006 to file final tariffs. See http://www.dleg.state.mi.us/mpsc/orders/electric/2005/u-14399_12-22-2005.pdf for details.
PowerStrategy® Strategic Sourcing of Energy: Integrating Energy Procurement into Your Supply Chain Strategy
It's a good time of the year to be firming up your energy sourcing strategy for next year-this year more than ever. Strategic sourcing is a systematic and collaborative approach to bring the appropriate resources from across the enterprise to bear on targeted spending categories. It is viewed as the ideal by most procurement professionals. An energy sourcing strategy gives a flexible platform from which to react rapidly and thoughtfully. Many of the considerations and principles of strategic sourcing apply equally well to energy sourcing: consideration of the total cost of energy procurement--transaction, procurement, and administrative costs-as well as the actual commodity costs, a systematic approach, prioritizing and focusing attention and resources, collaboration and involvement of a multiple-functional team, engagement of key stakeholders, supplier qualification and selection, and process similarities.
But some characteristics of energy markets require quite different approaches. Energy markets are very heterogeneous; prices, rules, suppliers, and their offerings vary from state to state and even utility territory to territory; so a monolithic global or even national procurement approach is not possible. Buyers must understand and calculate the default energy costs (what you pay if you continue to obtain your commodity supply from the local utility) for dozens of markets, to track them independently to determine when competitive bids may be lower, and request bids when the requests are likely to produce prices that will yield cost reduction. The volatility of energy markets means that opportunities can appear and disappear in a matter of one or two weeks and prices can vary dramatically from hour to hour; so it is essential to be poised to act very quickly. And greater detail is required in the spend analysis in order to separate and address separately electricity and natural gas, supply versus delivery costs, facility locations by market-regulated or deregulated, and facility location by state and local utility territory. The figure depicts the principal steps of the strategic sourcing process applied to energy.
The benefits of developing a strategy are:
The ability to answer, for various constituents, what you're doing about energy costs,
An objective and systematic view of energy supply status, opportunities, and risks,
A clear strategy and objective priorities so resources are applied effectively,
A simple framework and process for quickly evaluating the impact of changes in the energy environment and determining any necessary corrective action,
Identified potential opportunities for reducing, avoiding, or containing energy costs, and
A detailed plan, ready for quick implementation when windows of opportunity open.
The key steps in the process are as follows:
Chartering and Forming the Team
Energy Spend Analysis
Strategy Development
Setting Priorities and a Market Map
Energy Supply Risks Management
Energy Program Elements
Contracts and Contract Management
Program Implementation
Performance and Contract Management
For more detail, see associated full white paper about PowerStrategy® Strategic Sourcing of Energy: Integrating Energy Procurement into Your Supply Chain Strategy.
Quick Buyers' Tip
In this period of rapidly-rising and highly volatile markets buyers sometimes think that reverting to tariff rates is a "safe" alternative. In the past this was largely true, with utilities acting as a natural buffer to the wholesale markets. Rates were set by regulatory boards and tended to lag markets significantly. But not so any more. In most deregulated areas today, utilities have migrated toward default prices set more closely to the activity in the regional wholesale markets. So, instead of being a safe haven, utility rates often come with market, regulatory and business risks that they did not used to. Often the best way to reduce risk and achieve price certainty (something many buyers are beginning to value more than in the past) is to buy from a third-party supplier.
PENNY WISE
Cutting labor and energy costs and effectively using technology saves money and boosts the bottom line. (http://www.energywindow.com/press/NACS_PennyWise_1105.pdf)
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