FEATURE ARTICLE, AUGUST 2008

STORMY SKIES: PREPARING YOUR ENERGY BUDGET FOR HURRICANE SEASON 2008
With what’s already proved to be an active hurricane season, locking into energy contracts may save your company money.
John Battista

Commercial property owners concerned about budgeting for energy costs over the coming months have another factor to consider in their planning — the National Oceanic and Atmospheric Association’s (NOAA) annual report on the predicted severity of the hurricane season, defined as June 1 through November 30. This year, it’s expected to be above normal.

Energy prices and hurricane seasons are not an easy pair to make, but the regions typically affected by hurricanes are also the oil and gas producing centers of the United States. The Gulf Coast’s vulnerability to hurricanes translates to vulnerability of the energy production industry, where major damage can halt production, send energy costs through the roof, and keep production facilities out of commission for several months. 

This year, weather and climate experts say the Atlantic basin will likely see a more active hurricane season. The NOAA’s Climate Prediction Center calls for a 65 percent chance of an above-normal season, expecting 12 to 16 named storms and two to five intense hurricanes. The forecast team at Colorado State University predicts this season will be well above average for the U.S., with 15 named storms and eight hurricanes, four of which will be intense. Long-term averages for the United States are 9.6 named storms, 5.9 hurricanes and 2.3 intense hurricanes each year.

Last year’s rather benign hurricane season was a dodged bullet for the oil and natural gas industries, but just 2 years before, Rita and Katrina, two of the most destructive hurricanes in U.S. history, tore through the Gulf Coast. The destruction led to the shutting down of as much as 14 percent of U.S. refinery capacity, about 80 percent of crude oil, and 66 percent of natural gas production for several months. During this time, Texas energy consumers saw the price for a 12-month strip of natural gas climb to nearly $13/MMBtu (million British thermal units) and not recover until early the following spring.

Budget managers can avoid this unpredictable market volatility by working with an energy management firm that can secure contracts that lock into low third-party supplier rates. It’s an insurance policy against rising prices, delivering savings over prior years’ rates and the comfort of budget certainty.

Options for Gaining Budget Certainty

For Texas businesses, there are two options available for the procurement of electricity. No longer can a business choose to stay with the utility on a regulated rate, formerly known as the “price to beat.” If a business does not choose a supplier, ultimately it would be placed on a default, unregulated price that will prove to be very costly. The alternative is for that business owner to shop for power and go to a third-party supplier. Energy consultants can be very helpful in this process, particularly if the business is considering an index or blended product, rather than a fixed-price product.

With a third-party supplier, businesses will face a myriad of products  from which to choose. At one end of the spectrum is the fixed-price option. In a fixed-price contract, the customer is locked into one rate for a given length of time, be it 6 months, a year, 2 years, and so on. At the other end, there is a full-index product. With an index contract, locking in is still an option, and a consultant can help evaluate buying opportunities when locking in all or a part of the customer’s requirements would be beneficial. Hybrid or blended options also exist, where at the onset a portion of the customer’s requirements are locked in at a fixed price while the remainder floats on an index, with the ability to lock in at a time that will be economically advantageous or offer protection from events in the marketplace.
Expert Advice

Considering the options above, it’s clear that third-party suppliers are most likely to offer the lowest prices, and are a great choice for energy buyers looking to insulate themselves from the effects of a potentially severe hurricane season. But securing the best rates when negotiating a contract can be complicated. Many property owners turn to energy consultants who have the time and market expertise to make strategic decisions that will result in the highest long-term savings.

Energy procurement consulting can be very beneficial to property owners, especially for those operating multiple sites across the state or across the country. A consultant’s role is to manage risk for your business, and give you the most budget security and predictability. These experts analyze the financial and contractual differences among third-party energy suppliers and their products, determine which options are most beneficial to their client, and then help the buyer make final decisions about which vendors best meets their unique needs. Their knowledge of the markets, access to timely information, and analytic tools help them stay up-to-the-minute.

To best serve their clients, energy consultants will gather and analyze a year’s worth of utility invoices. In addition, the consultant will want to get a full appreciation of the customer’s risk/reward appetite.

As an example, if the customer is extremely risk adverse and interested only in budget certainty, the best option may be to develop fixed-price products or an index product where the majority of the customer’s load is hedged. At the opposite extreme, if the client is willing to accept more risk to attempt to minimize its budget, the best fit may be either a full index or an index with only a minimal portion of its requirements hedged. In any case, the energy consultant will help the customer in the negotiation of the terms and conditions of the contract and help the client develop a purchasing strategy designed to meet the customer’s risk/reward objectives. The consultant, throughout the term of the contract, will monitor the market and work with the customer to analyze buying opportunities in both a rising and falling market.

Locking into energy contracts can be risky business, but the benefits to major energy consumers in volatile markets can be great. When the threat of a hurricane season is looming, it’s a good time to take a hard look at the stability of your energy expense budget.

John Battista is director, supply management, with Advantage IQ.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.