Indexed Plans: What You Need To Know

Posted on Posted in Indexed Rate, TXU Energy

I’m sure I’m not the only person who’s seen the new TXU commercials that are appearing everywhere on TV lately. The commercials don’t really promote any TXU products, instead they talk more about Variable Rate plans and things that potentially make them risky or dangerous. They’ve got their advertising webpage set up here for people to poke through and compare against other Texas electricity providers. The commercials don’t really, in my opinion, do a good job of promoting Indexed Plans and explaining what they’re all about, so I want to take the time on this blog to shed the light on the facts about Indexed Plans.

Now, the biggest part of Texas Electricity Ratings and the part I’m most proud of is the consumer advocacy aspect of the website. And with TXU’s release of their new Indexed plan, Texas Electricity Ratings has a rare opportunity to take a look at a new plan as it hits the market and is hitting public awareness. A large percentage of the people who share their experiences with me often have bad stories or negative reviews, and most of the time these are centered around shifting prices or unmet expectations with the plans they sign up for. So now I want to take a look at what exactly are the key pieces of TXU’s Index Plan so people can have an understanding of exactly what makes it different from the Variable Rate plans and what they should expect, in advance, if they sign up for an Index plan. So lets get into what I found.

What is an Indexed Plan?

Ok, so lets start with details about exactly what an Indexed Plan is, so people understand that. As we’ve covered many times before, the costs of electricity in Texas deregulated markets are based largely in part on the cost of Natural Gas prices. When those gas prices go up in the marketplace, the cost of ALL electricity prices are affected, be it Variable Rate plans, Fixed Rate plans, or Indexed plans. Variable Rate plans go up and down monthly based on the price of natural gas in the marketplace. Fixed Rate plans are still tied to the marketplace, but they’re a longer term hedge (or gamble) by both electricity providers and customers on the price of natural gas in the marketplace. Fixed Rate Plans are typically higher than Variable Rate plans because of the risk on the side of the electricity companies. So what is an Indexed plan? Well, like every other plan in Texas, a TXU Indexed Plan is tied to the price of natural gas market prices. But in this instance, the connection is direct. It’s based on this formula below:

  • a. Price per kWh = (Monthly Natural Gas Price multiplied by Applicable Seasonal Natural GasFactor) + Energy Charge + ((Monthly Charge + Monthly TDSP Advanced MeterSurcharge)/Monthly billed kWh Usage)
  • This formula basically creates a concrete tie between the cost in the natural gas market and the prices you see every month on your bill. If the natural gas market prices rise, so will your monthly bill. If they fall, so will your monthly bill. However the market changes, your electricity bill will change accordingly. The difference between this an a Variable Rate plan is that the price adjustment will always be based on this formula, and with a Variable Rate plan the particular REP can rise and lower the price of their rates once a month according to their discretion (of which there are many factors, including natural gas market, credit score of their customer base, etc). It’s also fair to point out that with a variable rate plan, prices are typically kept low by market competition between companies, like any other free market. The same principle for why things typically cost the same at Best Buy and (formerly) Circuit City. So it’s a formula vs. a provider discretion.

    Questions to Ask TXU if you are interested in an Indexed Plan

    So now we’ve looked at the nuts and bolts of an Indexed plan and how it’s different, now lets take a look at some of the questions and ambiguities I had when I looked at the TXU website. This isn’t a criticism at all, but I have some questions to which I don’t know the answers to, and I think a responsible customer should maybe ask a TXU rep about this if they’re considering this plan.

  • TXU’s website claims that they’ll give two weeks notice for any price changes to their Index plan, however, the electricity facts label states they’re only obligated to notify customers if they change the formula of the Indexed plan. That’s a pretty huge disparity. The market prices change monthly, if not more, so will people get a notice every month for rate changes? TXU might plan on notifying their customers for every price change on top of the formula obligations, however, so I would just advise people shopping for an Indexed plan to specifically ask this question to a customer rep and finding the answer.
  • In for Formula above, there’s a multiplier that is listed as “Applicable Seasonal Natural Gas Factor.” What is that, exactly? They don’t give a direct number, but it’s a big part what goes into making the monthly bill, so it would be good to have a ballpark what those #s are for each season.
  • My Final Thoughts

    So what does all this mean, exactly? Ok, well let me sum up what I think someone should expect from an Indexed plan. The TXU advertising presents it as a much safer alternative to Variable Rates, and the reason for that in their marketing plan is that with an Indexed plan, your bills can’t be changed at the discretion of the electricity company. This is true, the bill is based on a formula. But I would stress to all customers that with an Index plan, a customers bill will STILL change up and down with the natural gas market. This is not a Fixed Rate plan, so people’s bills will move up and down, and I feel that it’s important for customers to understand that going into getting into an Indexed Plan, and I’m not certain that fact is presented clearly in their commercials. I’d also suggest that all consumers looking into this ask the questions I presented above, which is more specifics on the formula that determines their price, and how often they can/will notify customers of any actual pricing changes.

    Since the number one form of complaint that comes across Texas Electricity Ratings has to due with pricing changes and people feeling misled by their electricity companies in one way or another, I would encourage everyone to ask critical questions now about the Indexed Plan AS it’s hitting the marketplace. People should ask the right questions just so they fully understand the plan and what determines the changes/prices that determine their bills. In their advertising campaign, TXU is encouraging everyone to be smart consumers: so be just that, ask questions, and understand the details about your plans.

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