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Understanding Indexed Plans in the Texas Electricity Market

October 11, 2011

The deregulated retail electricity market in the state of Texas gave consumers the power to choose their retail electric providers. Aside from the many different reselling companies competing for consumers’ attention, there are also different programs, payment schemes, and pricing consumers can select from. However, many consumers are getting confused about what particular Texas electricity plans would be best for them. Some Texas electric companies market variable rate plans as the better choice while others push for indexed rate electricity plans among consumers. Among the different electricity plans, the indexed rate plan is one that is not among the top choices among consumers, who more often than not choose either variable rate electricity plans or fixed rate electricity plans as their program of choice. Many reason out that indexed plans have a higher risk for consumers than other plans while other simply do not understand what indexed rate plans are. The recent heat wave that placed the state into a Texas electricity emergency put indexed rate plans into the limelight, although not in a positive way, catching the attention of consumers throughout the state. The following puts indexed rate plans into perspective to give electricity users a better understanding of what these plans are and how it can affect them as consumers. What are Indexed Rate Plans? In its most basic sense, the price you pay with an indexed rate plan is based on a publicly available index, which in most cases is tied up with the price of natural gas in the market. Although other Texas electricity plans are also affected by natural gas market prices, the rates paid each month with an indexed rate electricity plan is based on a complex mathematical formula that the consumer and provider will agree upon. Just like variable rate plans, indexed plans are also based from month to month. The difference is that variable electricity plans is based on the consumer market trend while indexed plan is affected by the cost of natural gas. An example of a formula used to compute the cost of an indexed rate plan is shown below which is based on the Electricity Facts label issued by TXU for their indexed plans Price per kWh = (Monthly NYMEX Natural Gas Price multiplied by applicable Seasonal Natural Gas Factor) + Energy Charge + Storm Recovery Charge + Storm Recovery Tax Credit + ((Base Charge + EECRF Charge + CenterPoint Advanced Meter Charge)/Monthly billed kWh Usage) Indexed Rate Plans and the Recent Heat Wave Consumers who sign up for an indexed rate plan is often tempted by the seemingly low rates that they get when they pay their Texas electricity bills. However, if you are not monitoring the index such as natural gas prices from where your rates are based upon, you may end up paying a higher bill should these index prices increases. Such was the case during the recent heat wave which affected the prices of natural gas – which jumped up to sixty times its standard price. Index rate plan customers during these times found their electricity bills soaring to unbelievably high levels. The Texas electric companies who sent the bill could not be accused of extreme profiteering or taking advantage of an already desperate situation. It was just an unfortunate outcome in the struggle to keep the electricity grid running in the face of an imminent shutdown caused by the tremendous heat wave. While it would be fair to state that the risks involved in indexed rate plans goes exponentially higher at the onslaught of natural disasters, the volatility of such plans is normally stable most of the time. The bottom line for most consumers is getting cheap electricity bills but getting a clear understanding of the Texas electricity plans like indexed rate plans available for them can help them choose what would be best for them in the long run.

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