Gas Prices Dropped, but Electric Costs didn’t. Why not?

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.”

James Kelly

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, 2009By ELIZABETH SOUDER / The Dallas Morning News
esouder@dallasnews.com

 As electricity prices rose during the summer, consumers screamed, and electricity executives blamed higher natural gas prices.
Since then, natural gas prices have sunk about 70 percent. But electricity prices haven’t dropped as dramatically; they’re down around 23 percent.

Consumer advocates are crying foul, and electricity executives are offering more nuanced explanations for what drives electricity prices. Meanwhile, the Texas Legislature may consider laws to alter the deregulated electricity market.

“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.

 

 

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4 Responses

  1. Consumers in the deregulated areas at least have the ability to choose a provider. Those who receive their electric service from Entergy do not have “Freedom of Choice” as this service area is not deregulated and open to competition. Adding insult to injury is the PUC, which continues to give Entergy an extension on the deadline to implement competition. When Entergy obtains authorization from PUC to tack on an energy surcharge equal to or greater than the cost of electricity, the consumer cannot find a new provider. If people believe their deregulated provider is slow to reduce surcharges, they should be grateful they do not live in Entergy’s service area.

  2. my centerpoint energy bill was over 130.00 for jan 09.my bill for my house(1700 sq ft)for 7 yrs has never been over $50 dollars let alone $100.i called they told me because increase in price for last yr 08 yea in the middle of 08 is what i was told.i told them your are a bunch of rip-off artist and they still can’t see straight since that hurricane.my feb 09 bill $125.00 mar 09 bill just got $74.what a joke

  3. just saw the story on the new smart meters, which will most likley effect all areas soon..the electric companies will charge us for the repalcement of the meters for years. so what are they going to do with all the money they are saving with not having to have meter readers to pay to do the the job. also not having to make service calls to turn power on and off..looksmto me like thats making us pay to make thier business more profitable.like a painter charging you to paint your house then charging to watch the paint dry.taxation with out any representation

  4. Yes I get the same answer when I contact Reliant, it is always the customers fault, well maybe you are using more or our prices went up, basically they have us where they can charge us whatever they want. If you complain, nothing is done. This country is in a mess and Americans need to stand up and call these idiots out, some fat cat inside of Reliant is getting rich off of increasing our bills. I am tired of it.

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