Depending on where you live, you may have gotten offers to “lock in” rates with your utility company.
Is that a smart idea? Are you better off dealing with the natural fluctuations of the market, or can really you save money by sticking with the fixed rate they offer? Plus, how do you know if rates are likely to change?
Location, Location, Location
The more de-regulated your state is, the more likely you’ll be able to shop around for a better deal on utilities. For example, two states that are particularly helpful to consumers in that regard are Texas for electricity and Georgia for natural gas, according to Bob Harris, the chief executive officer WhiteFence.com, a site that helps consumers compare prices on utilities.
Geography also plays a role in utility costs, because of the energy usage and needs of that region. For instance, a city like Boston, where temperatures fluctuate more dramatically depending on the season, would tend to have higher electricity costs than a place like San Diego. The Northeast also tends to have higher gas prices because of the distance from the main gas supply.
But prices tend to fluctuate relatively consistently throughout the country. (You can check out Harris’ WhiteFence Index to see how major cities stack up in terms of utility costs.)
Factors for Fixed-Rate Plans
Fixed-rate plans tend to span from six to 24 months depending on your energy or gas provider. Simply put, they eliminate the risk that prices go up — but also the reward that prices go down, says James Williams, an energy economist at energy research and analysis company WTRG Economics.
In general, a variable rate plan (meaning one where pricing changes according to the market) offers a lower price per kilowatt-hour, but “you’re betting that that rate will stay low” says Harris. A fixed-rate plan, on the other hand, “is slightly higher in price, but you know you’ll have [that price] for 12-24 months.” Harris compares the concept to that of choosing between a fixed-rate and a variable rate mortgage.
Fixed-rate plans appeal to consumers who are risk-averse and want greater control over their budget. “If I don’t want to worry about the ups and downs of the market and want to make sure I know what I’ll be paying, I can govern my usage to meet my needs,” Harris says. “That way, I don’t have [as much] variability month to month.”
Williams recommends locking in prices if you’re on a fixed or low income. It especially makes sense for “people who couldn’t afford to pay their bills if the rate went up” to lock in natural gas prices.
Harris adds that some people like the convenience of a fixed-rate utilities plan, because it means that if your usage is roughly the same from month to month, your bill should be roughly the same. When he moved from North Carolina to Texas, he chose a fixed-rate plan because of the convenience factor.
However, since this winter is expected to be colder than usual and prices are more likely to go up than down, he says locking in natural gas prices could make sense for most consumers. “I think there’s more upside risk to prices than downside at the present time,” he says.
So, what determines fluctuations in utility costs? That depends on what utilities you’re talking about. According to Williams, “the price of crude oil seems to go up with the stock market rather than fundamental supply and demand.” That’s because the stock market tends to fluctuate with value of the dollar. And when the dollar goes down, the price of crude oil goes up.
Heating oil is tougher to predict and thus riskier to lock in, but Williams says there’s a more than sufficient inventory of heating oil at the moment. Natural gas prices, on the other hand, fluctuate according to fundamental supply and demand.
If you’re on a variable rate plan, then your cost will fluctuate depending on the price that your provider pays to wholesalers. Their wholesale price goes up, and you’ll pay more. If it goes down, you’ll pay less. Williams says that the cost of natural gas normally fluctuates by about 30 cents per therm (or $2-3 per million BTUs) from summer to winter. However, a big chunk of your utility bill goes to the local distribution company in the form of fees, so your price is higher than the wholesale price. (On the other hand, Williams says, distribution fees and other costs on your monthly bill don’t fluctuate very much.)
To help consumers make informed decisions, Harris says WhiteFence is working on a new price tracker tool that will track current rates and predict future rates, much like some travel search engines predict increases or decreases in airfare using trends and historical data. That tool should be available next year.
Susan Johnston is a Boston-based freelance writer who covers business and lifestyle topics.