Three Card Monty

As of late, we've heard the same refrain from a few industries: "Our business model can't survive $120 oil." Airlines, independent truckers...but what about utilities? Haven't heard much from them, have we.

SMUD, as with most other utilities in the US of A, has almost exclusively relied on natural gas fired power plants to meet load growth over the past 20 years. Natural gas now provides 60% of our energy; hydro 20%, 7% from solar, geothermal & wind, 4% from nuclear/coal, with municipal waste and cow shit making up the 9% balance.

Although gas represents 60% of the mix, gas purchases represent 60% of SMUD's budget. So there's 40% for everything else: transmission lines, lawyers, distribution lines, hydro/solar/methane generation assets, facilities, customer services, bucket trucks, my salary, and the operation and maintenance of all of them. One single budget item taking up 60% is high exposure if you ask me...small fluctuations in the price of gas can have huge budget implications.

And so it is.

SMUD approved a 7% rate increase on Jan 1. Since then, gas is up 50% to $11.70/MMBtu, just in 5 months. You don't hear about that from Brian Williams or Katie Couric, now do you, cause 'you ain't fillin' your tank with gas.' Wait, that didn't come out right. 'Natural gas.'

And SMUD didn't plan on such an increase going forward. Barring a natural gas price turnaround (which I don't predict), SMUD will absolutely be forced into another substantial rate increase by 2010. But...we'll pass the costs on to ratepayers! What a novel idea! Those who consume the product get charged! So why aren't truckers and airlines doin' the same? Why can't their business models operate under any price structure?

I don't know the answer. But I do know that as of today you'll get directly charged for checking in luggage if you fly. I don't know why airlines don't just raise the fucking ticket price. No, they 'sneak' in charges that do the same thing. It's a Three Card Monty.

Natural gas, historically, is in lockstep with oil, priced at eleven times MMBtu per barrel of oil. 11 * $11.70, and you get less than what a barrel of WTI or Brent crude is currently trading at. (Should you end a sentence with a preposition?) So it appears gas might have some room to go higher.

Utilities don't fuck around with higher source costs -- we pass it on to the ratepayers...unlike 'discretionary industries' like airlines, who seemingly act like politicians: "No fare increases...but we will have a higher destination fee." "You'll be charged a fee to bring any additional shit on board." "We are phasing out our coffee, tea, and Sanka offerings. Please pardon the inconvenience as we seek an alternative beverage solution."

If airlines are willing to remove a 35 lb. coffee cart to accommodate higher energy costs, what else are they willing to remove?