Managing Utility Price Risk Preserving Capital Budgets in...

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1 Managing Utility Price Risk and Preserving Capital Budgets in Today’s Volatile Energy Market Presented By: Larry Myers, PE, CEM * Mike Mumper, CPMM * Sherri Crawford Sales Representatives - TAC Energy Solutions 4431 North Front Street, Suite 100 Harrisburg, PA 17110 Office: (717) 232-8182 May 2, 2006 1 2 Agenda Volatility in Today’s Utility Market Natural Gas & Electricity Transitioning Away From Rate Caps Within Semi- Deregulated Energy Markets PA PUC’s Implementation of an Electric Market Portfolio Standard Energy Rate Escalations / Locking in Today’s Rate Minimizing Risk Exposure via Conservation Typical Approaches to Implementing Utility Conservation Measures Pros / Cons of Each Approach Questions and Answers Agenda 3

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Page 1: Managing Utility Price Risk Preserving Capital Budgets in ...igate.sydist.com/Expo2006/presentations/managing_utility_price_risk.pdfManaging Utility Price Risk and Preserving Capital

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Managing Utility Price Riskand

Preserving Capital Budgets in Today’s Volatile Energy Market

Presented By:

Larry Myers, PE, CEM ∗ Mike Mumper, CPMM ∗ Sherri Crawford

Sales Representatives - TAC Energy Solutions4431 North Front Street, Suite 100

Harrisburg, PA 17110Office: (717) 232-8182

May 2, 2006

1

2Agen

da

Volatility in Today’s Utility Market• Natural Gas & Electricity• Transitioning Away From Rate Caps Within Semi-

Deregulated Energy Markets• PA PUC’s Implementation of an Electric Market Portfolio

Standard• Energy Rate Escalations / Locking in Today’s Rate

Minimizing Risk Exposure via Conservation• Typical Approaches to Implementing Utility

Conservation Measures• Pros / Cons of Each Approach

Questions and Answers

Agenda

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Volatility in Today’s Utility Market

Natural GasNatural Gas

Fully Deregulated, Mature MarketFully Deregulated, Mature Market

Many suppliers can provide natural gas commodity to Many suppliers can provide natural gas commodity to meet your facilities needs. meet your facilities needs.

Large Commercial AccountsLarge Commercial Accounts: Daily reconciliation : Daily reconciliation General Commercial AccountsGeneral Commercial Accounts: Monthly reconciliation: Monthly reconciliation

Volatile Energy Markets Cause Headaches

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What Happened To Predictability?

Variability In Weather Conditionshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf

Katrina

Rita

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Variability In Substitute Fuel Costshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf

Variability In External Conditionshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf

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Variability In Market Expectationshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf

Volatility in Today’s Utility Market

ElectricityElectricity

Semi Semi ––DeregulatedDeregulatedRate Caps in PlaceRate Caps in Place

1998: Deregulation initiated by PA Legislature & PUC 1998: Deregulation initiated by PA Legislature & PUC 2000: Wholesale prices exceed Price 2000: Wholesale prices exceed Price –– to to –– CompareCompare2002: Practically no retail shopping of accounts2002: Practically no retail shopping of accounts2004: Alternative Energy Portfolio Standard2004: Alternative Energy Portfolio Standard

Electric Utilities begin phase out of rate capsElectric Utilities begin phase out of rate caps2012: Full Deregulation of all Electric Utility Companies2012: Full Deregulation of all Electric Utility Companies

Total Energy Costs Industrial Users in Pennsylvania

4,000

4,200

4,400

4,600

4,800

5,000

5,200

5,400

5,600

5,800

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

$1,0

00,0

00

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Variability In Usage PatternsYour Buildings Are Dynamic

Facility's Actual Electric Use Per Day

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

12:00 1:0

02:0

03:0

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06:0

07:0

08:0

09:0

010:

0011:

0012:

00 1:00

2:00

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4:00

5:00

6:00

7:00

8:00

9:00

10:00

11:00

Time of Day

Ele

ctri

c D

eman

d (

KW

)

Peak Energy Needs Can Be Costly

Facility's Electiricity Need

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0% 5% 10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Occurance Rate

Act

ual

Dem

and

(K

W)

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Direct kW charge$12.09 per kW

Indirect kW chargeBut, the billing demand (kW)

affects the size of each kwh block in the tiered

rate structure.

Variability & Complexity In Rates

kWh

$ p

er k

Wh

Tier 1Tier 2

Remaining kWhNew Tier 1New Tier 2

New Remainder of kWh

Example: 20,000 KW reduced to 19,000 KW

300 KWh / KW x 1,000 KW = 300,000 KWh

300,000 KWh x $0.026 / KWh = $7,800 / month

Example: 20,000 KW reduced to 19,000 KW

150 KWh / KW x 1,000 KW = 150,000 KWh

150,000 KWh x $0.026 / KWh = $3,900 / month

$12,090 + $11,700 Savings Per Month

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Electric Supplier’s Manage Costs

Facility's Actual Electric Use Per Day

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

12:00 1:0

02:0

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06:0

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08:0

09:0

010:

0011:

0012:

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2:00

3:00

4:00

5:00

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7:00

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9:00

10:00

11:00

Time of Day

Ele

ctri

c D

eman

d (

KW

)

Base Electric Need(Long Term Contract)

Seasonal Daily Need

Spot Market Buy Spot Market Sell

Variability In Market Prices

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Variability In Market Prices

Henry Hub Historical and Future Price Expectations

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

1/1/20

04

4/1/20

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9/30/2

004

12/31

/2004

4/1/20

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7/1/20

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10/1/2

005

12/31

/2005

4/1/20

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7/2/20

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10/1/

2006

12/31

/2006

4/2/20

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7/2/20

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10/1/

2007

1/1/20

08

4/1/20

08

7/1/20

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10/1/2

008

12/31

/2008

Wh

ole

sale

Nat

ura

l Gas

( $

/ mm

Btu

)

Average NYMEX Henry Hub NGSettle Price

NYMEX Futures Henry Hub NGPrice

Variability In Market Prices

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Variability In Market Prices

PJM Historical and Future Price Expectations

$30

$40

$50

$60

$70

$80

$90

$100

$110

1/1/20

04

4/1/20

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004

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/2004

4/1/20

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005

12/31

/2005

4/1/20

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006

12/31

/2006

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7/2/20

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0071/1

/2008

4/1/20

08

7/1/20

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10/1/2

008

12/31

/2008

Wh

ole

sale

Ele

ctri

city

( $

/ MW

h )

Average PJM Hourly PriceNYMEX Futures PJM Price

Variability In Market Prices – All Energy

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Projected Energy Costs with Inflation

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

BaseYear

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years Looking Forward

To

tal

En

erg

y C

ost

s

Status Quo

Proactive Approach

Return To Energy Costs of Six Years AgoHow do you make it happen?

So where does this leave us?

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The Ugly Truth – This is Where We Are

Ø Infrastructure is aging

ØGrowth is challenging capacity

ØFunding is decreasing

ØExpectations are increasing

ØSystems are more complex

Are we doomed to fail?

Does this happen in your budget meetings?

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Financial Impact of Implementation

En

erg

y B

ill

Now Yr6 Yr12

Lost Funding OpportunityLost Funding Opportunity

Financial impact of implementing ECMsover time

Ene

rgy

Bill

Now Yr6 Yr12

Wouldn’t this scenario be better?

Full Funding PotentialFull Funding Potential

Financial Impact of Implementation

Financial impact of implementing ECMsover time

Projected Energy Costs with Inflation

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

BaseYear

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years Looking Forward

To

tal

En

erg

y C

ost

s

Status QuoTraditional

Proactive Approach

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• Selection based on best qualified proposed design

• Single point of responsibility

• Eliminates “finger pointing” between GC and A/E

• Time and growth costs minimized

• Shorter design/ construction phase

• Selection based on reputation, quality of work and past performance

• CM works with architect to evaluate materials, building systems, costs and schedules during design

• CM reviews drawings early in process to minimize conflicts and change orders during construction

• CM provides a bonded, guaranteed price for work

• Lowest long-term cost

Typical Construction Delivery Methods

• Lowest initial price

• Potential for change orders and claims very high

• No contractor involvement in design phase

• Final price unknown

• Staff extension of owner

• PM can be involved in operations, design, construction and maintenance

• PM has no liability for cost and schedule control

• PM has no control over trade contractors

Performance Contracting Benefits

PiecemealConsistent Approach

Funding Must Be ObtainedSelf-funding Project, Guaranteed

Low Bid ContractingBest Value Contracting

Increased Deferred Maint.Reduced Deferred Maint.

Future Construction PricesToday’s Construction Prices

Ene

rgy

Bill

Now Yr6 Yr12

Ene

rgy

Bill

Now Yr6 Yr12

Performance Contracting vs. Traditional ImprovementsPerformance Contracting vs. Traditional Improvements

Lost Funding OpportunityLost Funding Opportunity

Full Funding PotentialFull Funding Potential

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Where does Performance Contracting fit?

versus

What is Performance Contracting (PC)?

A procurement method used to obtain facility improvements without the requirement of up-front capital.

Project (maximum of 15 years) is funded through GUARANTEED energy savings.

Guaranteed Energy Savings Act: Act 77 of 2004Guaranteed Energy Savings Act: Act 77 of 2004

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++

LightingLighting

Speed DrivesSpeed Drives

Energy ManagementEnergy Management

Major HVACMajor HVAC

Building EnvelopeBuilding Envelope

Power SystemsPower Systems

PC: What?Energy Related Improvements

$Annual Bill

Utilities

ESCO

Inve

stm

ent

Gra

de

Audit

Inefficient Uses

Inefficient Costs

Utility CompaniesUtility CompaniesElectricElectric

Natural GasNatural Gas

Water & SewerWater & Sewer

PC: What?Project Implementation

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$Annual Bill

Utilities

ESCO

Impro

vem

ents

, plu

sIn

tegra

ted D

esi

gn

Const

& P

roje

ct M

gm

tTra

inin

gW

arr

anty

Up-Front Cost

Third-party funding- Secured against Improvements & Savings

- Paid on Schedule of Values

$$

Inefficient Costs are SAVED!

Utility CompaniesUtility CompaniesElectricElectric

Natural GasNatural Gas

Water & SewerWater & Sewer

PC: What?Project Implementation

$Annual Bill

Utilities

ESCO

Impro

vem

ents

, plu

sIn

tegra

ted D

esi

gn

Const

& P

roje

ct M

gm

tTra

inin

gW

arr

anty

Paym

ent

Guarantee >

Payment

Guara

nte

e

Utility CompaniesUtility CompaniesElectricElectric

Natural GasNatural Gas

Water & SewerWater & Sewer

PC: What?Project Implementation

$$

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PC Overview

There is hope!

Ø Leverage inefficiencies(create money out of your problems)

Ø Long-term performance guaranteed

Ø Long-term savings guaranteed

Ø Single-point of accountability for project performance

Ø Funded with O&M savings

Ø Guaranteed energy savings projects are being implemented throughout facilities in Pennsylvania

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Conclusion

Single Most Important Factor in the Success of a Project is Selecting the Right Partner!

Selecting The Right Partner

Ø Independent and objective

Ø Solution focused

Ø Comprehensive long-term approach

Ø Organizational depth/expertise

Ø Financially stable:require bonding reference

Ø Professional disciplines on staff

Ø Similar experience

Ø Can you maintain a relationship over time

Ø Commitment to Pennsylvania

References validate selection criteria.

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Questions?