EnergyWindow MarketElert ^TM - December 2007

Energy Window's Annual Electric Market Roundup

2007 Issues and Trends

• Wholesale Energy Markets - Natural gas and electric futures (which are highly correlated) were relatively flat throughout 2007, as the figure illustrates. But stepping back and looking at the longer term trend suggests current prices are relatively low.
  

• Hybrid Re-regulation - Illinois has acted and New York, Connecticut, Ohio and Pennsylvania are debating how to set default pricing after their transition periods end. California is contemplating a return to Direct Access and Texas’s fully deregulated model is working well. Despite all the rhetoric, no reasonable plan has or can promise real long-term rate relief to business customers, due to pressures from macro-economic forces beyond the ability of any legislative entity to contain.
  
• End User Risk - Utilities are continuing the trend of tying retail prices more tightly to wholesale market prices and passing through price risk to (particularly business) customers.
  
• Market Complexity - End users are employing an increasingly wide array of products, strategies, and tools to combat higher supply costs and market volatility, requiring better analytical tools and the discipline to implement a given strategy and the flexibility to modify it in the face of changes.
  
• Indexed Contracts - As wholesale prices have gone down, a number of customers have chosen to ride the spot markets rather than to fix prices. This has yielded some short-term positive results; however, wholesale spot prices historically reflect the long-term increases seen in the futures markets.
  
• Renewables - 2007 saw more of the country’s largest companies adopt very aggressive plans to use renewable energy in terms of construction, facility management and environmental stewardship.

2008 Outlook

• Higher Wholesale Markets - History tells us that all good things come to an end. Current prices are still low relative to the average trend and post-Katrina highs. Based on the historical trend and volatility, odds are 9 to 1 (90% probability) prices will go up in the future.
  

• Regulator Issues - 2008 will see a continuation of the debate over whether market forces or regulatory actions should dictate prices. For reasons mentioned above, though, it is unlikely that legislative action can have any lasting impact on prices, although more “hybrid” regulatory adjustments may emerge. We see lots of rhetoric and some structural change, but largely a de facto continuation of the status quo for businesses in 2008.
  
• End User Risk - Utilities in both regulated and deregulated markets will continue to link their default retail generation rates more and more closely to wholesale prices, thus passing price risk on to the end user—especially commercial and industrial customers.
  
• Renewables - It is clear that the trend to greater renewable activity by businesses means not only good press, but good business. Expect to see a lot more renewable energy in 2008.
  
• Infrastructure Issues - 2007 saw increased capacity costs of $2-10/MWh in PJM and less dramatic, but significant increases in New England, as a result of new capacity constructs there and a slew of increases on regulated delivery rates driven by utilities shoring up aging infrastructure or building out new assets. We expect to see this trend continue in 2008, with congestion and capacity costs continuing to increase requiring end users to understand what exactly is and is not covered in their contracts.
  
• Diverse Portfolios - End users will continue to seek the balance of the possibility of lower prices versus price certainty and risk avoidance that’s right for them with a diversity of products and suppliers, and broader, more integrated strategies that include elements of risk management, demand-side initiatives and renewable policies.
  

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