The Rising Cost of Doing Business

Gasoline prices have soared. Heating oil and natural gas prices are taking flight. The last thing West Florida Electric Cooperative (WFEC) member-owners want to hear is more bad news about energy costs. But, despite the best efforts of electric co-ops around the country to hold the line, monthly electric bills may be on the way up for many.

The good news for WFEC members is that the increases they may experience, on average, shouldn’t be as severe as those at the pump. The bad news, most analysts agree, is consumers could see several years of upward pressure on electric rates.

That’s because a complicated set of factors – everything from increased demand for power to dramatic increases in fuel costs in the U.S., to long-term economic growth in the Far East – seems to be conspiring to increase the cost of making and delivering electricity.

There are steps the power industry, the government and every consumer can take to help keep costs down. But a large part of the problem is simply that the world faces a new era of increased global competition for limited energy and other resources.

The new reality starts with much higher costs for natural gas, which will make it more costly not only to stay warm in the winter, but also more expensive for consumers in some regions of the country to keep the lights on. Natural gas is the fuel used to generate more than 17 percent of electricity in the United States. The U.S. government’s Energy Information Administration estimates that will grow to 20 percent by 2010. Almost all new power plants built during the last decade burn natural gas to generate electricity. The reason is simple: when the plans for those plants were on the drawing board, natural gas was one of the great energy bargains, costing about $2 per million Btu as recently as 2002.

Unlike oil, the United States and Canada produced almost all the natural gas they used, so the supply seemed less dependent on the whims of world markets and, in particular, the ups and downs of Middle Eastern politics. But in 2005, natural gas went as high as $14 per million Btu. That was a spike, but analysts project that prices will stay at least in the $6 to $8 range, an increase of as much as 400 percent in only a few years. The problem is the fuel that seemed to be a bargain was always subject to the basic laws of supply and demand. The United States and Canada now use all the natural gas they can pump out of the ground and more, leaving no slack in the system.

To make up for shortfalls in the domestic supply, the United States has imported natural gas from Canada and Mexico, as well as a small amount of liquefied natural gas, or LNG. Several nations that used to export natural gas – including the United Kingdom and China – have started importing as their needs have grown. Efforts are underway to expand LNG import capability on a dramatic scale, but competition has also increased for it.

Countries such as India, China and Brazil are rapidly industrializing, and their needs are changing. World energy consumption is projected to double by 2030, according to the Energy Information Administration.

The United States still uses the most power of any nation in the world, but the demand for electricity is growing more modestly. Rising natural gas costs here could be partially offset by increased investments in nuclear or coal-fired plants – although both face regulatory and environmental hurdles – and by increased conservation by consumers.

Smart homeowner choices, along with more investments in alternative energy sources such as solar and wind generation, help reduce dependence on world energy markets. But unfortunately, another problem remains. The nation’s high-voltage electricity transmission network needs some updating.

Most analysts agree that state and federal attempts to deregulate the electric industry contributed to the reluctance to invest in transmission. To complicate matters, power plant construction in the last two decades and new players in the power market have resulted in more than a 100-fold increase in activity on the transmission grid.

The bottom line is, even with increased conservation and the pursuit of alternative sources of power, the price of electricity is still going up. The Energy Information Administration’s forecast shows energy costs falling back from last year’s highs, but not to previous lows, and then increasing more slowly over several years.

For consumers, the big question is: “how much are my rates going to go up?” The answer varies by community, because the cost of generating and delivering power varies across the country. In some parts of Texas and California, power companies are requesting increases in the 14 to 17 percent range to cover fuel costs. A large utility in the Midwest has requested an 11 percent increase in its base rate, and in New England, one utility has proposed a 60 percent increase in industrial and commercial rates. But in other areas, increases will be modest or may not occur immediately.

Luckily, the equation doesn’t look as bad for WFEC members as it does for most consumers. For one thing, most of the power used by WFEC comes from coal-fired generation plants. The United States has plentiful amounts of coal, and the price is less susceptible to the sharp ups and downs of oil and natural gas. However, the cost for delivery is on the rise.

Historically, electric cooperatives, like WFEC, have not been as dependent on the spot market, where prices can be highest, for electricity. Cooperatives have tended to take a long-term view and build solid systems that provide stability for their member-owners, making them industry leaders in finding innovative ways to hold down costs.

Unfortunately, cooperatives will not be able to escape all the nationwide pressure on electricity costs completely. Some co-ops will have to make adjustments in their rates to deal with the new reality. But, WFEC holds one final advantage. We’re owned by and run for the people we serve. Co-ops are not for profit and don’t try to get the highest price from their members, but the lowest possible.