If the electricity crisis is over, why haven't my rates come down?

 
This is a question that we have heard often in recent months, and we are sure that many utilities are hearing the same question from their customers. Wholesale spot-market electricity prices have, indeed, dropped in recent months. However, utilities do not acquire most of their power supplies in the daily spot wholesale markets. Utilities' power supplies may be combinations of generating plants that they own, contracts at set prices for various time periods, and, sometimes, relatively modest amounts of daily spot market electricity. For this reason, consumers should not expect their retail rates to move in lock step with wholesale electricity markets.

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The timing of an individual utility's retail price changes will partly depend on the power supply contracts that it holds, when those contracts expire, and decisions about the length of replacement contracts they commit to. Many utilities' retail prices did not immediately increase when wholesale electricity prices spiraled out of control in the summer of 2000. This is because to various degrees they had contracts for power supplies signed when prices were low. When those contracts expired, utilities were faced with decisions about replacing supplies at high prices. Many of those contracts might appear costly now, but at that time, the situation was very uncertain and it was important for utilities to secure supplies for their consumers in the face of impending shortages.

The direct linkage between wholesale prices and retail rates is further weakened by the fact that most utilities are not able, or don't want, to pass on their cost increases or decreases immediately. Rate stability is something that utilities understand is valued by their customers. Utilities and their regulators will often try to manage the effects of sudden electricity cost increases. Sometimes the increased costs are financed, creating debt that must be repaid over a longer period of time. This has the effect of reducing the initial consumer price increase, but it also spreads it over a longer period of time. Thus, when wholesale power costs decline, the utility rate may not decline immediately because the utility must continue to pay for the previous cost increase. Similarly, a utility may draw down cash reserves to delay a rate increase. But those reserves must be replenished when costs decline before a rate decrease can be passed on to its customers.

Because of these factors, consumers should not generally expect their rates to respond immediately to changes in the wholesale electricity market. Successful utilities and regulators will strive to achieve variations in the consumer price that are considerably less volatile than the wholesale commodity market for electricity.

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