DANGER: HIGH VOLTAGE! [CONTRACT]

It’s important for city leaders to understand the dangers that can zap cities when they contract for electricity. But first, allow us to demonstrate the complexity involved with a car shopping analogy.

Everyone has gone car shopping. You think to yourself: they can’t fool me, I know the games they play. I’ve got this! So, you go to that new dealership with the searchlights and the big neon sign advertising “Lowest Prices In Texas!” You’ve been looking for a particular car and ask how much they’re asking for the one you want. The salesman points to the big $21,999 on the window. Wow, you think, “best deal yet!” That same car was hundreds, even thousands more elsewhere. So, you trade your clunker in and sign a 60-month contract. $195/month and it’s now yours to drive home!

Imagine the shock, then, when the first monthly invoice comes for $300. “This has to be a mistake!”

You look at the invoice expecting to maybe see someone else’s name on it. But, no, it’s yours. Then you see the laundry list of add-on charges: a separate charge for extended warranty (did I buy that?), another for a maintenance plan (when did that happen?), an additional surcharge for undercoating, another for the ADM (Additional Dealer Markup?), and the list goes on.

And it hits you… you’ve been had! And you start wondering, what might those other dealers not have been telling me?

Buying electricity can be like that. And it’s just as true for cities as it is for individuals. Unless you pay attention to and understand what’s in the fine print—the stuff no one wants to read—chances are slim you’ll know what you’ll end up paying for. Every company offers a different array of prices, contract terms, and services. And that, you can chalk up to competition.

Here’s why. In 2002, Texas deregulated its electricity market. From that point forward, Texans could choose any provider to buy from. And that’s true for cities, too. The idea behind deregulation, of course, was that healthy competition results in lower prices for all. And it has. But there’s a down side, too.

The more companies competing, the more “creative” the players have to be to win the business. And that creativity, in the case of the electricity market, manifests as companies using the complexity of the market to gain a tactical advantage. Unfortunately for the consumer, that can translate into obfuscation and manipulation of the information that those companies use to sell with.

No doubt, your city has received more mail, phone, and email solicitations than you can count from companies promising to save your city money on electricity. But who can you trust?

The answer is, only yourself. The key to getting the best electricity deal for your city is to understand the components that comprise the total electricity cost being offered to you. First, check out the people knocking on the doors at City Hall wanting your business—REPs (Retail Electric Providers), independent brokers, aggregators, consultants, and ESCOs (Energy Service Companies). Are they legit?

Whatever their contract structures and additional services, the differences between their buzzword-filled offers belie the truth. Those numbers that look great can have hidden gotchas lurking behind them. Remember that these folks are not philanthropists, and they use unfamiliar terminology and fail to point out the contract terms that are only in the fine print. That means that some bad actors and even many legitimate companies count on these tactics to make an apples-to-apples comparison all but impossible for you.

Although cities are exempt from State of Texas purchasing requirements when buying electricity, that doesn’t mean a well-crafted RFP can’t help you get a great deal. But beware, copying some other city’s specs and putting them out to bid can end in results that only make choosing more difficult and risky. They may not know all the ins and outs either.

Prices are based several ways: spot-market based, fixed price, and variable. So, knowing your electric usage, the market dynamic at the time of contracting, and the terms of your contract will help you determine which best fits your city’s needs. That said, you could still end up comparing apples to oranges—especially, since people assume the advertised per-kWh price is all that really matters. (But that’s like the big number at the top of the car sticker… not the small “all-in” price at the bottom.)

With companies offering low-ball per-kWh prices just to “win the business, what’s included or excluded from the price can make all the difference. And those hidden gotchas can jump a 4.5 cents per-kWh advertised price into a 5 cent effective price or more. Unless you’re able to parse and understand the industry jargon and legalese in the fine print, you’re messing with high voltage.

You might think the more line items in the contract, the better. But often that’s just more opportunity for a company to trip you up later under the guise of pass-through costs. Be aware, too, that there is one price component that simply can’t be negotiated. That’s the cost of transmission and distribution (towers, power lines, and such). These fees are regulated by the Texas Public Utility Commission and passed right through to you. (And these fluctuate daily based on “congestion” and other factors.)

In addition to having a handle on contract language and industry parlance, you also need a solid understanding of the market itself as well as ways it might change in the future. For example, you may have the option to treat “congestion costs as a fixed “adder” or as a pass-through. Which is better? Are the costs similar to historic levels or not? Should you risk locking in prices if the market’s at an abnormal peak?

Achieving any semblance of real price certainty can be unacceptably expensive!

From the different ways companies define common terminology, to the way certain contract provisions are worded, to the thresholds that trigger additional charges — all have different implications and outcomes. The same is true of how different companies charge for adding or deleting meters for new construction in your city.

If you are going to release an RFP for electricity, be sure to clearly define what the kilowatt price includes and what you will entertain as allowable pass-through costs. Make sure what kind of services are included and how important they are to you. Clearly defining the pricing components such as congestion costs, system losses, and retail adders, is critical to success.

Oh, and remember prices are typically valid for 24 hours or less. That means if you do an RFP, you have to take immediate action the day the proposals are received. To avoid this, you can request “indicative pricing” and narrow it down to one or two providers—then get pricing the day the council/board has it on its agenda for approval. Of course, some market providers are aware of this strategy and will provide loss-leader indicative prices to make the city’s short list. Alternatively, you could have a resolution passed giving the City Manager authority to sign so long as the per-kWh doesn’t exceed a predetermined price. Finally, you may hear of reverse auctions. While this approach can result in a very competitive price, there’s no assurance market prices will be favorable auction day. Also, reverse auctions seldom incorporate contract language favorable to you.

Finally, many companies offer additional customer service benefits to their clients such as handling billing problems, state compliance reporting, and assistance with the city’s budgeting process. Check to see whether these services are included. Bottom line: the risks associated with purchasing electricity are minimized if you educate yourself on the market, the players, the pricing components, and the regulatory environment or you may end up living with an answering service that hides the gotchas in that teeny-tiny type.