Time and time again, when I asked Retail Electric Providers (REP’s) last summer why their rates were so high, they played the “gas card.” Just watch this story to see what I mean.
Now some of you are asking, and rightfully so, why your electricity bill didn’t drop along with the price of natural gas.
“Amy, maybe you can tell me, why has the consume not seen a reduction of our electric and nat. gas bills since the cost of fuel is down by 100% from 6 months ago. The fuel charge on your elec. bill is higher than the elec. charge. Thanks for all you do.”
I came across this article in the Dallas Morning News that attempts to answer the question.
Why haven’t Texas electric rates fallen more sharply?
02:51 PM CST on Friday, February 20, 2009
“When gas prices go up, there’s just no hesitation, the electricity prices go up very quickly. But when the gas prices come down, it’s stubborn, takes a long time, and sometimes doesn’t fully happen at all,” said Tim Morstad, associate state director for AARP.
Electricity experts respond with four points:
• It takes time for fuel costs to affect retail rates.
• Other costs have risen.
• Retailers don’t always set their rates based on the cost of generating power.
• Retail rates have dropped, and anyone who hasn’t seen lower bills should switch to a new provider.
John Young, chief executive of Energy Future Holdings, said customers who signed up for a fixed-rate pricing plan might not have seen their prices drop, but they also didn’t experience the pain on the way up.
He also said natural gas prices are only a portion of the total cost of electricity. Natural gas prices might drop by a big percentage, but the impact on the total cost of electricity would be smaller.
Energy Future Holdings owns electricity retailer TXU Energy.
The former monopoly still serves most North Texas customers, and nearly a million people are on the former regulated rate, called the Price to Beat.
TXU dropped that rate during the last legislative session two years ago and promised to keep it steady, in order to please lawmakers as the company planned a buyout.
That means most people in North Texas pay 12.7 cents per kilowatt-hour for electricity; they paid that rate when natural gas prices rose, and they still pay that price now that natural gas prices have dropped.
On the other hand, anyone who has signed up for TXU’s Market Edge plan, which follows natural gas markets exactly, saw prices rise above 20 cents per kilowatt-hour last summer and fall to 9.8 cents this month.
TXU spokesman Tom Stewart said competitive rates have dropped, and if natural gas prices remain low, prices should fall even further.
“As gas prices remain lower and stable, you’re likely to see these prices come down over time,” he said.
Electricity companies often sign long-term contracts to buy power from generators at a particular price, then set retail rates based on that cost. Until those contracts roll off, it’s risky and costly for a retailer to cut prices.
That doesn’t explain why power prices rose immediately last summer when natural gas prices rose. Some experts say electricity companies are grappling with rises in other costs besides fuel.
Credit has become more expensive, and retail electricity companies often rely heavily on credit to buy power months before customers pay for it.
“The embedded credit charge is going to be a much more significant component of the cost of energy,” Jim Miller, chief executive of Pennsylvania power company PPL Corp., told the Cambridge Energy Research Associates conference last week.
Miller said some companies might not be able to bid on long-term power contracts because of credit constraints.
That could leave retailers exposed to the risk of volatile electricity prices.
When power prices spiked last summer, several retailers that hadn’t purchased long-term power contracts went out of business, dumping their customers on high-priced providers of last resort.
Deregulation advocates disagree with the notion that electricity prices are unfairly high. They say anyone who doesn’t like his rate should find a new provider.
Public Utility Commission Chairman Barry Smitherman said consumers can find a price today about as low as the rates before deregulation.
“Those prices are dramatically better than the prices we saw this summer,” he said.
Electricity retailers don’t have to base their consumer prices on the cost of power. Retailers can charge customers any rate they please.
Eventually, deregulated electricity prices could detach entirely from the cost of making the power. The prices for most commodities – natural gas, gold, copper – have little to do with the cost of producing them. Commodity prices typically trade on supply and demand, or how traders perceive supply and demand.
TXU’s Stewart said company executives are positioning the former monopoly as the “value retail electricity provider,” offering better service at a higher price.