While electric rates in parts of Texas open to competition fall, rates in regions without customer choice are increasing, despite drastically lower fuel and wholesale energy prices compared to a year ago.

 

It just shows that no region is immune to changes in the costs of producing electricity, no matter how the industry is structured.  However, it also shows that, when customers have choice, consumer prices fall much faster as wholesale fuel and power prices fall, meaning customers get faster relief from any price increases.

 

In February 2008, oil prices were around $100, and natural gas prices were $8-9/MMBtu.  In February 2009, oil prices plummeted to the $40 range, while natural gas prices bottomed out to around $4-5/MMBtu.

 

Why then, do several utilities not open to competition have much higher prices in February 2009 versus February 2008?

 

According to data from the Public Utility Commission of Texas, residential customers using 1,000 kWh per month in the following regions paid for more power in February 2009, despite drastic reductions in the cost of energy, compared to February 2008:

 

Comparison of Monthly Average Bills:

Utility                                                             Feb. ‘09                Feb. ‘08                % Increase

El Paso Electric                                                $126.48                $112.96               12.0%

Entergy Texas                                                 $132.36                  $83.60               58.3%

Southwestern Public Service                             $100.08                  $83.56               19.8%

Magic Valley Co-op                                          $111.08                $105.08                 5.7%

Victoria Co-op                                                 $127.88                $109.31               17.0%

City of San Marcos                                          $107.95                  $92.44               16.8%

 

Customers at each of those utilities do not have the ability to choose their energy provider.  And those February 2009 prices are in many cases higher than what is available in areas of Texas open to competition, where rates have been falling steadily since the summer, and customers can find several energy suppliers offering electricity for only 9-11¢/kWh, or about $90 to $110 per month for the average user.  That’s as much as $20 less than the price in Entergy Texas or El Paso Electric.

 

So why are prices in areas closed to competition going in the wrong direction, when wholesale energy prices are falling?  Two reasons.  First, utilities in areas closed to competition typically pass through higher costs on a lagged basis, through various fuel riders or other mechanisms, or rate cases.  That means when the cost of coal, oil, and natural gas rises, the higher prices do not immediately show up in bills — but as seen above, they do show up eventually.  It also means that consumers don’t receive the benefits of lower prices right away, because of the lag in utility pricing. 

 

Secondly, competition simply forces electric companies to cut prices faster.  Because energy suppliers have to compete to win your business, they can’t afford to keep prices any higher than cost, meaning there’s no lag when wholesale costs fall.  In comparison, monopoly utilities face no pressure to lower rates when wholesale costs fall, meaning customers end up paying higher rates even as the cost of producing power falls drastically, as is currently the case.

It may be difficult to imagine now, but not so long ago, Texas electric customers only had one option for electricity, a bare bones, one-size-fits-all product offered by their utility, that didn’t offer any custom features, or value-added services.  That has all changed with the advent of customer choice, which has forced electric companies to innovate by offering new products, customer bonuses, and green energy, which simply were not available before choice started in 2002.  And the greatest innovations are just around the corner, as electric companies plan a host of new products to interact with new “smart” meters that are now starting to be installed in the Dallas and Houston areas, which will enable customers to see their electric usage in real time, and allow their appliances to interact with their meter to save them money.

 

The innovations seen in the Texas electric market are not surprising, given the rapid product development in similar industries that have been opened to customer choice.  Take the telecommunications industry.  For over 50 years, customers were stuck with one type of phone, a cumbersome, rotary phone provided by the phone company, with only one rate option for local calls, and another for long distance.  Since competition has started, customers can now buy Blackberries and iPhones to make calls from anywhere in the world, can email from their phone, take pictures with their phone, and can choose from a host of pricing plans that fit their needs, including unlimited plans, rollover plans, and prepaid plans.  Such new products would not have been introduced absent competition which has forced companies to innovate to win customers’ business.

 

The same thing has happened in the Texas electric industry.  Currently, some of the most popular innovations are value-added products that give customers something extra when paying their electric bill.  For example, several energy providers allow customers to earn frequent flier miles based on the electricity they use, allowing customers to take a vacation simply by using electricity.  Other value-added options include gift certificates to a host of stores and retailers, hotel reward points, magazine subscriptions, and customer rebates or bill credits for signing up with a specific energy supplier. 

 

Competition has also made green energy available to all customers, and revolutionized how it is bought.  Prior to customer choice, renewable electricity options were limited, if even offered.  Customers only had one option on the type and amount of green energy, and it often carried a hefty premium.  With competition, the popularity of green energy programs has exploded, as energy providers are now able to offer a wide range of renewable products and plans.  Instead of being forced onto a one-size-fits-all green tariff, customers can choose the amount of green energy they want, and can even buy 100% renewable electricity from wind power.  Meanwhile, competition has brought the price of green power down.  In some cases, renewable electricity rates are the same, or lower, than comparable standard rates depending on the costs of other fuels like natural gas.

 

And it may not seem innovative now, but the ability to have a fixed-price for your electric rate was unheard of before competition.  Prior to competition, utilities would pass through variable fuel costs on a regular basis, meaning that rates, at times, could change monthly based on the cost of natural gas, or coal, or other inputs. 

 

That prevented businesses or customers on fixed incomes who need budget certainty in their monthly expenses from knowing how much they would be charged for electricity in the coming months.  With the advent of competition, energy companies now offer a fixed rate for electricity for several different terms, from six months, to a year, up to five years.  In addition to allowing customers to lock-in a good rate when prices are low (shielding customers from any price spikes), the fixed rate contracts also provide important budget certainty for customers, so they can plan their future expenditures.  This is incredibly important to business customers seeking to limit volatility in their monthly outlays and effectively manage cash flow.

 

The most exciting innovations are just around the corner, which will be enabled by “smart meters” which are being installed throughout the state.  The meters, which will radically depart from the century-old metering technology currently used, will enable communication between the meter and a home’s appliances in real-time.  Such a “Home Area Network” (HAN) has the promise of letting customers reduce their power bills, by adjusting how they use electricity.  The smart meters will allow customers to be charged lower rates in the evening hours when electricity is cheaper.  HAN and other devices will alert customers when prices are the cheapest, so they can choose to wash clothes or dishes during that time.  Eventually, some appliances may become automated to run more efficiently and take advantage of the lowest priced periods, saving customers further money.

Electric competition in Texas is producing lower prices and saving Texans money versus the old monopoly system, a new review of energy prices shows.

 

With over 30 electric companies now competing to win customers’ business in most parts of Texas, including Dallas (the Oncor area), Houston (CenterPoint) and Corpus Christi (AEP Texas Central), electricity rates have been pushed lower than the last regulated rates of December 2001, from right before competition started.  It’s no surprise, as electricity companies now have to compete to survive and grow, which means better offers and products for customers. 

 

On an inflation-adjusted basis, rates are lower in every service area under competition, whether using for comparison a month-to-month offer, or a 12-month fixed-price offer that not only provides savings versus the old regulated rate, but also protects customers against price increases.

 

In fact, today’s rates under competition are typically 20% to nearly 30% lower than the last regulated rates of 2001, when adjusting for inflation using the Consumer Price Index.  A breakdown of savings, both for month-to-month plans and fixed plans, is below, using offers from Retail Electric Providers (REPs) from last week.

 

Month-to-Month REP Offers as of March 9, 2009:

Service                      Lowest                    12/01 Regulated                      %

Area                          REP Offer                Rate                                       Difference

Oncor                          9.3¢                      11.8¢                                     -21.2%

CenterPoint                  9.9¢                      12.6¢                                     -21.4%

TNMP                           9.1¢                      12.9¢                                     -29.5%

AEP TNC                      8.9¢                      12.2¢                                     -27.0%

AEP TCC                    10.0¢                      11.7¢                                     -14.5%

 

One-Year REP Contracts as of March 9, 2009:

Service                      Lowest                    12/01 Regulated                      %

Area                          REP Offer                Rate                                       Difference

Oncor                        10.6¢                      11.8¢                                     -10.2%

CenterPoint                11.3¢                      12.6¢                                     -10.3%

TNMP                         10.1¢                      12.9¢                                     -21.7%

AEP TNC                    10.0¢                      12.2¢                                     -16.4%

AEP TCC                    10.9¢                      11.7¢                                      -6.8%

 

Even when not adjusting for inflation, the lowest prices available today under competition are still lower in four of the five service areas.  These lower prices show the power of competition to keep prices down, because the inputs to generate electricity have risen astronomically since 2001.  For example, natural gas prices have risen 72% over that time, western coal prices have doubled, and copper prices have risen 114%.  Despite these increases, energy providers are offering customers lower rates than eight years ago, because competition forces them to, in order to win customers’ business.

 

Lowest REP Offers as of March 9, 2009:

Service                      Lowest                    12/01 Regulated                            %

Area                          REP Offer                Rate (No Inflation)                         Difference

Oncor                         9.3¢                         9.7¢                                             -4.1%

CenterPoint                 9.9¢                       10.4¢                                             -4.8%

TNMP                          9.1¢                       10.6¢                                           -14.2%

AEP TNC                     8.9¢                       10.0¢                                           -11.0%

AEP TCC                   10.0¢                         9.6¢                                            +4.2%

 

Even in AEP Texas Central, where rates have increased marginally, competition has kept prices down from where rates would be under the old system, under which the full weight of fuel costs and other raw material increases were passed onto customers.  Instead of feeling the full effect of a 72% increase in natural gas prices, customers at AEP Texas Central only see a modest 4% increase, which, as noted above, is actually less than the rate of inflation, so prices today, in real terms, are actually lower than 2001 levels.

Reliant Energy, the second largest energy retailer in Texas, last week announced it is selling its Texas operations to power plant operator NRG Energy.  Reliant was originally spun off from the old Houston Lighting and Power, while NRG has bought most of the old HL&P plants, so the deal represents something of a re-integration of the Texas electric market.  While the deal has the potential to result in customer savings, customers also need to make sure they get the benefits of lower prices, rather than the savings being retained by NRG.  Using SaveOnEnergy.com to find the cheapest electric rate can ensure that customers get the best deal possible, and aren’t paying more than they should.

 

The Reliant sale is being touted as cutting out the middle-man, as NRG intends to sell the power that it generates at its power plants directly to customers, rather than buying power at wholesale and then reselling it as most Texas energy suppliers do.

 

However, whether this new model results in lower prices for customers depends on whether customers are vigilant about getting a good price.  Because other energy companies will still be buying their power at wholesale and using a middle man, their pricing will have to reflect that cost.  NRG, therefore, could continue to charge similar prices and still remain competitive, even though its internal cost is much lower by cutting out the middle man.  Essentially, NRG could choose to earn higher margins on its sales from selling its own generation at the same pries as competing companies, rather than passing savings onto customers through lower prices.

 

To combat this play, customers need to force electric companies to compete for their business, rather than just taking whatever quote they get.  Getting energy providers to compete for your business is now as simple as a few clicks of the mouse, thanks to SaveOnEnergy.com.  With SaveOnEnergy.com’s one-of-a-kind retail exchange portal, Texas businesses can get up to eight competing offers from qualified, vetted electric companies in just a few minutes.  That means suppliers will be battling each other head-to-head to win the customer’s business, and will be offering their lowest electric rate.  Customers won’t be stuck on a high-margin product, or paying more for electricity than they should.  The best part is it’s a simple and easy process than can be done any time day or night.  Energy providers contact you directly with their best offers, to save you time and trouble.  Saving money on electricity couldn’t be easier.

Consumer choice and energy competition should fare well under the new administration of President Barack Obama, as the administration focuses on green energy and smart grid applications, two industries dominated by new entrants and other merchant players not tied to monopoly, franchised utilities.

 

The recently passed economic stimulus bill contains a number of initiatives to promote smart grid and advanced metering technology, both of which are keys to increasing energy efficiency and reducing energy costs.  So-called “smart meters” which can interact with home appliances to show customers the exact energy usage and savings from different activities are one of the keys that allow competitive energy suppliers to offer customers innovative and unique products, which can save customers money.  Total smart grid funding in the stimulus is $11 billion.

 

Texas is ahead of the nation in this regard, as both Oncor and CenterPoint are rolling out smart meters across their service territories.  However, other states which had not yet undertaken smart metering initiatives are reacting to the stimulus funding for smart grid applications, and are ramping up advanced metering efforts.

 

The New York Public Service Commission, for example, recently codified advanced metering protocols which give the green light to utilities to file applications for smart grid programs, to ensure New York is eligible for federal stimulus dollars.  Since New York is the second most vibrant competitive energy market next to Texas, utility rollout of smart meters will greatly benefit competitive energy providers, and their customers, by opening the door for a number of new energy products, and competition based on innovation.

 

Meanwhile, Obama’s pick to head the Federal Energy Regularly Commission (FERC), at least on an interim basis, is a supporter of customer choice and markets.  Jon Wellinghoff, who has been at FERC since 2006 and was recently named acting Chairman, said at the COMPETE-EPSA forum in 2007 that he has become a “convert” to markets, and believes they are needed to achieve FERC’s mandate of just and reasonable rates.

 

Wellinghoff is a big supporter of green energy and demand response, and sees customer choice as essential in achieving both goals.  Without a competitive energy market, consumers may not receive choices for alternative and green energy, as monopolies don’t have to cater to customer demands as competitors do.  Demand response, which occurs when customers reduce their loads at peak times in exchange for a payment to prevent the most expensive power plants from running, is most efficient when customers reducing load can interact directly in the market on equal footing, and don’t have to go through a monopoly utility to participate.

 

For these reasons, Wellinghoff is expected to continue FERC’s decade-long policy of promoting competition in the wholesale electric market, including the use of so-called Regional Transmission Organizations (RTOs) to promote open access to the nation’s electric grid.  RTOs serve to act as exchanges where competitive generators and other suppliers interact and buy and sell energy. 

 

In RTOs, an Independent System Operator runs the transmission lines of member companies, instead of the monopoly owners.  This ensures equal access to the grid, and that undue preference is not given to incumbent companies over new competitors.  For the wind industry, which is dominated by merchant generators, this means green developers flock to RTOs so their green energy is not kept off the grid by having access denied by an incumbent competitor using traditional fuel.  In fact, about 73% of wind resources are located in RTO markets, despite the fact that only 44% of wind energy potential is found in those areas.  Given the new administration’s focus on green, RTOs and energy competition are here to stay.