TROUBLE AHEAD, TROUBLE AHEAD, TROUBLE BEHINDTROUBLE BEHIND

SOME THOUGHTS ON THE ENERGY OULOOKSOME THOUGHTS ON THE ENERGY OULOOKAND THE LOW-INCOME CONSUMER AND THE LOW-INCOME CONSUMER

INTERESTINTEREST

NCAF LEVERAGING CONFERENCENCAF LEVERAGING CONFERENCE

ST. PETERSBURG, FLORIDAST. PETERSBURG, FLORIDA

OCTOBER 25, 2006OCTOBER 25, 2006

EIA Winter Outlook EIA Winter Outlook For 2006-2007For 2006-2007

Heating Oil Prices FlatHeating Oil Prices Flat Heating Oil at $2.46 per gallonHeating Oil at $2.46 per gallon Natural Gas Prices Down 16%, Propane Down 5%Natural Gas Prices Down 16%, Propane Down 5% Natural Gas at $12.23 per mcf, Propane at $1.85 per Natural Gas at $12.23 per mcf, Propane at $1.85 per

gallongallon Electricity Prices up 5 %Electricity Prices up 5 % National average of 10.1 cents per kwhNational average of 10.1 cents per kwh A Normal Winter Will Wash Away The Price DropA Normal Winter Will Wash Away The Price Drop Last Winter Was So Warm It Was Off The Charts!Last Winter Was So Warm It Was Off The Charts!

HISTORY OF MIDWINTER NATURAL GAS HISTORY OF MIDWINTER NATURAL GAS COMMODITY PRICECOMMODITY PRICE

Price Trend For January 07 Futures ContractPrice Trend For January 07 Futures Contract

Source: Wall Street Journal, 9/19/06

EXPECTED EXPENDITURES EXPECTED EXPENDITURES FOR 2006-2007FOR 2006-2007

Low-Income HouseholdsLow-Income Households

$806

$1,832

$1,034

$2,311

$1,289

$2,714

$520

$1,344

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

NaturalGas

Propane Fuel Oil Electricity

By Primary Heating Fuel

Heating/CoolingTotal Bill

Source: ORNL Tabulation from EIA STEO & RECS

SSHORT-TERM MARKET CONDITIONSHORT-TERM MARKET CONDITIONS

Inventories well above Inventories well above average levels for all average levels for all major fuelsmajor fuels

No repeats of No repeats of Hurricanes Katrina and Hurricanes Katrina and RitaRita

Most (but not all) Most (but not all) production losses from production losses from last year restoredlast year restored

Normal weather will Normal weather will increase demand increase demand

Consumers of fuel oil and Consumers of fuel oil and propane now compete propane now compete with European demandwith European demand

Natural gas demand is Natural gas demand is highly dependent on highly dependent on industrial and power industrial and power generation growthgeneration growth

SUPPLY DEMAND

RESIDENTIAL PRICE TRENDS SINCE 1997RESIDENTIAL PRICE TRENDS SINCE 1997EIA HISTORICAL DATAEIA HISTORICAL DATA

Home Heating Oil Home Heating Oil Prices have increased Prices have increased 138% since 1997138% since 1997

Natural Gas Prices Natural Gas Prices have increased 85% have increased 85% since 1997since 1997

Electricity Prices are Electricity Prices are up 26% since 1997up 26% since 1997

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Heating Oil Electricity

Natural Gas

AGGREGATE RESIDENTIAL ENERGY EXPENDITURES AGGREGATE RESIDENTIAL ENERGY EXPENDITURES BY LOW-INCOME HOUSEHOLDSBY LOW-INCOME HOUSEHOLDS

Eligible for LIHEAPEligible for LIHEAP

By Primary Heating Fuel

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2001 2004 2005 2006 2007

Fuel OilNautral GasPropaneElectricity

SOURCE: ORNL TABULATION BASED ON EIA STEO AND RECS

Millions of Dollars

1970 1980 1990 2000 2010 20250

5

10

15

20

25

30

35History Projections

Production

NetImports

Consumption

Pipeline Liquefied Natural Gas0

1

2

3

4

5

6

2001

2025

Natural Gas Net Imports, 2001, 2025(trillion cubic feet)

Source: AEO 2003

1970 1980 1990 2000 2010 20250

5

10

15

20

25

30

35History Projections

Production

NetImports

Consumption

Pipeline Liquefied Natural Gas0

1

2

3

4

5

6

2001

2025

Natural Gas Net Imports, 2001, 2025(trillion cubic feet)

Source: AEO 2003

Natural Gas Supply, Consumption, and Imports Are Natural Gas Supply, Consumption, and Imports Are Projected to Expand Through 2025Projected to Expand Through 2025

(1970-2025, trillion cubic feet)(1970-2025, trillion cubic feet)

HOME HEATING OIL

NO PRICE CONTROLS

NO SIGNIFICANT PRICE REGULATION

LARGE COMPANIES AT TOP OF PRODUCTION CHAIN AND SMALL ONES AT THE BOTTOM

WELL DEVELOPED FUTURES MARKETS AND ESTABLISHED PRICE/VOLATILITY REDUCTION METHODS

JAWBONING

NATURAL GAS

DEREGULATED AT THE WELL HEAD, COMMODITIES TRADING MARKETS

FEDERAL PIPELINE REGULATION

LOCAL DISTRIBUTION COMPANY REGULATION

MAJOR CHANGES IN MARKET CONDITIONS

REGULATORY INTERVENTION OPPORTUNITIES IN PRICE VOLATILITY REDUCTION, RESOURCE ACQUISITION AND CONSUMER PROTECTION

ELECTRICITY

PARTIAL DEREGULATION OF WHOLESALE ELECTRICITY IN SOME PLACES AND COMPANY CONSOLIDATION, NEW MARKET MECHANISMS LIKE RTOs

CONTINUED REGULATION OF TRANSMISSION AT FEDERAL AND STATE LEVEL

STATE REGULATION OF LOCAL DISTRIBUTION

PUBLIC BENEFIT FUND PARADIGM, EFFICIENCY INVESTMENTS, RATE CASE PROCEEDINGS

TIGHT MARKETS MEAN MISCHIEFTIGHT MARKETS MEAN MISCHIEF

REMEMBER ENRON AND CALIFORNIA?REMEMBER ENRON AND CALIFORNIA?

AN INVITATION TO SPECULATION AND AN INVITATION TO SPECULATION AND MANIPULATIONMANIPULATION

WATCH OUT FOR THE ECONOMISTS!WATCH OUT FOR THE ECONOMISTS!

HISTORY OF MIDWINTER NATURAL GAS HISTORY OF MIDWINTER NATURAL GAS COMMODITY PRICECOMMODITY PRICE

Price Trend For January 07 Futures ContractPrice Trend For January 07 Futures Contract

Source: Wall Street Journal, 9/19/06

MARKET DANGERSMARKET DANGERSMISALLOCATIONMISALLOCATION

PROBLEMS COMMON TO ‘NETWORK’ PROBLEMS COMMON TO ‘NETWORK’ INDUSTRIESINDUSTRIES

SUPPLY IS PRICED AT THE MARGIN WHILE SUPPLY IS PRICED AT THE MARGIN WHILE CONSUMER PRICES DISCRIMINATECONSUMER PRICES DISCRIMINATE

BOOM AND BUST INVESTMENT CYCLES BOOM AND BUST INVESTMENT CYCLES CREATE INCENTIVES FOR PRODUCERS TO CREATE INCENTIVES FOR PRODUCERS TO TRY TO SHIFT RISKS TO CONSUMERSTRY TO SHIFT RISKS TO CONSUMERS

MARKET DANGERSMARKET DANGERSSPECULATIONSPECULATION

A GROWING PERCENTAGE OF TRADE A GROWING PERCENTAGE OF TRADE IN ENERGY MARKETS IS SPECULATIVEIN ENERGY MARKETS IS SPECULATIVE

THIS INCREASES PRICE VOLATILITY THIS INCREASES PRICE VOLATILITY AND PUSHES PRICES UP AND DOWN AND PUSHES PRICES UP AND DOWN MORE SHARPLYMORE SHARPLY

MUCH OF THE TRADE IS MUCH OF THE TRADE IS UNREGULATED WITH NO OVERSIGHTUNREGULATED WITH NO OVERSIGHT

MARKET DANGERSMARKET DANGERSMANIPULATIONMANIPULATION

WITH POOR REGULATION COMES LACK OF WITH POOR REGULATION COMES LACK OF INFORMATION NEEDED TO PREVENT INFORMATION NEEDED TO PREVENT PROFITEERINGPROFITEERING

PRICES CAN BE MOVED IN EITHER PRICES CAN BE MOVED IN EITHER DIRECTION!DIRECTION!

UNDER THE RIGHT CIRCUMSTANCES UNDER THE RIGHT CIRCUMSTANCES INDIVIDUAL ACTORS CAN CONTROL AND INDIVIDUAL ACTORS CAN CONTROL AND DIRECT PRICESDIRECT PRICES

WHAT CAN WE DO?WHAT CAN WE DO?

Don’t Drink The kool-AidDon’t Drink The kool-Aid Defend The Provider Of Least Resort With A Defend The Provider Of Least Resort With A

Balanced Supply/Price PortfolioBalanced Supply/Price Portfolio Pursue Supply SurplusPursue Supply Surplus Fight Monopoly Market PricingFight Monopoly Market Pricing Keep Public Benefits Together- Sustainability and Keep Public Benefits Together- Sustainability and

Affordability Hand In HandAffordability Hand In Hand Consumer Protection Regulation & Info VitalConsumer Protection Regulation & Info Vital When’s The Next Train?When’s The Next Train?

IN SHORT…IN SHORT…

SIGN AND ORGANIZE SIGN AND ORGANIZE AROUND THE PRINCIPLES AROUND THE PRINCIPLES OF ENERGY AND WATER OF ENERGY AND WATER SECURITY FOR ALL SECURITY FOR ALL AMERICANSAMERICANS

www.ncaf.org/issues/energywww.ncaf.org/issues/energy