Power Options or Why Deregulation Misses the Mark

While the country is still charging ahead with energy de-regulation, it seems at times dubious if it has been really conducive to solving any problems that we know of, particularly in an area like NYC, where the Transportation & Distribution portion of your power bill is 60-70% of the bill, and set to increase faster than inflation as far as the eye can see. Deregulation probably garnered lots of political donations, safe to say. Be that as it may, at least some of the innovations that have resulted from deregulation are helpful, in particular green power, and perhaps in some cases fixed rate pricing options.

The larger accounts have mostly moved to independents, but smaller accounts, and residences in particular have barely switched, largely because there is little real incentive, and to the extent an ESCO can make a difference, it is well within the margin of error. It is easy enough to understand, large accounts consuming perhaps millions of kWh per year can make a real difference in their bottom line with a better price, but an average household does not have that option. A 1 cent price swing on the average household account of 900 kwH/mo is $9/month, but if the total all-in rate is ca 25 cents per kwH, that is still only a 4% price swing on a $225 bill. In short, this is not a life-style changing event, and hence it is not worthy of attention. In NYC a penny on the rate of such an average household is the equivalent of four subway fares.


People are made to believe they can save money by switching, but the difference, if any, is lost in the shuffle, and can never be proven, or worse the market moved up significantly, and then the new company gets the blame, when often it had nothing to do with it. Even if the macro-economic effect is true that competition brings the rates, down, it would mean we're going down in the aggregate, and unless you are a large user, it makes no sense to spend time finding lower prices. And in some cases companies indeed took advantage of people, and misled them. One of the frequent misrepresentations was that their sales people made customers believe that they were from ConEdison. This is no longer permitted. So the reps are finding new ways of misrepresenting themselves, as I experience with some frequency with reps from various energy companies that call door to door in my building.


In many respects however, the independent energy providers (ESCOs) have been their own worst enemies, by often times marketing things they cannot deliver, and/or either allowing, or even encouraging their reps to lie. One prominent example is fixed rate pricing. Fixed rates are about risk management, not about beating the market, but most reps will make customers believe that they are going to beat the market, or 'save' money with a fixed rate. Nope. If you are more afraid of the market going up than of overpaying a little, a fixed rate may be warranted. Having the fixed rate option is arguably an improvement, but it is often sold in the wrong way. And failure to set the right expectations leads to unhappy customers.

Another tricky area is the issue of 'saving' money in general. Here also the ESCOs cannot deliver. Sometimes they will, sometimes they won't. Here in NY, ConEdison bills on a daily basis, after the fact. It is a pure pass along to them. If the rate is 6 cents, they charge you that, and if it's 15, they charge you that, including whatever the markup is they take. You can never be sure in advance, because you cannot buy a monthly, quarterly or yearly rate from ConEdison. So it's like with the strawberries at the supermarket, that were priced at $3.49/lb this week, but last week there was a special at $1.49/lb. It won't help me when I go to the cash register and try to buy strawberries at last week's price.
So, if last month ConEdison billed 8 cents per kwH for the month as a whole, and I was on an ESCO pricing that is a one month variable rate at 10 cents, I was above ConEdison's daily market rates, but it's a moot point, for there was no place to ever buy that rate. By the same token if my company has locked me in at 10 cents/kwH for the month and there is a plant outage or a heat wave, ConEd customers may end up paying 15 cents per kwH, while I'm still only paying 10 cents, because it was bought in advance. Over time the variability of a one month variable rate should be less than with daily pricing, or I may have an option to procure fixed rates and lock in my pricing for a year or even multiple years. Just like the strawberries, electricity does not keep too well. So it probably does not pay to buy 10 lbs when they are $1.49/lb. You'll merely end up throwing out a lot more strawberries, and as far as electricity is concerned, batteries are very expensive.

To apply that argument to power, particularly in the ConEdison area, we might observe that only in retrospect can we judge if last year ConEd's rates were lower than with our favorite ESCO. But if with the ESCO we are buying monthly, quarterly, or yearly pricing, the natural tendency will be for those prices to be flatter over time, whereas with ConEd's pass-through daily pricing a few events that cause rate spikes could drive our costs with ConEdison up unexpectedly at any time. So, just because last year I did not have an accident with my car, and I arguably could have saved myself the collision insurance, does not mean that this year I can do without. Over time the day rates might show greater variability, and some form of monthly or quarterly, or yearly rates might be preferable to most people. Knowing in advance what you'll be paying has some value here.

In general, if we are saving money with deregulation it is not because we can all go out and negotiate market beating rates. That remains for the big boys with the millions of kWh. Perhaps the overall price levels come down because of deregulation, at least that was the economic theory. But when history gets written, and proper research done, it may well be that deregulation worked only for a few large players and made no difference whatsoever for the average consumer. Reducing consumption and energy efficiency are much more important.

An agonizing fact of life is that because the utilities have a fairly unwieldy infrastructure, and it takes three months to switch, so just like cannot buy flood insurance at the time of the flood, when you think it would be smart to switch to a fixed rate, it is already too late. This is not day-trading where you can get in and out, and take your profit whenever you want. In short, don't bother switching providers to save money, unless your current provider is a bad apple, and they are really taking advantage of you.

The last innovation of the ESCO's is Green Power, and that for the most part is straight forward, except most ESCO's don't have a clue how to market it, but it could be a worthwhile consumer movement, if it ever gets going.