Buying Energy in Deregulated Markets

Brian Hicks

Written By Brian Hicks

Posted May 15, 2014

Electric bills have become a fact of modern life. It’s harder to live without electricity than it is to find the money to pay your electric bill. It’s that simple.

While many of us don’t give a second thought to our bills, it’s important to remember where the money goes, and what it’s for.

Until fairly recently, large utility companies held total power over energy prices. They would buy energy from companies that generated it, and then distribute and sell it to customers. In many markets, this is still the case.

Since 1996, some states have deregulated their gas and electricity markets to improve competition in pricing. Rather than have the utilities sell electricity, they just distribute it to energy retailers who can compete on a price level.

As red-blooded Americans, we applaud the idea of competition, but now we also have a whole new set of problems. After all, it was deregulation that triggered California’s electricity crisis back in 2000 when Enron got too greedy.

Fast forward to today, and there are more complaints than ever in certain regions of the country where electricity has been deregulated.

A lot of these complaints stem from energy consumers who say they were duped with promises of low rates that vanished in a sea of hidden fees and high-pressure sales tactics.

As always, we need to be careful as consumers. By this time next year, some of these customers who were promised big savings by these alternative electric suppliers could be paying up to 20 percent more than what the big utility is charging.

Buyer beware

I’m not saying that alternative providers are a bad thing. With the right deal, customers can still save money and it’s always good to have choices. But at the end of the day it’s buyer beware, just like anything else.

If we look at Chicago and its variable prices on May 7, according to the Chicago Tribune, Viridian was at 15 cents per kilowatt-hour, Starion Energy was at 13 cents per kilowatt-hour, Ambit Energy 11 cents per kilowatt-hour and Xoom Energy was at 10 cents per kilowatt-hour.

So, if you were living in Chicago last week you would be lucky to have Xoom Energy as your provider. But in some cases, consumers are seeing electric bills quadruple from month to month with no real way of knowing how the rates were calculated. This is all perfectly legal, too. ComEd (NYSE: EXC), the major utility provider for the Chicago area, would need to show customers where it was getting its numbers.

Representatives from these alternate providers contend that varying prices and spikes in charges come from different plans. One customer might pay more because they signed up for a premium service that offers a more expensive energy product. They would also say that the data collected by the Chicago Tribune only looks at the month of May and doesn’t include savings from a year total.

Deregulation’s Dark Past

If we go back in time for a moment, we can’t forget about Enron’s manipulation of California’s power market during the year 2000, which eventually rolled into two consecutive days of major blackouts that June.

Enron traders were supposed to reap big rewards for the company by exploiting loopholes in California’s flawed electricity market, and for most of that year, that’s what they did.

By June 14, as a heat wave swept through Northern California, Enron traders had clogged Path 26 with power, creating a bottleneck that restricted power via Path 15 to Northern California. Oops.

That lasted for two days and left more than 100,000 businesses and residents in the dark. People were trapped in elevators; pretty much everything in Northern California came to a screeching halt and it cost millions of dollars in lost revenue.

Enron was still sitting pretty. The aggressive trading was steadily filling their pockets while they took advantage of a wholesale market that bolstered Enron’s stock. Those blackouts pushed some California businesses into more than $1 billion in long-term energy contracts with the company.

Enron really got its hands dirty on this one, and we all know what happened from there. The American energy company was up to its ears in legal troubles by 2001 – fraud and corporate corruption swallowed it whole – and it went bankrupt in by late 2001.

The End

Unregulated suppliers can offer a healthy alternative to the big utility companies, but it’s important to understand the process and exactly what it is we’re signing up for.

The Enron scandal opened eyes not just to energy practices, but to business practices in general. The United States uses more than 4 trillion kilowatt hours of energy per year, and the demand is constantly growing. In the absence of regulation, there is bound to be exploitation.

But it’s a free market, and deregulation is just the name of the game now. At the very least, it gives small companies a shot at contending with the ten major providers who dominate the industry. It keeps them on their toes and keeps the price of electricity competitive.

An increasing amount of people are signing up for alternative services, too. The Illinois Commerce Commission reported that 3 million residential consumers will buy electricity through an alternative provider this year, compared with just 1.8 million in 2013.

The real answer is, no matter who you decide to get your energy from, the big guy or the little guy, the one true way to find savings through power is to use it more efficiently. Turn off the lights, use power strips, and in general, just be conscious of the energy you’re using. Then it won’t really matter where your electricity originated.

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