The Energy Market

History

The electricity and natural gas markets in the US experienced large-scale federal and state intervention from the 1930's through the 1970's. They were regulated using a combination of state public utility laws and federal legislation. The result of this period was stifled competition and inefficient markets as regulation replaced competition as the determinant of prices.

During the late 1970's, a shortage of natural gas was created by a convoluted system of federal and state laws. This shortage encouraged reform and the eventual enactment of the Natural Gas Act of 1978. The goal of this act was to encourage the development of a single national natural gas market to allow market forces to determine the price of natural gas and to break down the barriers between intrastate and interstate markets. This Act also resulted in the creation of the Federal Energy Regulation Commission (FERC), which today is the Federal Regulator of the electricity and natural gas markets.

In the early 1980's, the country had a boom in electricity generation growth that resulted in extremely high electricity prices as these prices were passed on by utilities to their customers. Following the lead of the natural gas industry, the electricity industry had a restructuring during the late 1980's and early 1990's. The primary result of this restructuring was to unbundle the electricity-supply function from distribution on the theory that only the wires (the fixed network system) constituted a natural monopoly, while the generation of power did not. In some cases, large-volume customers (big commercial and industrial users) were allowed to negotiate directly with wholesale power suppliers that competed with the services provided by the utility at regulated prices. In other states, the utilities were forced to divest their power plant ownership, and the production of power was left to competitive suppliers. In both cases, the utilities retained the regulated natural monopoly of distribution.


The Situation Today

Over the last 20 years, the US has moved down the path of deregulation. Generally, the wholesale markets for electricity and natural gas are open, and several states are now open to retail competition for natural gas and electricity. While this ongoing transformation has resulted in more choices for customers, it has also transferred the energy price risk management to the customer. Even in the short time that energy deregulation has existed, the market has seen extreme fluctuations in prices due to a myriad of market forces and technological developments, and the market is always changing. These risks need to be properly managed to garner the opportunities that natural gas and electric choice can provide.


The energy service offering shown on the map above is based on I&C (industrial and commercial) clients as some states have restrictions on smaller volume customers.


Challenges Ahead

Looking ahead, the main challenge is to help our clients understand where the risks are and to what extent they can control them. Alfa Energy Group has a duty of care to clients to provide a better understanding of all factors that influence their energy and non-energy costs and to provide full transparency of all components. Our main role is to prepare the clients for what may be ahead and to protect their cash flow at risk. Our Total Energy Cost Management offering is designed for that purpose and provides a comprehensive framework for any further market changes.