The benefits of energy deregulation
As regulators and electricity suppliers continue to sort out the nuances of deregulation, market forces and climate change combine to make one thing abundantly clear: The idea of a “normal” calendar season is no longer operative. Summer heat waves are longer and more frequent than ever and the last two winters were brutally cold.
So, with summer cooling bills upon us and jitters over what next winter's heating bills might look like, this seems to be a good time to consider the benefits of energy choice and compare traditional utilities with competitive energy suppliers.
Although the infamous polar vortex of 2014 and its high energy costs did not make a repeat appearance last winter, there's no way of knowing what the coming winter will bring.
Before the introduction of energy choice programs, customers had to buy energy from their local utility. The utility set the prices that customers were required to pay. In recent years, however, a number of states have introduced competition for energy supply. In these states, utilities no longer have a monopoly on both energy generation and distribution. Customers in these states may choose to buy from any number of licensed retail energy providers (REPs) or their local utility company.
Just because the energy industry has been “deregulated” does not mean that REPs are “unregulated.” REPs and utility companies are similar in many respects. Both are licensed and regulated by state public utility commissions for service and their relationship with consumers.
So, what's the difference between energy supplied by the utility versus a REP? Unlike utility companies, REPs specialize in procuring energy. REPs rely upon the utilities to deliver that energy. They do not maintain the system of meters, poles, pipes and wires required to deliver it. Customers who choose REPs still have their meters read by their utility, and in most states, receive their bills from their utility. Most important, REPs are not bound by the take-it-or-leave-it rate structure that utilities offer.
The power of choice has enabled REPs to compete for business by offering flexible options that the utilities never could — such as rebate programs, rewards and longer-termed “fixed” or “locked-rate” price programs.
So why did many REPs' prices rise so dramatically in 2014 compared with utilities' prices? The culprit was an unprecedented and unforeseen confluence of weather and market events that caused wholesale energy prices to skyrocket. Unfortunately, faced with those immediate costs, many REPs had no choice but to pass along those sudden price increases without delay. By contrast, sudden cost increases are not readily apparent in utility companies' rate calculations.
Thankfully, many REPs realized quickly that customers could not bear this burden and voluntarily absorbed as much of the cost increases as they could, issuing millions of dollars in good-will rebates to customers.
The path to improvement is not always smooth, and the polar vortex provided a particularly bumpy ride for the retail energy industry. But with the lessons learned and development of smarter and better controls, residential and business energy customers are certain to benefit in the long run.
Michael Stein is CEO of IDT Energy.