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Electric power associations confronting steep fuel cost climbs

Mississippi’ s 26 electric power association cooperatives play a vital role in providing electricity to 101,000 businesses and 632,000 residential customers in the state. As with for-profit utilities, steeply higher prices for natural gas and fuel oil used to generate electricity are causing concerns-especially in light of Entergy Mississippi’s proposed 28% rate hike for increased fuel costs.

Those who are paying attention to rising energy costs around the world should not be surprised by Entergy’s fuel cost adjustment increase, says Michael Callahan, executive vice president/CEO of the Electric Power Associations (EPAs) of Mississippi.

“The public knows about the price increase for crude oil and gasoline,” Callahan said. “But since January 2008, U.S. natural gas prices have risen more than 81%. Coal prices and coal transportation costs have increased by nearly that same amount. Fuel expenses are, by far, the largest driver of our costs to provide service to our members and those costs now account for about half of the member’s bill. Power plant operators will also be facing significant new costs for environmental compliance over the next several years as the Clean Air Interstate Rule goes into effect in 2009 and 2010.”

Economic concerns

troubling increases in fuel prices are only one problem. Another is the decline in the economy. EPA managers across the state report delinquencies are increasing, and more customers are paying with credit cards.

Some EPAs are increasing rates. Eleven EPAs in the state own the South Mississippi Electric Power Association (SMEPA), which is the generation and transmission co-op with a coal generating plant in South Mississippi. SMEPA made a fuel cost adjustment (FCA) increase in June of about 6% of the total wholesale rate. Members of those electric power associations will see varying increases beginning in July, averaging about $5 per month for 1000 kwh.

A large driver on SMEPA’s rate is rail transportation charges from Norfolk Southern (NS).

“SMEPA is a captive shipper, meaning that NS has a monopoly on the rail line service to our Plant Morrow,” Callahan said. “Due to NS’s contract increases, our costs have gone up $20 million in the last five years, more than 30% a year the last two years. We have complained to Congress about the lack of regulation and anti-trust review of railroads, but so far no progress has been made.”

The Tennessee Valley Authority (TVA) is the wholesale provider of power for 14 of the EPAs. In January of 2006 TVA implemented a quarterly FCA. Callahan said this implementation was due mainly to the erratic cost of natural gas, but also the rising cost of coal, uranium and power purchased on the wholesale market.

High and dry

TVA has also been hurt by the drought that has blanketed Tennessee, Alabama and Georgia for the last two years. Normally 10% of TVA’s 33,000 megawatts is hydro generation. But because of the lack of rainfall, TVA has had to replace that generation with power purchased from the wholesale market.

“TVA has had three fuel cost adjustments in 2008,” Callahan said. “In January the fuel cost adjustment was decreased by 2.7%. In April, there was an FCA increase of 4.8% plus a 7% base rate increase which combined for an 11.8% overall increase in member’s bills. On July 1, TVA increased the FCA by 2.1%.”

Both TVA and SMEPA have a diverse fuel generation mix: nuclear, coal, natural gas, and hydropower. Callahan said in the past this diversity has served them well and allowed them to switch fuels to achieve the best economics. “However, we are in unprecedented territory where all generation fuels are at historic highs,” he said.

Conservation of energy by businesses is no longer just something trendy; it is critically important to the bottom line particularly at a time when the economy has been sluggish in many sectors. Callahan said conservation is now more a forced measure than a voluntary effort.

“With the rising cost of gas and food, our members are having to make some tough choices about where to spend their monies,” he said. “More members are requesting information on energy efficiency and energy audit programs offered by our associations.”

Communicating conservation

EPAs are responding by stepping up their customer education programs, which include radio, TV and newspaper ads, to encourage members to conserve and use electricity more wisely, especially during the “peak” hours of the day. The peak is when electricity is in most demand-and the most expensive. Depending on weather and time of year, usually occurs between the hours of 4 p.m. and 8 p.m.

EPAs are also encouraging members to switch to compact florescent light bulbs (CFLs). Energy efficient appliances also help reduce the amount of energy a member uses and, over time, can actually pay for themselves. EPAs are practicing what they preach. Many have done “in-house” energy audits and made changes to make their offices more efficient.

EPAs primarily serve rural areas, some of which are experiencing rapid growth.

“Many EPAs are experiencing rapid residential growth because many new subdivisions are in rural areas or in outlying areas near cities,” Callahan said. “We expect the area around the Toyota plant in north Mississippi, the area south of Memphis and areas along our Coast to continue to grow faster than the national average. SMEPA added 15,000 meters last year and currently serves over 402,000 members, through their 11 members systems. In addition, SMEPA’s latest Power Requirements Study is projecting long-term growth in electric demand of 2.2% a year.

“However, there are problems associated with this growth. As Mississippi’s economy and population grow over the next two decades, TVA and SMEPA, like many other American electric utilities, will be investing in new generation projects and transmission lines. Projected fuel costs will be a major determining factor in those decisions about future generation projects. Those investments will be much more expensive than in the past, but the consequences of not keeping up with demand could be serious, including more instances of major failures in the some parts of the country, or rolling blackouts.”

Climate change?

Another concern on the horizon is the possibility of utilities being taxed for emitting greenhouse gases. Recently, representatives from the EPAs met with congressional leaders in Washington D.C. on climate change legislation.

“It was important for the Congressional delegation to understand the financial impact of the Liebermann-Warner climate change bill,” Callahan said. “If the legislation would have passed, Mississippians could have seen a $1,200 increase in their annual residential electric bills. Mississippi cooperatives recommend that Congress focus on comprehensive energy policy that includes goals for reliable generation and transmission before they work on climate change legislation. The nation needs a strong energy policy that can assure reliable and affordable electric energy for many years to come.”

Randy Wallace, general manager, Pearl River Valley Electric Power Association, said they are very concerned about the political environment possibly putting limitations on construction of new coal fired electric generating plants or putting a tax on emissions.

“The buzzword is global warming, and politically we are very sensitive to what is going on there,” Wallace said. “There are two sides to the science out there on global warming. One side says global warming is a huge problem, and the other side contradicts the global warming thing all together. There are brilliant people on both sides of the issue. We’re concerned about what Congress is going to do. People are concerned about emissions, but what price are they willing to pay for that? Addressing global warming has its price consequences. We are going to continue to monitor climate legislation from the political standpoint and continue to keep our people informed of potential costs involved with that.”

Wallace said the potential tax on greenhouse gases is particularly troubling during this time of rapidly escalating fuel costs. He said while Pearl River Electric can continue to do a great job on quality service, they have absolutely no control over fuel costs.

“Fuel costs are a major concern on our radar screen right now,” Wallace said. “We are very cost conscious because the people we serve actually own our business. We try to keep our costs as low as possible. Right now coal is much more cost efficient than natural gas. Coal itself has gone up because of the cost of transportation to get it to Mississippi. Some of it comes from out West, and the shipping cost into Hattiesburg area is substantial. “

Like many of its sister companies, Pearl River Valley EPA is currently installing automated meter reader systems that will allow two-way communications from the office. When operational, it will allow the EPA to read meters from the office, as well as connect and disconnect service.

“Along that line in the future we will be able to send signals to customers to motivate them to get off our peak,” Wallace said. “The meters will be that sophisticated. If we can move people off our peak, that will save the possibility of having to build more generation as quickly. We will communicate to customers that if they use electricity during peak demand hours, it will cost more. That will motivate people to do things like laundry and dishwashing at other times.”
The remotely read meters also save gas, vehicle expenses and personnel expenses.

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.


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