Utility gas prices typically change quarterly or monthly. Until recently, that wasn't the case in electricity. Now Maine is cutting the term of their standard offer service from one year to six months in order to more closely track the wholesale market. Massachusetts has already shortened the term of their variable default electric service for industrial customers from six months to three, and their Standard Offer rates will disappear in March of next year. New York ratepayers have been paying variable wholesale-based electric rates for years, and markets in New Jersey and Maryland are now set by competitive auctions, reflective of wholesale rates. Larger customers in these and other states are increasingly finding themselves placed on market-based rates.

Energy buyers used to making decisions to switch to third-party suppliers, based on savings derived from fixed price rates, are realizing that the future will be more challenging in determining the value of competitive contracts. Guaranteed savings may come only with variable-price contracts, and fixed prices will increasingly need to be judged against a moving utility benchmark. This phenomenon, coupled with volatility and rising prices, makes it critical for buyers to keep a weather eye on tariff changes, wholesale indices and overall pricing trends.

So what's a buyer to do? In this changing environment, two buying strategies emerge. One is to quickly execute a series of short-term contracts based on default rates, as they become known. The other is to "shop" almost continuously, looking for reasonably good times to lock in prices (possibly for longer terms) that do not necessarily coincide with the end of current contracts.

The first strategy offers a higher certainty of short-term savings, but suppliers may grow weary of competing for short-term lengths for all but the largest loads, and the move toward hourly pricing will erode the territories in which this can effectively be done. The second strategy - that of non-stop shopping - requires considerable time and sophisticated information resources to execute properly. And it comes with the additional risk of making forward commitments that may or may not prove to be optimal with the passage of time. How do you mitigate that risk? Seek better decision-making tools, and help your company understand that energy procurement, like investment management, will entail taking measured and appropriate risks.




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