Indexed Plans have always been a quiet, and rarely understood part of the Texas electricity market. They’ve been present on the market for a couple years now, but for the most part have been sitting in the background behind Fixed Rate Electricity Plans and Variable Rate Electricity Plans.
Recently, however, that has changed. For starters, TXU Energy has started spending millions upon millions of dollars in television commercials advertising the “safety and reliability” of indexed plans. It’s been an effective, if somewhat misleading, marketing campaign. Which brings me to the second item that has brought Indexed Plans to the attention of people recently…the Texas heat wave. There’s been many articles written and barrels of attention brought to bear on Indexed Plans in recent weeks. But we’ll get to that in a minute.
What is an Indexed Plan?
An Indexed plan is very simply a plan that is tied directly, through a mathematical formula, to, well, anything really. In theory, you could tie the pricing of an Indexed Plan to the cost of oil, the cost of the Dow Jones Index, or even the cost of pork bellies. However, in practice, Indexed Plans are tied to the cost of natural gas market prices. Now, it’s important to note that the cost of natural gas prices set the market prices for ALL electricity plans, be they Fixed Rate, Variable, or Indexed. The difference is that the free-market acts as a control of the electricity prices for variable and fixed-rate plans. And what that means is that Retail Electricity Providers (REPs) have to keep their prices somewhat close and competitive to their competition, otherwise they’ll never get any customers. For Indexed Plans, however, the prices aren’t controlled by the free-market. Instead the cost of the plans is tired directly to the cost of natural gas by a mathematical formula. Here is the formula for one of TXU’s Indexed plans from their Electricity Facts Label:
Price per kWh = (Monthly NYMEX Natural Gas Price multiplied by applicable Seasonal Natural Gas Factor)
+ Energy Charge + Storm Recovery Charge + Storm Recovery Tax Credit + ((Base Charge + EECRF
Charge + CenterPoint Advanced Meter Charge)/Monthly billed kWh Usage)
Now, I’m not going to go through the formula like I have in other write-ups, because to be perfectly honest, it doesn’t really matter for our purposes here. All you really need to know is that Indexed Plans are Month to Month Plans, just like variable electricity plans, but the rate is determined by the cost of natural gas and the formula above. It’s very cut and dry and easy to track if you’re so inclined.
Indexed Plans: Perception vs. Practice
So lets talk a bit about how Indexed electricity plans are often portrayed to customers by different REPs, as well as some realistic examples of things that aren’t talked about as often. A common refrain you may hear about Indexed Plans is that they’re more stable and that they’re “safer” than regular variable plans. The justification for this is that a variable rate plan’s rate can go up and down “solely at the provider’s discretion.” And that’s absolutely true, although the way that statement is wielded, by design, often makes it sound like an REP that might raise their electric rates are doing it solely for purposes of profiting at the expense of consumers. Again, it paints a nice story. However, being a slightly more cynical person, I would point that the profits on Indexed for their proponents are consistent and built right into the monthly mathematical formula on the Electricity Facts Label. The fact of the matter is, Indexed plans are very safe for REPs in terms of making a profit, while at the same time allowing their proponents to take a step back and blame any of their electricity rate changes entirely on the cost of natural gas and avoid any responsibility. Meanwhile, variable rate plans, which are also based on the natural gas market (because ALL electricity plans are based on the natural gas market in some regards, because all REPs still have to BUY the electricity for their customers), rely upon the market forces to keep their rates competitive. So instead of a formula, their pricing is based on:
a.) What a provider can afford to sell the electricity at in any given month and keep their doors open
b.) Whether or not they’re competitive in the market place, because if they’re not they won’t get any customers regardless
So upon closer examination, the two plans aren’t really that dissimilar after all. But there are some definite differences, and recently those differences have reared their ugly head in a way that really brings to question just how much of a “safer” option Indexed Plans are in practice.
How has the Heat Wave affected Indexed Plans and Consumers?
The heat wave has made things ugly for pretty much everyone in Texas, not just the people suffering from the heat or their high electricity bills. It’s also been hell on the Texas Electricity Grid and the individual Retail Electricity Providers. Recently Indexed Plans have been thrust into the limelight, and not for good reasons. Recently, ABC News ran a story about a Champion Energy customer who opened his bill to a shock. Champion Energy deals almost exclusively in Fixed Rate electricity plans and when customers fail to renew their contracts at the end of term but fail to cancel service, they are rolled over onto an Indexed Plan, which is tied to the rates of the natural gas market. Which is all well and good, except that due to this heat wave and the struggles of the electricity grid to meet the needs of Texans, the cost of natural gas has shot to SIXTY TIMES the normal price. It’s not price gouging, it’s not profiteering, it’s just an unfortunate fact that the cost of natural gas has risen exponentially during this heat wave when the grid faces shutdown. And for customers with Indexed Plans, where the costs are automatically tied into the natural gas market through simple math, the fact of the matter is that those colossal cost increases are passed on directly to the customer. Which is why Robin Jansen was shocked to find an electricity bill covering 4 days of service that was almost as much as their entire last month’s bill. Which is a perfect illustration of one of the rarely discussed dangers of an Indexed Plan. And this is hardly just one instance that was reported, I’ve personally received dozens of similar complaints from customers over at Texas Electricity Ratings.
I actually find the interplay between Indexed Plans and Variable plans to be pretty interesting. In some ways, it’s kind of a microcosm of the differences between regulated and deregulated electricity markets. Indexed Plans represent the regulated market, where things are more cut and dry, things are more simple, and easy to understand. Variable plans represent the deregulated electricity markets, where the free market forces are the power that shapes the cost of electricity and forces providers to find ways to stay competitive with their peers.
It’s fair to note that when Indexed Plans get risky is particularly during times of natural disaster, so it’s not as if they’re this volatile on a regular basis. By the same note, prices on Variable plans have risen during this drought, but the market forces worked to keep prices at acceptable levels, and the losses were incurred by the electricity providers more than the consumers themselves in an effort not to lose customers. Personally, I find the dynamic pretty fascinating, although I’m probably in the minority on that one. Most people just want a reasonable electricity bill without any unexpected surprises. Either way, I hope that this post explains how Indexed Plans work to customers, so they know what they can expect, as well as what to be cautious about if you’re a considering an Indexed plan.