It was a known fact that electricity rates would take a substantial hike after Donna Nelson and the PUC approved an increase in the market cap last summer. And I’ve been steadily watching those rates rise since then. And this summer in particular I’ve seen more angry reviews than usual from customers complaining about the available rates when they’re renewing their electricity plans. It’s a potent cocktail of panic over the supply on the ERCOT grid, and the PUC’s inability to pull back from hitting the panic button, mixed with the all too self-serving pressures from the existing generators for more, more, and more that are driving prices up and why they’ll likely stay there with no end in sight. Let me explain.
Why Are The Rates Increasing?
When the emergency market price cap for power was voted into an ongoing, every summer increase through 2015 from the original $3000/mWh in 2011 to an absurd $9000/mWh in 2015, people familiar with the market and the market drivers knew that electricity rates would go up. And while updating the Texas Electricity Ratings recently, I took the time to compare the rates from this summer versus last summer’s electricity rates. Of the 41 electricity companies listed on Power To Choose last summer, the average rate for a 12 month plan in the Oncor service area was 8.8 cents per kWh. This summer, of the 46 electricity companies listed on Power To Choose offering a 12 month electricity plan in Oncor, the average kWh rate was 9.8. That’s an increase of almost 13%.
An increase of 13% might not seem like much, but it came after the market cap increased from $3000 to $4500. The staggered increases are scheduled to keep increasing until they stop at $9000. If the numbers continue upon that projection, it would mean prices could settle after an increase of 52%. That would be an average 12 month contract rate of 13.3. That’s approximately 15% higher than the highest 12 month plan on the market today, and even that is a 12 month green energy plan which are even more expensive than regular 12 month plans. And that will be the AVERAGE plan rate.
Another thing to consider is that the price per kWh isn’t the only thing that will cause your bill to increase. Electricity companies, trying to keep up with soaring energy generation costs, are getting more and more clever at disguising and passing on their costs to customers. One method is the increasingly noticed Minimum Usage charges. I’m seeing more and more customers complaining about them in reviews and emailing me asking questions. If customers are citing them more, it’s because their effect on bills is increasing enough for people to take notice. Minimum Usage fees are how electricity companies cover costs for servicing customers such as billing, call centers, etc. on customers if they aren’t using a given threshold of electricity, but there is no oversight or regulations on how an REP can implement their minimum usage rates. They can have a high rate from the start, or increasingly they can pick an arbitrary usage threshold and jack the electricity rate up astoundingly if a customer doesn’t meet that threshold. This way REPs can recover their expenses while still seeming to be offering competitive rates. So read your fine print, customers.
If Not The Electricity Companies, Then Who?
The natural assumption when a company raises their prices is that it’s entirely by their own choice. But in this instance, a better comparison would be the cost of gasoline. The cost of gas at the pump is tied to many things, first and foremost the cost of oil per barrel. Another is the cost of transportation (there’s a reason gasoline is cheaper the closer you get to refineries as opposed to places where it has to be transported by truck across several states). The cost of electricity is heavily dependent on the cost to buy the energy from the electricity generators (such as Luminent, NRG, etc). As when the cost for barrels of oil increases the price of gas at the pump, when the generators set higher rates for the sale of their energy, REP’s have no choice but to raise the electric rates they offer their customers.
So the real question is, why is the cost of generation increasing so substantially? Well, as I’ve written about before, the beginning of the problem is the perception of growing scarcity of energy to meet the increasing needs of the state of Texas. With the rapid population increase the past few years, and the growing industries moving to Texas because of a favorable business environment, the electricity needs of Texas are potentially outpacing the growth of generation. And because the Texas electricity market is deregulated, the private sector has to decide to invest in generation and build more power plants. The problem is, the generators are saying that they aren’t certain they’ll make the profits they’d need to justify the investment.
The power generators aren’t building many new plants. It appears they’ve decided to play chicken with the state of Texas’s electricity needs because, well, they can and with the PUC giving into their every request to date, they’re incented to do so. PUC is proving itself to be more or less beholden to the electricity generators, and as a result every single decision they’ve made to try and spur generation has unsurprisingly seen in favor of the claimed needs of prospective electricity generation investors. The market cap was a move to entice generators to build more plants, but right now all it has done is increase prices for residents and REPs alike. As well, changes have been made to effect the longevity of emergency pricing events. Ancillary energy charge pricing has been moved up as well. Each of these moves feeds into the claimed needs of generation. And the generators are also hugely in favor of switching to a capacity market, which is another move that would also favor their interests as well, as opposed to consumers.
While the population increase of Texas can’t be controlled, one thing that certainly could change would be Donna Nelson and the PUCs willingness to lay prostrate for the energy generators and rubber stamp any initiative in hopes that they’ll eventually invest in new generation. The problem is, why would the power generators start building anything until they’re positive they’ve squeezed every last possible drop of profits and concessions from the PUC and Texans? It isn’t as if they’re meeting any resistance, or like the PUC is saying “No” to anything. If I were an energy generator, I’d also probably say nothing and let the PUC keep throwing consumer dollars at me as well. It’s almost like one of the ridiculous movie scenes where someone keeps bidding more money at an auction against themselves without anyone else putting out any bids.
A key to this whole bataan death march towards higher prices since the August of 2011 scare is that the pricing for residential electricity has been at an all-time low. Frankly, it was artificially low last summer heading into this spring, given the enormous jump in wholesale pricing from pre-summer 2011 to the pre-summer 2012 period. It’s as if REPs were waiting, hoping even, to see if there wouldn’t be a pull off from the wholesale pricing before they took the step of driving the prices in the market upward. This spring’s climb in natural gas prices appears to have been the final straw. Numerous reputable REPs ultimately moved prices upward significantly and the other names more or less followed. The luxury in the pricing lull for the PUC during all of the recent changes that will hammer residential bills is that they were able to claim, and often have repeatedly, that pricing on the residential side remained at all-time lows. Of course this was a house built on sand and now it’s being washed away. As the heat from residential advocacy groups rises again, it’s going to be interesting to see how the commission endeavors to handle further negative moves that favor no one but the bemoaning generators. It’s one thing to make moves when no one is looking, but something altogether different when everyone impacted begins paying attention.
What’s disturbing in all of this is of course that the whole point of an electricity-only market is to maximize the efficiencies of the market’s ability to produce the last necessary MW of power. It’s not a design intended to have excessive length in the ability to generate power. Nonetheless, every decision made in the last two years has basically planned for the worst possible scenario, a market seize-up due to running out of power – something that has never occurred and has a likelihood of occurring even in current situations of scarcity at an infinitesimal percentage. It’s as if almost having to institute rolling blackouts for a few hours on a few days in a once-in-115-years-of-weather-history weather event in August 2011 has now been established as the accepted norm for planning with all market actions into the future. That that would create a market with excessive length to the detriment of every participant for 718 out of every 720 days seems to be moot. Here we are, 2 years later with more reserve margin than 2011, normal weather, and virtually zero pressure on the grid regarding scarcity, yet pricing for consumers is soaring and will continue upward.
So What Happens Next?
Unfortunately the only certain answer to that question is that electricity rates will continue to rise. For consumers, I’d suggest locking in long term rates for as long as possible. As for the PUC, who knows what will change in that regard. It’s hard to see their behavior towards energy generation changing any time soon, at least not until a 3rd member is added to replace the existing vacancy for the 3 person panel of commissioners. And while Kenneth Anderson has been a more consumer oriented voice on the commission, the truth is that little will probably change in the near future for the PUC. The best customers can do is understand what and who is causing their rising electricity rates and to be diligent in shopping for the best deals they can find. And then duck for cover