Have Energy Service Companies (ESCOs) in Deregulated States Been a Sham?
Utility expenses can be some of the of the largest monthly real property expenses. When several states decided to deregulate the supply of electricity and natural gas many real estate owners expected to see significant savings on their utility bills. Unfortunately, these expectations have not materialized.
This article will provide you with a brief background on energy deregulation, why savings for real estate owners has not occurred, and provide you with pitfalls to avoid when dealing with an Energy Service Company (ESCO) that can save you money.
Summary of Deregulation of Energy
In 1996 several states began the process of deregulating the utility industry. Prior to deregulation one utility company supplied the commodity (electricity and/or natural gas) and delivered it to its customers.
Deregulation gave utility customers the opportunity to choose their commodity supplier. This gave rise to the commonly used acronym ESCO (Energy Service Company). The goal of deregulation was to create competition and drive utility prices down. Deregulation didn’t change the utility company that delivered the commodity to your real property, but it did give consumers the option of who supplied the commodity. This splitting of commodity supplier and commodity deliverer at times resulted in receiving two bills, one from the energy supplier (ESCO) and one from the company that delivered the energy to your property. Deregulation did not give consumers the opportunity to choose which utility company delivered the commodity because those incumbent utility companies needed to stay in place in order to maintain the infrastructure that delivered the commodity to your property.
Not every state offers energy deregulation so it’s important to check with your local public service utility company to see if your state is a deregulated energy state. Below is a current listing of deregulated states for both electricity and natural gas. The grid is customized for residential real estate owners (some states are deregulated but don’t offer residential property owners a choice of suppliers).
The Goal of Deregulation
The goal of deregulating the energy industry was to bring prices down. Prior to deregulation utility companies faced no competition and therefore had no incentive to lower prices. Allowing other companies to enter the marketplace would expand customers’ choices and force the suppliers to compete for your business using lower prices as their main tool to attract customers
Unfortunately. deregulation has not brought about the desired results. An April 2019 report by the American Public Power Association (Link: https://www.publicpower.org/periodical/article/residential-rates-deregulated-states-saw-uptick) , found that deregulation has not lowered energy prices, as compared to regulated states. There are many theories as to why deregulation has not significantly lowered energy prices. Let’s discuss a few reasons.
Why Deregulation Has Not Lived Up to the Hype
Deregulation has not delivered the results desired due to several factors. The good news is that some of these factors are controllable. Let’s start with the non-controllable reasons.
Non-Controllable Reasons
(1) States that mandated deregulation were typically states that traditionally had higher energy prices, as compared to the national average. One of the main drivers of these higher energy prices is related to fixed infrastructure costs. The infrastructure costs, the costs to produce and deliver the commodity, play a role in driving prices. If you’re in a state that consumes less energy per customer the fixed costs are spread among fewer consumers, as compared to states which consumes a larger energy supply per customer. Deregulation does nothing to lower those infrastructure costs or increase the number of consumers demanding the commodity. Therefore, deregulation cannot help lower energy cost as it pertains to this effect on prices.
(2) Energy prices are driven by global markets. Deregulation cannot lower the price when unexpected supply shortages occur due to natural disasters or terrorism; and it cannot lower excessive demand due to unfavorable weather conditions. The law of supply and demand and the expectation of price movement by speculators plays an important role in price movement.
(3) Another uncontrollable driver of energy prices is each state’s level of access to alternative energy sources such as hydroelectric and renewable energy. The more competition to supply energy, the more pressure there is on prices to decline.
Controllable Reasons
There are also many controllable decisions you can make to avoid mistakes that are costing consumers in deregulated states. We recommend that you use a broker or energy consultant to help you avoid some of the pitfalls that occur when real estate owners directly negotiate with ESCOs.
(1) Not understanding the purpose of an ESCO – There are common misconceptions about dealing with ESCOs that lead to a less than stellar performance. Using an ESCO does not guarantee that you get the lowest prices at the time of purchase. Electricity and Natural Gas are globally traded commodities. There is no way to time the markets to get the lowest prices. The odds of doing this is equivalent to trying to buy Microsoft on the New York Stock exchange at the lowest price of the year.
ESCOs can help you in executing your purchasing strategy whether it’s buying a commodity for a fixed, variable or mixed price. They also can execute contracts with various lengths ranging from months to years. Competent ESCOs understand their client’s tolerance for risk and execute a purchasing strategy to meet those needs. For example, ESCOs can create budget certainty for real estate owners by executing a fixed rate electricity contract for one year. With a fixed rate utility contract as market prices increase your commodity price stays fixed for the duration of the contract.
With this strategy there is a downside if prices fall, you’re locked into paying the agreed upon higher prices. In other words, ESCOs can help real estate owners determine if they want to bear the risk of price movements or not. Conversely real estate owners can purchase the commodity at the market price if they feel energy prices will decline. This strategy puts all the risk on the real property owner if prices rise. Many ESCOs offer their clients a mixed price where part of the price is variable and the other part is fixed. This is a way to hedge against extreme upward price movement while still being able to enjoy cost savings if prices go down. Since ESCOs have years of historical price data and a closer ear to the market they can give you insight on pricing strategies and the timing of when to lock in rates. Note, ESCO’s may not have your best interest in mind so it’s advisable to hire an energy broker/consultant.
(2) Not understanding the ESCO Contract – Energy supply contracts can be very confusing and filled with hidden traps and teaser rates. Many lay people fall victim by going after the cheapest prices and fail to understand that these rates are only temporary. A broker or energy consultant can help you compare apples-to-apples and not have you chasing shiny objects that disappear after a few months. Pricing alone won’t save you money. Energy contracts have monthly quantity limits. If you exceed the monthly quantity you may be paying market prices on the excess quantity used. Ask your ESCO for protection for exceeding the monthly quantity limits.
(3) Not paying attention to details – Many consumers in deregulated states have squandered away any potential saving by not paying attention to the details in their contract. One of the most costly mistakes real estate owners make when signing up for fixed rate contracts is to allow their fixed rate contracts to expire without renewal. When fixed rate contracts expire they become market rate contracts. During periods of rising prices many real estate owners have found themselves unknowing in a variable rate market contract during the peak heating or cooling season. Staying vigilant and continually monitoring your contract will prevent this mishap from occurring.
Finally, make sure you’re paying the correct sales tax rate on your utility bill. Utilities sometime mis-classify the type of real estate and subject you to higher sales tax rates. This scenario typically happens when a residential customer is charged commercial sales tax rates.
As stated, energy costs can be a significant portion of the total expenses in owning real property. If you live in a deregulated State you may not automatically find the cost saving you’re looking for. That does not mean you don’t take advantage of the lowest energy supply rates available. Cost savings is relative, just because your state’s average utitity bills have not gone significantly down does not mean you don’t have a responsibility to try to minimize them. Use the grid below to see if your state is deregulated, and offers choice to residential property owners, then find an energy broker/consultant to help you determine your risk profile and then match the available deals to your needs.
Note: “No” means there is not choice of supplier for residential property owners. “Yes” means there is choice for residential property owners. If a state is deregulated but only offers choice to industrial and commercial customers it is marked as “No”.
| State | Electricity | Natural Gas |
| Alabama | No | No |
| Alaska | No | No |
| Arizona | No | No |
| Arkansas | No | No |
| California | No | Yes |
| Colorado | No | Yes |
| Connecticut | yes | No |
| Delaware | yes | No |
| District of Columbia | Yes | Yes |
| Florida | No | Yes |
| Georgia | No | Yes |
| Hawaii | No | No |
| Idaho | No | No |
| Illinois | Yes | Yes |
| Indiana | No | Yes |
| Iowa | No | No |
| Kansas | No | No |
| Kentucky | No | Yes |
| Louisiana | No | No |
| Maine | Yes | No |
| Maryland | Yes | Yes |
| Massachusetts | yes | Yes |
| Michigan | Yes | yes |
| Minnesota | No | No |
| Mississippi | No | No |
| Missouri | No | No |
| Montana | No | Yes |
| Nebraska | No | yes |
| Nevada | No | no |
| New Hampshire | Yes | No |
| New Jersey | Yes | Yes |
| New Mexico | No | yes |
| New York | Yes | Yes |
| North Carolina | No | No |
| North Dakota | No | No |
| Ohio | Yes | Yes |
| Oklahoma | No | No |
| Oregon | No | No |
| Pennsylvania | Yes | Yes |
| Rhode Island | Yes | Yes |
| South Carolina | No | No |
| South Dakota | No | No |
| Tennessee | No | No |
| Texas | Yes | No |
| Utah | No | No |
| Vermont | No | No |
| Virginia | Yes | Yes |
| Washington | No | No |
| West Virginia | No | Yes |
| Wisconsin | No | No |
| Wyoming | No | Yes |