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Mirror, Mirror

A rash of rate hikes around the country could have utilities facing a public-relations disaster.

Fortnightly Magazine - August 2006

still fall short of cumulative demand growth by more than 31,000 MW. Only 45 percent of post-2006 capacity additions are already in construction.”

Then Fleishman delivers the real punch line—that demand growth itself appears to be accelerating:

“Peak demand rose 7.6 percent in 2005 driven by hot weather, and 6 of 8 regions set new peak records. Four of those regions expect to set new peaks this summer. Texas recently increased its 5-year peak demand growth rate from 1.8 percent to 2.3 percent.”

Notwithstanding, the industry reserve margin this summer should be about 23 percent, still well above a 15 percent “equilibrium” level, the report finds. However, the regional breakdown tells a more interesting tale. Merrill Lynch discovered that six of 16 regions—Texas, California, upper Midwest, New England, TVA, and Rocky Mountain— are projected to be below 15 percent reserve margin. Another three—Florida, PJM, and Virginia Carolinas—come in below 20 percent.

Moreover, New England in particular has everyone, including the chairman of the Federal Energy Regulatory Commission, on pins and needles as to whether supply will meet demand.

In mid-June, at a commission meeting to review (and eventually approve) the settlement that rejected the controversial LICAP model proposed by ISO New England in favor of a much simpler forward capacity auction designed to ensure future power capacity (see “Counterpoint,” p. 19), FERC Chairman Kelliher outlined the challenge:

“Demand for electricity in the region is growing,” he said. “The region is facing the prospect of real supply shortages and very high prices.”

Kelliher conceded some disagreement over how soon supply shortages and high prices might be realized, but reiterated the basic problem: “There’s really little doubt that New England is not adding adequate electricity supply.”

Kelliher said that last year, according to a recent report from the ISO, New England actually added a total of 11 MW to its regional electricity supply—a figure he then repeated for emphasis. At the same time, however, he noted that peak demand compared with the prior year had grown by 2,700 MW.

“Those are exactly the kinds of trends,” Kelliher warned, “that we saw leading up to the California and Western crisis before the year 2000.”

Soothing the Pain

We haven’t heard the word m-a-r-k-e-t-i-n-g in utility circles for a long time, but some analysts see marketing as key to making the coming price shocks more palatable to consumers. Dean Maschoff, managing director at Navigant Consulting, outlined this brave new world. “The time is now,” he says, “for utilities to establish a new relationship with the customer.”

Maschoff believes that high power and gas prices will expose utilities to the effects of a customer backlash unless they become more responsive and establish a partnership model with their customers. Maschoff advises that one of the reasons customers become agitated during price hikes is that most don’t have the information or ability to manage their energy use to offset the impact of high prices. To counter that, he proposes to use time-of-use pricing, real-time metering, and other demand-response techniques in a way that gives utility customers a measure of