April 8, 2010

Powerful Insights on Today's Energy Markets

Game Time in Cali and PA

California

Competition is coming back to California, but the clock is ticking. Customers interested in participating in Direct Access and testing the competitive electricity market must notify their utility as soon as the market opens (currently set for April 16). Only a limited number of customers will be allowed to switch. Applications are being accepted on a first-come, first-served basis, so don't get caught flat footed. Contact World Energy immediately if you'd like to take advantage of this opportunity.

For more on the California opportunity, please catch this rebroadcast of our webinar with Dorothy Rothrock of the California Manufacturers & Technology Association and Kenneth Ivanic, World Energy.

Pennsylvania

Not to be outdone, Pennsylvania is witnessing the effects of changes in its own electricity landscape. Rate-cap expirations, which began this year with PPL, are spreading across the State. By the close of 2010, the entire state will be open to competition. As we've mentioned before, you don't need to wait for new rates to be set to take advantage of opening markets. We are actively transacting across Pennsylvania now and encourage you to inquire how to make competitive energy markets work best for you. For a white paper on the topic, please click here.

Around the Horn

Fast Facts on State and Regional Energy Developments

Big Picture — Electricity and natural gas prices remain at or near 5 year historical lows. In this environment, occasionally customers indicate that they would prefer to continue monitoring the market, in hopes of benefiting from even further price declines. While we understand the reticence to act now (as no one likes to be questioned by management if prices do drop), we recommend considering a dollar cost averaging approach — similar to how an equities investor might act — to capture at least a portion of today's attractive market pricing.

Electricity

CA - See today's lead story above.

CT - Electric rates average approximately $0.11723/kWh for CL&P customers. The market is returning rates in the 9 cent range, depending on a customer's load characteristics. This should be a good time for customers to transact.

DC - A multi-phase bidding process began in October 2009 and concluded with the posting of retail rates in March for supply service contracts that will begin on June 1, 2010. New rates are lower overall; however there should be savings headroom for customers who switch.

DE - Delmarva Power & Light concluded its multi-phase bidding process in late January 2010. DE SOS Rates effective June 1, 2010 through May 31, 2011 are posted on the utility's website and are subject to Commission Approval. Broadly, shoppers in Delaware who switch should see savings opportunities.

MA - New rates will become effective for NGrid as of May 1, 2010. The utility rates for small commercial customers will be $0.081/kWh for July to October 2010. The NEMA rate for May to July will be $0.07282/kWh, the SEMA rate for the same 3 month period will be $0.07494/kWh and the WCMA rate will be $0.07567/kWh. Customers in this market cannot achieve savings against these short-term utility rates unless they go on an index rate. Budget certainty is the current customer focus in this market.

MD - SOS Type II Rates for March 1 — May 31, 2010 service are posted. The procurement for Type I accounts will occur in April for the June 2010 - June 2011 service period.

ME - Customers looking for guaranteed savings in Maine are likely better off staying with their utility rate. The new Standard Offer rates that took effect on March 1, 2010 reflected a 16% decrease in price for large Bangor Hydro customers and a 3% decrease in price for medium class customers. For Central Maine Power customers, the standard offer prices reflected increases of 3.5% for medium and 8.5% for large customers.

NJ - A Basic Generation Service procurement was held in February 2010, resetting prices for one third of the BGS load through a 36 month term effective June 2010. DRAFT utility rates are already posted and lower as the market was lower than past levels during this procurement period -- but we should still see headroom if the market remains at similar levels.

OH - In addition to customers in First Energy territories, customers behind AEP and DP&L should now consider shopping for competitive supply. We continue to see savings opportunity for low load factor accounts.

PA - Met-Ed and Penelec have a second auction for 2011 standard offer rates scheduled to run on April 19, 2010. PPL has another auction scheduled for April 20, 2010 to procure 2011 supply. PECO's large customers were required to "Opt-In" to PECO's Fixed-Price Program Option by March 11, 2010 in order to have their load included in the May 24, 2010 auction. Those customers that chose to opt-in will have the option of deciding to take on the auction rate by late June. For more on PA, see today's lead story above.

RI - National Grid has published its rates for April 1, 2010 to June 30, 2010. The rates average about $0.078283/kWh for that 3 month period, generally below the rate available in the competitive market.

TX - Texas power prices continue to have a strong correlation to natural gas, due to the abundance of gas-fired generation in the region. As long as natural gas remains at relative lows, commercial and industrial customers in ERCOT should consider locking in historically low power rates.

Natural Gas

Overview — Basis prices remain at or near 12 month lows in the Northeast, particularly in New Jersey, New York, Maryland and Washington DC, where gas is linked to Transco Zone 6 and Texas Eastern (TETCO) Zone 3. What's behind this, relative to the higher basis trends elsewhere across the country? The Marcellus Shale producing region looks to be a major source of supply in the Northeast over the coming years. This, coupled with plans to expand regional pipelines to support the increased supply, have driven basis prices lower, and in the longer term may have a disruptive effect on other regional price trends.

Demand Response

Big Picture — With World Energy now running competitive auction events for demand response, it has never been easier for customers to source demand response and maximize their share of demand response revenue.

NY - Customers who have past participation in DR should be assessing their strategy for summer 2010 participation. The construct of the New York market does provide enrollment flexibility for participants — contact a World Energy sales representative for help defining a strategy that meets your needs.

Demand Response

Big Picture — With World Energy now running competitive auction events for demand response (see lead story above), it has never been easier for customers to source demand response and maximize their share of demand response revenue.

NY — Customers who have past participation in DR should be assessing their strategy for Summer 2010 participation, looking towards making an enrollment decision by late March. The construct of the New York market does provide enrollment flexibility for participants — contact a World Energy sales representative for help defining a strategy that meets your needs.

PJM (DC, MD, OH, IL, NJ, PA) — Customers who missed the February 15th window for ILR enrollment still have opportunities.

You Asked

Q: I'm in the market for natural gas, but with basis so high, is it even worth considering?

A: The short answer is yes. Even with the majority of the country (excluding the Northeast) currently experiencing historically high natural gas basis pricing, it is still prudent to evaluate buying your basis now. One significant reason for this is that, depending upon your organization's hedging policies, you very well may need to have your physical supplies purchased in advanced of hedging a fixed price. Across the U.S., 12-month basis pricing high/low differentials range from as low as $0.25 to well over $1.00. However, the basis premium that you may be forced to pay pales in comparison to the great savings opportunities that currently exist in the NYMEX market. NYMEX prices are currently hovering at 5-7 year low levels, more than $7.00 below the market peak of 2008 and down over $2.00 from more recent 12-month highs.

When you consider the fact that 1) the relative NYMEX decrease is significantly greater than basis increases and 2) the NYMEX component of your overall natural gas price is significantly larger than basis, you can see why many of our customers have fixed, or are looking to fix, prices now. Ultimately, your company's goals and objectives will be the main driver in your decision. But, if you value price and budget certainty, you should strongly consider getting into the market today.

Note: We welcome your questions about energy markets and how to be more successful in them. If you have a question you would like us to address in a future issue, or have one you would like to discuss with World Energy immediately, please e-mail us at marketedge@worldenergy.com.

Pricing Update

Natural Gas

Since our last report natural gas has finally dealt with the unfinished business of closing the price gap that was created last November when prices jumped from 4 to 4.5 in a single day of trading. While this isn't something that MUST happen, it often does and represents the reestablishment of a healthy equilibrium in the ebb and flow of the overall market.

The price of natural gas has clearly been in a prolonged downtrend, occasioned by bloated inventories that are currently 8% over the five year average. But then on Monday reports came out that the US Energy Department is going to revise recent monthly reports and change the way it prepares natural gas inventory reports going forward. The reason? Inaccuracies inherent in the current process had resulted in overestimation of the country's NG reserves — somewhere on the order of 10 percent. While prices spiked up, as can be seen on the chart, the revisions are not expected to lend much more upside power to the very Short Term bullish move, but would result in reducing overall market volatility.

Coincidentally, it is interesting to note that natural gas historically trades at pricing 12 times lower than coal. Up until the spike on Monday, natural gas been trading 21 times lower than coal, a level that normally stimulates acquisitions and encourages generators to switch from coal to gas based on its favorable $/Btu comparison. The net is that while natural gas appears to have broken out of its Short Term downtrend and pricing factors could awaken NG demand, it would take a convincing move up through the Intermediate Term downtrend line (in Green), now at 4.8, to change the IT trend and point up toward the 5 to 5.5 price level.

Also of note is the first cut at hurricane analysis for the coming season. It projects a higher level of activity than last year with the focus of landings in the Gulf...where 40% of the country's natural gas is produced.

PJM

Since our last post in March, stormy, snowy conditions in the eastern half of the US have given way to much warmer than normal temperatures that have recently resulted in greatly reduced electricity demand. And this trend has only strengthened in the past 10 days as temperatures in the PJM region have averaged as much as 12 degrees higher than normal, further suppressing the Index. And the National Oceanic and Atmospheric Administration (NOAA) predicts these warmer than normal temperatures will persist in the eastern half of the US (anchored in the upper mid-west) for at least the next 10 days, while the southwest and west coast are forecast to be cooler than normal. See the NOAA map at this link: www.cpc.ncep.noaa.gov/products/predictions/814day/814day.01.gif

SPECIAL NOTE: We would like to draw your attention to the dates shown on the chart at which the Winter Highs have occurred in the last three years: January 11th in '08, January 9th in '09, and January 8th in '10 — all clustered within a three day period. One or two years look coincidental, but three in a row, and in such a tight time span, certainly suggests we have the makings of a reasonably reliable CYCLE. We'll check back next year about the 9th of March to see how this cycle holds up.

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