FEATURE ARTICLE, OCTOBER 2007

TEXAS’ LOW ELECTRIC RATES ARE WORTH LOCKING IN
A mild hurricane season thus far and low natural gas prices have held rates down, now’s the time for property owners to lock-in savings with a fixed-rate energy contract.
Chris Albrecht

Chris Albrecht, Cadence Network

On Wall Street, success in the market is all about timing. Act at the right time, and a decent return is assured, even if prices fall. Hesitate, and the window of opportunity can be missed.

Energy markets are similar. And low electric rates in the Lone Star State compared to last year mean the time is right for property owners to lock in savings, and gain budget certainty through a fixed-rate energy contract.

Why act now? A colder-than-normal winter could drive up demand and send energy prices skyward. And there’s always the risk that some unforeseen event, such as a natural disaster, could do the same.

The most effective way to lock into a fixed-rate is to partner with an energy consultant. These experts have access to competitive rates from a network of third-party energy suppliers, and the requisite market knowledge and negotiating skills to win the most favorable contracts.

Savings Season

Two primary factors held the line on Texas electricity rates. First was an uncharacteristically cool summer, with temperatures in the 80s and low 90s, rather than the 100 degree temperatures typical for that time of year. Second was low prices for natural gas, which is used to generate electricity.

Average per megawatt hour for on-peak rates were around $66 in August, according to the Market Clearing Price for Electricity (MCPE). Off-peak rates averaged $48 for the same month. Compare that to August 2006 averages of $80 and $56 for on- and off-peak rates, respectively.

With November signaling the end of hurricane season, which thus far has left Texas natural gas production centers unscathed, energy forecasters expect rates to fall even further. As a result, some property owners will be tempted keep their index-rate contracts (known as “floating the market”), or stay with their current utility until prices bottom out.

That’s betting against late-season hurricanes that can strike production centers and send prices soaring. And if that happens — as it did in when hurricanes Katrina and Rita hit in 2005 — electric rates will spike, blow out budgets and leave budget managers at the mercy of their CFOs.

But budget managers who lock into low third-party supplier rates will be insulated from market volatility whether electricity prices rise or drop. That’s because fixed-rate contracts deliver savings over prior year’s rates, maintaining budget certainty, regardless of market fluctuations.

Three Ways to Play

Texas businesses procure their electricity in one of three ways: they sign a fixed-rate contract with a third-party supplier, they float the market by signing an index contract with a third-party supplier or they get their electricity from the local utility.

A fixed-rate contract can lock pricing in for any length of time (from 6 months to 1 year or more). Signing one in late fall or early spring when prices are typically at their lowest locks owners into a better rate, in advance of summer usage demands and rate increases.

An index rate adjusts in step with electricity rates. Owners get no insulation from pricing fluctuations. They pay more when rates rise, less rates when rates drop. They can, of course, switch to a fixed-rate when rates get too high. Unfortunately, that locks in a higher rate.

Owners buying power from their local utility are typically on a fixed-rate and have budget certainty. But they’re usually paying more than they have to. If they switch to fixed-rate with a third-party supplier, they can save as much as 1 cent per kilowatt hour.

Expert Advice

Achieving budget certainty is the first step. Property owners can also reign in energy costs by working with an energy consultant. In addition to helping property owners negotiate the best deal with a third-party provider, these consultants can help organizations make strategic decisions that capitalize on energy savings opportunities.

Energy consultants have the tools and knowledge to perform sophisticated bill auditing, bill payment and utility rate analyses. While property owners can perform these steps on their own, deciphering each property’s energy use takes time and market intelligence — time many property owners simply don’t have.

The key to controlling energy costs starts with bill auditing. By collecting information from a year’s worth of utility bills, energy consultants determine which properties use the most energy.

Tracking the energy properties use helps the consultants build a plan that best fits the owner’s energy consumption. As part of the service, the energy consultant assumes responsibility for bill payment, giving the property owner one less thing to worry about.

A utility bill’s most important components are demand and usage. Combined, they determine a property’s true operational cost. The demand meter indicates the rate at which energy is pulled through the meter. The usage meter indicates the total number of kilowatt hours consumed over a 30-day billing cycle.

By capturing and analyzing data from the property owner’s buildings, energy consultants determine if the utility is billing properties correctly. For example, a two-story office building with 9-to-5 businesses will have a different energy load, and a different rate, than a high-rise hotel with retail stores. If it’s found that the property is on the wrong rate, a simple call to the utility will have owners receiving a reimbursement check.

Lastly, energy consultants that manage large portfolios have instant recognition with third-party suppliers. The top consultants manage energy portfolios running in the billions of dollars. This gives them extreme negotiating leverage with energy suppliers.

While all signs point to lower electricity rates on the horizon, Texans should examine their energy load and lock into a lower rate now. Doing so will assure fiscal-year budgets aren’t blown away by rising energy prices. Once this first step is taken, consider consulting with an energy consultant to manage your energy needs. Their tools and market knowledge will result in energy savings that will grow the bottom line.

Chris Albrecht is director of energy procurement for strategic accounts at Cadence Network.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.