Rising Fuel Costs Force FMPA to Raise Wholesale Energy Rates
ORLANDO, Fla., Sept. 30, 2005 – Sustained, record-high fuel prices have forced the Florida Municipal Power Agency (FMPA) to raise its wholesale energy rate effective Oct. 1.
FMPA is a nonprofit organization that supplies the wholesale power needs of 15 municipal electric utilities in Florida. The cities are Bushnell, Clewiston, Fort Meade, Fort Pierce, Green Cove Springs, Havana, Jacksonville Beach, Key West, Kissimmee, Lake Worth, Leesburg, Newberry, Ocala, Starke and Vero Beach. Owned by the municipal utilities it serves, FMPA provides economies of scale in power generation and related services to support community-owned electric utilities.
Electric power plants in Florida use a variety of fuels to generate electricity. One of the most commonly used fuels today is natural gas. Approximately 30 percent to 35 percent of electricity statewide comes from natural gas-fueled power plants. While natural gas is a clean-burning source of electric power, the downside is that natural gas prices have demonstrated a high level of volatility during the past few years and long-term forward prices have continued to rise dramatically.
Most natural gas industry participants projected in early spring 2005 that the average gas price would remain between $6 and $7 per million British thermal units (Btu) throughout the summer. FMPA’s wholesale power rates were based on those projections. Unfortunately, unusually warm weather throughout the United States has caused actual results to vary widely from projections. As demand for natural gas began to increase, prices reacted by moving higher.
Unusually high temperatures in the Southeast, Southwest and Northeast United States increased consumers’ demand for electricity beginning in June. For many electric utilities in Florida, including FMPA, customers’ demand for power set all-time records. Since a major portion of Florida’s electricity comes from natural gas power plants, utilities’ fuel demands increased, steadily driving prices upward. By August, futures prices for natural gas on the New York Mercantile Exchange reached an all-time record high of more than $10 per million Btu.
The supply situation worsened in late summer as Hurricanes Dennis, Katrina and Rita all passed through the Gulf of Mexico, decreasing the region’s natural gas production, which accounts for nearly 25 percent of the United States’ natural gas supply. A majority of the natural gas production facilities in the Gulf of Mexico remain shut-in due to these storms. Prices have remained high since the post-hurricane price spikes, and at the time of this writing, prices still remain above $14 per million Btu for gas supply this winter. This is more than double the price that utilities nationwide had expected. Because these supply disruptions also decreased the amount of natural gas that can be stored for winter heating needs, these high natural gas prices are expected to persist or even continue to rise throughout the coming year and, possibly, longer.
While FMPA has an active program for managing natural gas prices, these extreme natural gas price swings coupled with brief natural gas supply interruptions have pushed FMPA’s expected costs above its current budget forecast. Without FMPA’s fuel price risk management program—known as hedging—the necessary energy rate increase would have been nearly twice as large. Other electric utilities are experiencing similar cost increases that are likely to result in rate increases.
Because of this situation, the members of FMPA recently voted to increase the rate charged to recover fuel costs. Fuel costs are passed along at cost and represent one portion of FMPA’s total wholesale electric bill. As a result of the rate change, FMPA’s cost to its wholesale customers is projected to rise approximately 23 percent. Actual costs for individual cities may vary from the overall average depending on a city’s electric use characteristics and rate structure. FMPA does not earn a profit from its electric sales because the Agency is a nonprofit, member-owned organization.
In most of FMPA’s member cities, the wholesale rate increase is likely to result in increased retail costs. How much and when this might impact the bills of retail customers is determined by each individual city.
Besides continuing its fuel price risk management program, FMPA and its member cities have additional long-term plans to deal with the rising cost of natural gas. For example, FMPA is a co-founder of a new, first-of-its-kind partnership between municipal electric and gas utilities in the southeast United States. These utilities are seeking to protect a portion of their fuel supply from the volatility of natural gas markets by purchasing fuel directly from its source in the form of natural gas reserves or by other long-term purchase agreements.
FMPA is also committed to maintaining a modern, efficient and fuel-diverse fleet of power plants. It is prudent for an electric utility to have a diversified portfolio that includes a balance of natural gas, coal, oil and nuclear energy, just as it is prudent for individuals to have diversified investment portfolios. A diversified fuel mix provides more stable electric prices for consumers and a secure electricity supply that protects against fuel supply disruptions.
FMPA and its members are working together to address the challenges in their business and continue providing the most reliable, affordable power possible.
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Florida Municipal Power Agency (FMPA) is a wholesale power company owned by 29 municipal electric utilities. FMPA provides economies of scale in power generation and related services to support community-owned electric utilities. The members of FMPA serve approximately 1.8 million Floridians. FMPA’s members include Alachua, Bartow, Bushnell, Chattahoochee, Clewiston, Fort Meade, Fort Pierce, Gainesville, Green Cove Springs, Havana, Homestead, Jacksonville Beach, Key West, Kissimmee, Lake Worth, Lakeland, Leesburg, Moore Haven, Mount Dora, New Smyrna Beach, Newberry, Ocala, Orlando, Quincy, St. Cloud, Starke, Vero Beach, Wauchula and Williston. Additional information is available on the Internet at www.fmpa.com.