Residents and businesspeople on the Delmarva Peninsula are talking about the issue. Local media outlets have run numerous stories on it since late last year. And Delaware’s General Assembly will spend most of its time next week considering what to do with it.
Delmarva Power rate increases are expected to start on May 1 when a seven-year rate cap is lifted.
According to the original plan, Delmarva Power would raise its residential rates by 59 percent, starting on the first of May. In late February, company officials announced a proposed phase-in plan of the hikes over a period of about a year-and-a-half.
Now, according to a proposed bill floating around the general assembly, Delmarva Power residential customers might have the option to take the one-time 59 percent hike or defer to the phase-in, receiving incremental hikes until June of 2007.
With the proposed phase-in, the average customer would pay an additional $18 on their monthly bill starting May 1, another $18 starting Jan. 1, 2007, and an additional $34 starting June 1, 2007, according to Delmarva Power Spokesman Matt Likovich.
That plan would ultimately be more costly for customers, who would pay a rate increase of about 63 percent because Delmarva Power plans to borrow money to cover $60 million deferred through the proposed plan. In other words, the deferral of the hike comes with interest fees for the customer.
State legislative committees will hear the proposed plan in the form of one of six new pieces of energy legislation next week. State Sen. George Bunting said he is in favor of a phase-in plan but he hopes the legislature will pass a plan of its own rather than one adopted from Delmarva Power.
“It has to be a legislative plan. The legislature got us into this thing,” Bunting said, expressing concern about the proposed extra fees attached to the deferral. “You have to be careful with that so there’s no extra profit being made.”
State Rep. Gerald Hocker agreed with Bunting, favoring some kind of available deferral plan, especially for low-income families.
“I’m going to elect not to take it (personally) because in the long run it’s going to cost more money,” Rep. Hocker said. “But there are people on fixed income that can’t pay it all at once. It’s a must for those people.”
Likovich said that Delmarva Power is open to suggestions on the plan but legislators must work with the company to come to a decision soon. May 1 is just more than a month off, and the company’s billing department needs time to adjust to any new plan, he said. The company also needs time, he added, to inform its customers of the plan, in whatever form it may be approved.
“We need to get this hurdle cleared sooner rather than later,” Likovich said with a sense of urgency seconded by Bunting. “We want compromise on this issue but we’re also calling for a speedy decision.”
‘At the mercy of the market’
Before the Delaware general assembly deregulated the industry but capped energy rates in 1999, Delmarva Power residential customers experienced a 7.5 percent rate decrease. In the seven years since, while fossil fuel prices have continued to skyrocket, those residential customers have paid the 1999 rate for their home energy costs.
The rate hike proposed for May 1 is essentially making up for seven years of lost time, Likovich said.
“It’s not the most pleasant news for the customers, but we’re at the mercy of the market,” Likovich said. “Over the last seven years, customers collectively saved $1 billion. But people seem to forget that.”
According to the Energy Information Association (EIA), the statistical arm of the U.S. Department of Energy, fossil fuel prices for power generators have increased dramatically in those seven years, because — in part — of hurricanes and a decreasing amount of “conventional gas” available, said Jonathan Cogan, an EIA spokesman. The increases in natural gas — above coal and oil — have made the most impact, he added.
While there are wells for natural gas across the country, “conventional gas” doesn’t have anything to do with its geographic location, Cogan said. It has to do with where that gas is lodged and how much money it takes to extract that gas from rock formations.
“Natural gas is not in a hollow cavern underground. It’s within the rocks,” Cogan said. “Some rocks have more precocity to them. Other formations are holding gas but the way the reservoir rock is, it needs to be broken up through different processes through injecting high pressure gas and steam,” he added.
While technology is available to perform such processes, “that technology costs money,” Cogan said, but is necessary to utilize because of demand for energy in the United States. That demand is also being felt in Canada, a country which has traditionally exported 15 percent of the gas the United States consumes annually, Cogan said.
“Canada was the swing supply that filled in the gap,” he added. “Their supply-demand picture is not going to allow that to continue.”
Also, the hurricanes that devastated the Gulf Coast region of the country have had a lasting devastating impact on the energy market. Before the storms, 20 percent of the country’s natural gas was produced in the Gulf of Mexico, Cogan said. Some 14 percent of that production, he added, has not yet returned.
In consequence of those factors, natural gas prices for power generators have risen by about 325 percent since 1999, according to EIA numbers. Oil prices for generators since 1999 have risen by about 290 percent in the same time, according to the EIA, and coal prices have risen by less than 50 percent.
Increases passed onto Delmarva Power — which merely serves as a middle man, delivering energy to customers — have been significantly higher, according to Delmarva Power officials. It has seen increases of 450 percent in natural gas prices, 300 percent in oil and 150 percent in coal since 1999, according to Likovich and a letter that company officials sent to customers last week.
“There’s going to be a mark up on their end to turn a profit,” Likovich said, “And fossil fuel prices are the main driver of electric rates.”
While Cogan said that United States officials are working to import Liquefied Natural Gas (LNG) to ease the expense of drilling for “unconventional gas,” and start drilling in untapped Alaskan market, he doesn’t expect long-term prices to drop soon. According to the EIA, natural gas prices might drop minimally next year but rise again to more than 2006 prices in 2008.
“We’re seeing a declining production from cheap conventional gas,” Cogan said. “The remaining gas that we’re getting at is more expensive to produce.”