Demystifying Misleading Retail Energy Industry Plans

The noise created by gimmicky electricity plans in the market place have made it difficult for consumers to clearly identify the most appropriate plan to fit their needs. Some electricity plans are marketed in such a way where the customer is led to believe that the functional name of the product or plan, such as “Fixed Rate”, is synonymous with how the customer will be invoiced. Unfortunately, despite all the due diligence performed the customer, they may still end up with the short end of the stick if they are not aware of the gimmicks. How will you know the difference between what looks like a great plan and the real thing? We're here to help.

The sticker price is usually what catches most people’s attention.  One of the most commonly selected plans is a  “tiered-rate” plan. It allows for electricity providers to advertise rates much lower than what they actually charge you. Because these plans were so confusing, PowerToChoose.org, a Texas shopping website, has now automatically applied a filter on their site to reduce confusion and allow visitors to “hide” plans with minimum usage fees and plans with tiered-rate pricing. However, you can still find yourself signing up for this type of plan, without even knowing, if you shop directly on a supplier’s site.

Tiered-rate plans don’t actually guarantee a specific rate per kWh. Instead, they charge customers a flat fee based on their energy usage “tier”.

Here’s an example of a Tiered-Rate structure:  

This is what’s advertised: 6.5¢ per kWh

Looking at this advertised price, most people would expect to pay 6.5¢ for every kWh they consume.  So, if you used 2,200 kWh, you should pay $143 (6.5¢ multiplied by 2,200) for your energy.  This does not include TDSP (Transmission and Distribution Service Provider) charges assessed by the local utility company unrelated to your electricity supplier, that delivers the electricity to your meter.

Unfortunately, with a Tiered-Rate product, this is how you will be charged for the energy (does not include TDSP charges):

Tier 1:  Charge if you use at least 1 kWh:                                          $65 per billing cycle  

Tier 2:  Additional Charge if you use at least 501 kWh:                     $0 per billing cycle

Tier 3:  Additional Charge if you use at least 1001 kWh:                   $140 per billing cycle

Tier 4:  Additional Charge if you use at least 1501 kWh:                   $0 per billing cycle

            Additional Charge if you use more than 2000 kWh:               11.90¢ per kWh in excess of 2000 kWh

Let’s break this down… 

Example 1: If you use 200 kWh, you will pay $65 plus applicable taxes and fees from the supplier.  (You’re paying 32.5¢ per kWh here, not 6.5¢.)

Example 2: If you use 950 kWh, you will pay $65 plus applicable taxes and fees from the supplier.  (Tier 1 + Tier 2 = $65 + $0 - $65)  (You’re paying 6.84¢ per kWh, not 6.5¢.)

Example 3: If you use 1450 kWh, you will pay $205 plus applicable taxes and fees from the supplier.  (Tier 1 + Tier 2 + Tier 3 = $65 + $0 + $140 = $205)  (You’re paying 14¢ per kWh, not 6.5¢.)

Example 4: If you use 2,200 kWh, you will pay $228.80 plus applicable taxes and fees from the supplier.  (Tier 1 + Tier 2 + Tier 3 + Tier 4 + Additional Charge over 2,000 kWh = $65 + $0 + $140 + $0 + $23.80* = $228.80)  (You’re paying 10.4¢ per kWh here.)

*The $23.80 comes from the 200 kWh used in excess of 2,000 kWh, and is charged at 11.90¢ per kWh.  (11.90¢ multiplied by 200 kWh equals $23.80.)

This plan would be great for you if you are able to control your electricity consumption, down to the kWh.  Let’s be completely honest here, not many of us can. You are only able to pay 6.5¢ per kWh, on this plan, if you used exactly 1,000 kWh.  Nothing more, nothing less.  Very few people use exactly 500, 1000, or 2,000 kWh. In fact, the average TX residential customer uses approximately 1,255 kWh per month, with fairly large seasonal usage swings. That means tiered-rate plans may not be the best for you. 

Here’s what you can do to protect yourself.
If it sounds too good to be true, it probably is. Make sure you always check the Electricity Facts Label to see the real price breakdown.  We recommend going with a stable and reliable provider that makes things easy to understand. At APG&E, we’ve never participated in any type of gimmicky plans or offers. Since 2004, we’ve always believed in offering straightforward products that we’d recommend to our own family and friends. We keep it that simple.