Consumers’ Update on Massachusetts Electricity Rates
June 2006

Learn the Full Story Behind Recent Rate Changes for Small Businesses for the following Rate Classes:
Boston Edison G1, G2, T1, S1, S2, S3
Western Mass G0, T0, 23, 24
Commonwealth Electric G1, G4, G5, G6, G7
Cambridge Electric G0, G1, G4, G5, G6

NSTAR and Western Massachusetts Electric (WMECO) recently announced their electricity generation rates for Basic Service Customers (effective July 1 through December 31, 2006), a customer class that includes most small businesses. The latest rate announcement might give you a small decrease from current charges and may seem beneficial as you prepare to manage your summer energy budget. However, there are several factors that affect your rates, any of which may change your rate again after December 31. This guide provides objective advice designed to help you understand those factors.

As a Massachusetts business owner, you can choose your electricity supplier. Your choices are simpler when you have a clear understanding of how your current utility determines your rates. Strategic Energy, an independent electricity supplier that serves Massachusetts customers, prepared this information so you can understand how energy market conditions and the current NSTAR and WMECO approach to rate setting may affect your monthly bill—this summer and beyond.

Why Did My Rates Decrease?

This summer’s electricity rate decrease can be attributed to several factors.

Your Basic Service rates are actually set based on current energy market conditions and generally reflect the full cost of providing your electricity usage. Since generation costs are affected by market conditions, these costs—and your rates—are subject to volatile changes. Recently, the electricity market worked in favor of lower rates for consumers. In other words, the cost for wholesale electric power went down as compared to last winter.Since your utility will often break out these costs, you can see on your bill that generation charges account for the largest segment of your bill and the determination of your overall cost for electricity service.

It’s important to know that the cost of natural gas is one of the market conditions that most significantly affect generation costs and rates. Natural gas is heavily used to generate electricity in New England, so when its price rises, you will often see a rise in your generation rates. In early 2006, the industry has experienced a nationwide drop in natural gas prices. To a large extent, the natural gas industry has rebounded from last year’s Gulf Coast hurricanes that interrupted supply and caused gas prices to skyrocket. In addition, the recent mild winter reduced demand for natural gas and other fuels used to generate electricity. Therefore, the reduction of natural gas prices helped lower your Basic Service rates.

As a consumer with choice, you should know that these rate decreases are not exclusive to NSTAR and WMECO. Lower electricity rates are available throughout the wholesale energy market, where other competitive electricity suppliers purchase their energy to serve customers. In other words, by working with another competitive electricity supplier, such as Strategic Energy, you may be able to secure a generation rate that is comparable to that offered by your current utility.

The difference between utility rates and rates offered from competitive suppliers could be more visible at a later date, when utilities may collect other costs that are only estimated and included in your rates at this time. Then, it is possible that customers in some locations may experience a rate increase. The following sections explain why.

Issues for NSTAR Customers

Although NSTAR is currently offering you a rate decrease, you may see a rate adjustment later.

You might be aware that the ISO-NE is the company that operates the transmission system in New England and calculates the market price for energy. In 2006 ISO-NE reclassified a charge assessed to customers in southeastern Massachusetts. The electrical system in this territory has particular infrastructure constraints that require high-cost, supplemental power generation operations to ensure reliable power service. These costs, sometimes referred to as “Reliability Uplift Charges,” are passed along to consumers in their electricity rates.

ISO-NE’s Reliability Uplift Charges have been significant in 2006. However, NSTAR is not yet passing along those actual costs to consumers in their current Basic Service rates. Instead NSTAR’s Basic Service generation rates include an “estimate” for those charges. At a future date, NSTAR may look to make an adjustment to this estimate so that the utility can recover the actual costs that is being paid to ISO-NE. However, NSTAR has not released any information about when the adjustment will be made, how much the Basic Service rate will increase after the adjustment, or how they will go about collecting the adjustment. By doing so, NSTAR makes it a challenge to comparison shop because they don’t offer a transparent explanation of how their pricing is structured.

NSTAR’s approach of suppressing the actual costs until a later date can make it difficult for consumers to predict their future rates for Basic Service and make an apples-to-apples comparison to competitors rates. At some point in the future, NSTAR will most likely want to recover the actual costs. Depending on when NSTAR incorporates these actual costs into your rate, you may see a price increase go into affect as early as this winter at the January 1, 2007 rate adjustment. Any price increase could be intensified by other market conditions, such as an increase in natural gas prices, traditional seasonal cycles of increased demand for electricity and natural gas, or the effects of hurricane season.In short, these changes could result in a price increase that could cancel out any cost savings you achieve this summer.

Issues for WMECO Customers

Similar to NSTAR customers, Western Massachusetts Electric’s Basic Service rates are also not necessarily reflective of the actual costs that the utility is incurring to provide you with electricity service. At some point, these costs will most likely be passed along to you in the form of an increased Basic Service rate.

WMECO has modified their rates to remove their estimated amount for “Capacity” charges (sometimes called UCAP) from their customers’ rates. However, it is unlikely that the utility will block these costs from customers indefinitely, and at some point, we anticipate an adjustment that will recover these costs. Depending on when WMECO incorporates these actual costs into your rate, you may see a price increase go into affect as early as this winter, at the January 1 2007 rate adjustment. The price increase could be intensified by other market conditions, such as an increase in natural gas prices, traditional seasonal cycles of increased demand for electricity and natural gas, or the effects of hurricane season.In short, these changes could result in a price increase that could, cancel out any cost savings you achieve this summer.

At the writing of this article, WMECO has not yet revealed a plan for incorporating capacity charges into your Basic Service Rate. By doing so, WMECO also makes comparison shopping a challenge because they don’t offer a transparent explanation of how their pricing is structured.

A Clear-Cut Option for Shielding Your Budget

Some competitive electricity suppliers, including Strategic Energy, offer options for Fixed Price electricity service. With this product you can secure your electricity generation rate for the length of your contract. (Strategic Energy’s contracts are available in terms ranging from 12 months to 5 years, depending on your comfort level). As explained above, generation rates are typically the most volatile portion of your electricity rates because they are affected by many market conditions. With a Fixed Price contract, you can protect your electricity budget from the risk of increases in these costs.

It is important to note when choosing a Fixed Price contract, your generation rates will remain locked, but other fees are subject to change depending on unpredictable market cost, though those costs are subject to change in the utility’s Basic Service rate, too. Although the incorporation of these actual costs will change your monthly bill, you will have a much greater degree of certainty about your generation charges, giving you a greater degree of certainty in your budget planning.

In short, Strategic Energy can promise something that NSTAR and WMECO simply can’t. Your generation charges will remain the same throughout your Fixed Price contract. We are committed to a straightforward approach with our customers, and we will explain our price to you so you have a clear understanding of our offering. We can provide you with a quote that clearly outlines how we calculate your rate, including which components are fixed and which are not. Even if our current quote is slightly higher than your utility’s current short-term rate, we can offer protection from generation-related price increases that could bring you significant savings over the course of your contract.

To request an electricity quote, click here.

Since 2001 Strategic Energy has earned the trust of Massachusetts business owners by educating them on their choices in electricity service. As a nationwide, independent electricity retailer, we give you objective advice on how to manage your electricity supply and access to the wholesale electricity market. You’ll receive reliable service with a contract that works for your business.

If you would like to learn more about our current electricity rates and our contract terms, we are happy to explain them to you. To learn more about these regulatory issues, click here.