What's your exposure to a Texas-style electric bill?
Soaring utility bills in the Lone Star state due to extreme winter storms rais this question: are seniors in deregulated power markets at risk of similar instability in electric bills?
Reading about the impact of the winter storm in Texas, this quote from a New York Times story really grabbed my attention:
As millions of Texans shivered in dark, cold homes over the past week while a winter storm devastated the state’s power grid and froze natural gas production, those who could still summon lights with the flick of a switch felt lucky.
Now, many of them are paying a severe price for it.
“My savings is gone,” said Scott Willoughby, a 63-year-old Army veteran who lives on Social Security payments in a Dallas suburb. He said he had nearly emptied his savings account so that he would be able to pay the $16,752 electric bill charged to his credit card — 70 times what he usually pays for all of his utilities combined. “There’s nothing I can do about it, but it’s broken me.”
This had to be an extreme case, I thought. Mr. Willoughby is a customer of Griddy, a company that provides electricity at wholesale prices - which can quickly change based on supply and demand. What’s more, Griddy customers are required to give the company access to their checking accounts for electronic withdrawals - another big eyebrow raiser.
But at the same time, I wondered: to what extent are retirees elsewhere in the U.S. who live on fixed incomes exposed to this kind of extreme electric bill risk? For the typical senior, electricity costs account for just 2.45% of monthly budgets, according to Mary Johnson of the Senior Citizens League, citing Bureau of Labor Statistics data. But an out-sized spike could wreak havoc, especially for lower-income households or those without much of a cash cushion - or credit line - to tap in an emergency.
For answers, I turned to one of the top experts on electric utilities and grids in the U.S. Martin Cohen headed the Illinois Citizens Utility Board for 15 years, served briefly as Chairman of the Illinois Commerce Commission, and has been an energy policy consultant for the last decade.
Full disclosure: Marty is an old friend, occasional partner for golf and playing blues guitar together - and a newsletter subscriber to boot! So, he seemed like a great candidate to answer a few questions on the electric grid.
Q: What happened in Texas?
A: The electric system temporarily collapsed when it couldn’t handle a cold snap. Electricity demand spiked because that’s how most Texans heat their homes. That caused a jump in demand for natural gas because gas fuels most Texas electricity generation. But some power plants weren’t winterized and couldn’t operate, precipitating widespread blackouts. That in turn caused natural gas pipelines to reduce fuel deliveries because they need electricity to operate, making the problem even worse. Frozen wind turbines didn’t help, but they are a much smaller power component. Because Texas decided 80 years ago – seeking to avoid federal regulation – to isolate itself from the national electricity grid, they had no way to import power from other states, so it became a cascading disaster.
Q: Why would a Social Security beneficiary in Texas suddenly find his bank account drained by an electric bill of more than $16,000?
A: Texas has a completely deregulated retail electricity market. Instead of buying power from your local utility company, in Texas you must shop among many providers who sell power under their own terms and conditions. Some marketers provide traditional fixed energy rates. But others sell power at prices that fluctuate according to the wholesale energy market -- changing monthly or even hourly. The real-time energy price in the Texas market quickly skyrocketed to 250 times the average price --from less than 4 cents per kilowatt hour to $9. At least one supplier requires customers to maintain a prepaid account with sufficient funds to pay for usage. Instead of sending a monthly bill, they automatically put charges on your credit card - as often as every day.
Q: The situation where an electricity seller could tap directly into a customer’s bank account at will seems crazy. Is that arrangement prevalent?
A: No. Most people are on fixed rates and get monthly bills. But if a supplier can avoid all the costs of billing, credit, collections, and bad debt, they eliminate risk and save a lot of money. Such a “prepayment” plan might usually provide lower electricity rates, but when combined with exposure to volatile market prices it can lead to a consumer nightmare.
Q: Ok, that’s Texas. But I understand that roughly 15 states have these deregulated electricity markets, where consumers can take their pick of different offerings. To what extent are seniors (and others) elsewhere in the U.S. exposed to this kind of electric bill fluctuation risk?
A: The catastrophe in Texas is unlikely to happen elsewhere because other states are part of regional grids with diverse supply resources to draw on and they’re subject to reliability rules designed to keep the generators running. Only Texas goes it alone. Texas also has gone whole hog into deregulation, while other states generally give you the option of buying electricity from public utilities at regulated rates. There is always risk in a market, but competition can benefit consumers as long as people understand how to make good choices.
Q: What’s the best way for homeowners to determine what are the rules and protections in their own states?
A: Each deregulated state has its own set of rules and consumer protections. You can find objective information on the website of your state public utility regulatory commission. Also check with your state’s consumer advocacy agency.
Q: And, what’s the best way to determine if your own electricity supplier has the power to raise prices dramatically?
All states require terms and conditions to be disclosed, usually in plain language. Check your supplier’s website and make sure you understand your bills. Some offerings could save you money or give you more “green” power, but make sure you understand what you are buying and how it will be paid for. And don’t switch suppliers when a marketer calls you on the phone or knocks on your door. Get the offer in writing, read any fine print, and check out online reviews. Also check what your regulated utility may be offering – a growing number of them have optional rate plans, such as cheaper power on nights and weekends, that might be a good choice, depending on your usage pattern.
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My webinar on Social Security’s importance, claiming strategies and more
In case you missed my Retirement Researcher webinar last week, it’s streaming online now - just click the video above (or use this link if the video player gives you any trouble). I had a lively conversation with Wade Pfau, Bob French and a very large group of very focused attendees covering these points:
Why Social Security is so critical
Claiming strategies
Myths about the program
The solvency problem and solutions
Benefit adequacy
Public opinion on Social Security’s future
I also fielded some great questions from the audience, including this:
“Do you think they will change the formula for adjusting your benefit payments based on when you claim your benefits? Will they try and bring that more in line with actuarial assumptions in the future?
That’s a real hot-button topic, and one I plan to write more about in the near future
In the meantime, thanks to Wade Pfau, Bob French and the rest of the Retirement Researcher team for a great event!
If you have Social Security questions you would like to see us tackle in a future webinar, leave a note at the bottom of this newsletter post.