Quasi-competitive market offers cost reduction opportunity: volatility means that prices will eventually drop.(Power outlook: energy costs and trends)

Many large commercial and industrial (C&I) consumers now operate in a quasi-competitive electric market with a changing mix of regulated and competitive supply options. Regulated tariff rates are periodically adjusted to keep pace with competitive market price changes, as has been the case for over 100 years of electric price regulation. However, in a quasi-competitive market, this regulatory lag can also create a significant arbitrage opportunity for a savvy consumer prepared to monetize contract value.

Wholesale power prices rose sharply last year, creating a favorable contract position for consumers holding fixed-price contracts (regulated or competitive). Tariff consumers benefit (at least temporarily) from regulatory lag during a period of rising prices. However, holders of competitive fixed-price contracts have a more favorable position that can be monetized, subject to a successful negotiation with the competitive supplier and the host utility.

As prices rise, end users holding lower fixed-price contracts become below-market end users, with value equal to the expected savings of the fixed-price contract vs. the expected market price of power over the remaining term of the contract. Selling this contract could monetize this implicit value.

If the end user then had to buy power at the new market price, the monetized value obtained likely would be spent over the remaining period of the new contract, producing no net benefit. However, if the lagging utility tariff is still lower than the expected market price, then the consumer could reduce the total cost of electricity for the remaining period by selling the contract back to the supplier and switching to a lagging utility fixed-price contract.

To complete this transaction (contract cancellation and establishment of new contract), the end user needs the cooperation of the supplier and the utility. The supplier is likely to cooperate if the consumer is willing to share savings and if negotiations costs are low. The utility may be happy to regain an old customer or they may be required to supply all customers who request return service.

C&I's must consider a series of ...