Utilities often find themselves on the wrong end of a joke. In an old routine, a performer cuts off phone service to a city and then brags: “We don’t care. We don’t have to. We’re the Phone Company.”
States have been deregulating their electricity and natural-gas markets for some time, but choice finally is coming in a big way to residential consumers who live in deregulated states. One reason that it’s taken so long is that state caps on the price of power that utilities charge stand in place for years after deregulation to protect consumers, says Charles Gray of National Association of Regulatory Utility Commissioners, which represents state utilities regulators.
As those price caps expired, rates by utilities jumped dramatically—for instance by 72 percent overall in Maryland in 2006, largely due to the higher price of natural gas at the time. These increases presented an opportunity for third-party energy retailers, which bet on a reversal of complacency about shopping for electricity that had been the rule among consumers.
These mostly new providers typically sell electricity, and often natural gas, for less than what you pay to your utility. However, the fine print that’s on their contracts might include hidden fees and charges, and the service that the new companies provide even might have you yearning for the good old days of utility monopolies.
INDEPENDENTS DAY. It used to be that all that you had to do to get electricity was to call your local utility and wait for it to flip the switch. But now, in deregulated power markets, the process can be just like shopping for any service provider—and just as mystifying.
In deregulated states, customers typically can choose between standard-offer power (fixed-rate power from the local utility) or from third-party energy retailers, which can provide a bewildering array of options, including variable rates, green power and prepaid service. One company, Direct Energy, offers free power one day of the week (at the customer’s choosing) to consumers near Harrisburg, Pa. However, in exchange, Direct Energy charges a higher rate during the other days of the week.
For example, the Pittsburgh area is served by Duquesne Light, but consumers now can choose among plans that are offered by 20 different third-party energy retailers. One such company, Dominion Energy Solutions, guarantees that consumers who sign up for its fixed-rate plan will pay 25 percent less than what Duquesne would charge—at least through May 2013. Another company, American Power Partners, offers what it calls green energy that’s made from the wind, landfill gas and hydropower on a variable-rate basis, with the current rate at 9.13 cents per kilowatt-hour (kWh, enough to burn 10 100-watt light bulbs for 1 hour), compared with Duquesne’s standard-offer-power rate of 9.32 cents per kWh.
The most enticing feature that third-party electricity and natural-gas retailers provide, of course, is lower rates. For example, ComEd, which is the utility that serves the Chicago area, charges a standard residential rate of 7.7 cents per kWh. (In exchange for being able to operate as a monopoly, all aspects of utility operations that are in regulated states are subject to price regulation, under which state authorities allow sufficient rates to earn a guaranteed profit for the utility. The regulation—and the negotiation of long-term power contracts—protects consumers against big and sudden price increases.)
However, Illinois third-party energy retailers now charge as little as 6 cents per kWh. This happened because a state regulating agency, Illinois Power Agency (IPA), negotiated long-term power-purchase agreements for utilities’ standard-offer power when the price of natural gas was much higher than it is today. The economic downturn cut demand for electricity, which weighed on the wholesale price of power over the past 3 years. Consequently, third-party energy retailers in Illinois (and in other deregulated states) can make short-term purchases at the lower wholesale price, charge their customers less for their power and still net a tidy profit.