Local businesses investigate electricity cooperative

Oct. 5, 2006
By JOSEPH M. DELEON News-Post Staff
jdeleon@fredericknewspost.com

  FREDERICK — A group of 10 Frederick business owners gathered Wednesday at Goodwill Industries in Frederick to look at zigzagging line charts and tedious price schedules. It confirmed what they already knew — electricity prices are rising.
     In 2004, Maryland businesses paid 7.6 cents per kilowatt hour, a more than 20 percent increase from the 6.3 cents per kilowatt hour in 2002, according to the Maryland Energy Administration.
     A kilowatt hour is equal to 1,000 watts being used continuously for one hour — the same as running a 19-inch television four hours or a clothes dryer for about 15 minutes, according to EnergyVortex, an energy industry news group.
     The business owners hope to combine their buying power to save money on electricity. They will request bids from energy companies by Oct. 27 and could hear back as soon as the second week in November.
     By banding together, they share the cost in preparing to solicit bids from competing electricity providers, eliminate the time needed to learn how the process works and predict next year's budget needs.
     That's because the rate is locked in while the default price for most customers increases each year. It's impossible for business owners to budget for price increases when they don't know what the cost of electricity will be a year or two from now.
     The 10 business owners aspire to become the second Frederick County Chamber of Commerce Electricity Cooperatives. The chamber initiated the first 75-member co-op in late 2004 and members accepted the terms in early 2005.
     Rising electricity prices, the deregulation of electric utilities in Maryland in 2000 and increased power consumption throughout the country prompted the chamber to pursue its first coop.
     The group pools the buying power of commercial customers to negotiate a competitive price for electricity. Deliberations are led by Bonnie Grady, senior associate with Columbia-based energy management consulting firm CQI Associates LLC.
     Ms. Grady expects co-op participants could save about 8 percent on electricity in the first year, about 15 percent in the second and nearly 30 percent in year three. The difference in savings is caused by prices going up for nonco-op electricity users while co-op members have a locked-in price.
     Rosina Novak, operations and marketing director for Amber Hill Physical Therapy with locations in Frederick, Damascus, Jefferson and Thurmont, said the business' electricity bills have increased about 30 percent over the past year.
     “It's hard to distinguish between usage and price increase, but I hope the co-op will help even the price out over time,” she said.

Deregulation and co-ops
Electricity rates are shifting from a fixed price to a marketbased price because of the deregulation of the power industry in Maryland, Ms. Grady said.
     “If you consider inflation, we are paying much less today than we did 30 years ago for telephone service because of deregulation,” she said. “It's expected the same thing will eventually happen with electricity.”
     That's because competition between electricity providers will lead to lower prices over time, she said.
     Businesses in areas served by Baltimore Gas and Electric, Delmarva Power and Light Company, Allegheny Power and the Potomac Electric Power Company can shop for electricity contracts offered by more than 12 competing retail energy providers in Maryland, such as Direct Energy Services, Washington Gas Energy and Strategic Energy.
     That was made possible by legislation in 2000 that allowed some Maryland residents to begin shopping for new electricity suppliers July 1, 2000, while businesses had to wait until Jan. 1, 2001.
     If a provider wasn't picked, a default provider was assigned, which could mean higher rates than market price, Ms. Grady said.
     “If you can lock in your rate for three years and not have to pay any demand charges, it's a sweet deal,” she said during Wednesday's presentation.
     CQI Associates coordinated more then 40 energy deals in 16 states since 1999, according to the company's Web site. The company negotiated the first of 20 chambersponsored electricity co-ops in Maryland in Ocean City in 2003.

Rising prices, increased consumption
When geophysicist M. King Hubbert predicted in 1956 that U.S. oil production would peak between 1990 and 2005 and then begin to decline, no one took him seriously, Ms. Grady said. The prediction came true and now the United States consumes two barrels of oil for every barrel it produces.
     “I remember when gas was rationed in the ‘70s and I would get gas only on even numbered days in my little Pinto,” she said. “Seven years of good conservation practice then delayed that peak in production to 2005. Now we're seeing trouble.”
     Climate changes, terrorism and increased energy consumption in China, India and the United States, among other factors, have combined to push energy costs.
     Warmer than usual summers for the past two years and hurricanes Katrina and Rita caused an increase in electricity use and decline in U.S. oil production, respectively, according to the Energy Information Administration.
     “Remember Katrina and Rita?” Ms. Grady asked the participants. “They are proof weather has an impact, especially in the Gulf of Mexico. If you have to dismantle an oil rig, it takes four weeks to put it back in operation.”
     Electricity is generated by different means, primarily by burning coal, Ms. Grady said. Other ways include nuclear and hydroelectric energy and by burning natural gas and oil.
     Burning coal generates about 56 percent of Maryland's electricity, followed by nuclear energy, 28 percent, according to the Maryland Energy Administration. Oil makes up about 6 percent, while hydroelectric, 5 percent and natural gas, 2.3 percent, make up the least electricity.
     “Typically, oil prices lead electricity prices. The same thing is true for natural gas,” Ms. Grady said. “When oil prices go up, electricity and gas follow.”
     Residents in the United States have increased their use of electricity about 2.4 percent every year since 1995, according to the Energy Information Administration. While people in the United States used about 3.5 billion kilowatt hours per day in 1995, last year that number rose to about 5 billion kilowatt hours per day.
     The average household consumes about 8,900 kilowatt hours each year, according to a 2005 Energy Information Administration report.
     Nationwide, commercial electricity prices are expected to increase by 10.2 percent to 9.56 cents per kilowatt hour in 2006 from 8.67 cents per kilowatt hour in 2005 because the costs of fuels for generating electricity have risen. Another reason is restructured electricity markets have loosened retail electricity price caps, such as in New England and the Southeast, according to the Energy Information Administration.
     “Prices are rising, no question about it,” Ms. Grady said. “The answer is to manage your energy — use less and buy smartly.”