Wednesday, February 24, 2021

Griddy Greedy?

Who is to blame for staggering power bills, the electric company or the consumer?

Recent articles in the media imply that everyone in Texas is now receiving thousand-dollar-plus electric bills, which is ironic, considering they have been without electricity for so long.  The reality is, however, that some consumers who signed up for alternative electrical suppliers, are getting these bills, as they agreed to pay "spot" market prices for electricity.  During normal times, this means reduced electric bills.  During peak demands times, well, all bets are off.

And like everything else these days, many Republicans are proposing that relief money designed to compensate people for damage caused by the Texas "big freeze" be used to pay these electric bills.  Why should the utility companies have to suffer?   Also on the agenda, is a proposal to use disaster relief money to pay Ted Cruz's Margarita tab at Cancun.

Are consumers innocents in all of this? Perhaps.  Perhaps not entirely.  When we had the house in New York, we were bombarded with offers to go with "alternative" electrical suppliers.  I never quite understood how this worked - after all, electricity is electricity, and the electrons have no idea what company produced them.  It is like these companies that claim they are "green" because they buy only "green" electricity from solar panels or wind farms.   But the reality is, the juice comes off the grid, and if you designate a particular source, you are not really making things greener - just laying claim to a particular portion of the power source.

Our neighbors in New York, from whom we bought the house, both worked for NYSEG, the utility company, and they recommended just going with the standard option.  A lot of these "alternative" companies seemed kind of sketchy and had funny names (I don't recall "Griddy" being one of them, though).   The idea was, I guess, that they would negotiate power prices for you, and your share would be allocated.   But as the Griddy fiasco shows, these types of arrangements can backfire, as they have no upper end on costs.

When we had the office building, I opened a commercial account with Virginia Power.  Probably a mistake on my part, as residential rates would have been far lower.  Anyway, I was billed on peak usage, not on Kilowatt-hours.  They went to a radio meter but for some reason didn't change out my meter.  After three months, they read the meter and charged me peak usage based on three month's worth of electricity!  I was able to negotiate down the bill, as it was their error, but it was an interesting experience.

In Auburn, New York, there was an old GE plant for sale (a real PCB cleanup mess!) and apparently someone came to check out the old factory. The Real Estate Agent turned on the lights - and the seller got a huge electric bill as a result.  Since they billed by peak usage, just turning one one light bulb triggered the meter and they had to pay the minimum amount for usage for that month - in the thousands of dollars.   Commercial electric billing is a weird beast.

I suspect a similar thing happened with Griddy.  They bought power based on peak load, and when everyone's heat pump went to "auxiliary heat" (which they do, once the temperature goes below 40 degrees or so) load levels went though the roof (auxiliary heat is resistive heat - an electric heating coil, which is the least efficient form of heating).   So Griddy gets charged a maximum amount for power, which in turn is passed on to consumers as part of the contract they signed.

NOTE:  Griddy offers this explanation as to what happened - they claim the utility commission is to blame for setting rates at a staggering $9/kW-h.  Compare this to the ten cents per kW-h most people pay, and you can see the problem.  But of course, if you had a standard utility company contract, odds are, you wouldn't be getting these sky-high bills.  We'll see.

Of course, consumers profess innocence in all of this.  Sure, it is all fun-and-games when you are paying $50 less per month than your neighbor.  But when the chickens come home to roost, where's my government bailout?  Why should I have to pay the contract prices on the contract I signed?   Why can't I get the low, low prices during lean periods of energy usage, and then get low prices during periods of high energy usage?  Why can't I have heads-I-win and tails-you-lose?

Sadly, this is the way of the world today.  We saw this in 2008 when people defaulted on mortgages on houses they could never afford - and petitioned the government for a bailout.  And some got it, too!  One lady in Ft. Lauderdale got a "mortgage reduction" on an overpriced condo she had bought, and then turned around and sold it for a profit later on!   Of course, many more got no reduction and ended up on bankruptcy court.  Others foolishly held on, cashing in their 401(k) (and paying huge tax bills as a result) to make payments on a house that would never, in their lifetime, be worth what they owed on it.  When they finally lost the house to foreclosure, they were utterly broke.  And yes, some folks today are still "upside down" on houses they bought before 2008.

I suspect the same will happen here - a few people will get "bailed out" of these high utility bills, which in turn will be a bail-out of Griddy.  Many more will simply not pay the bills, get default judgments against them, end up bankrupt and/or with their credit ratings destroyed. It is like food stamps - is that a bailout of poor people, or a bailout of Walmart, which can afford to pay employees less?  You decide.

The more complication you make a transaction the easier it is to fleece the consumer.  I mentioned before how Georgia Power offers a "flat bill" service which sounds appealing, but if you read the fine print, isn't a free giveaway of power.  It is not a mere bill-leveling service (where you pay a flat amount every month and then they reconcile the difference at the end of the year) but something far more complicated than that.  I read the fine print and decided to nope out of it.  If you go over your standard limit, they can drop you from the plan, or when you sign up the next year, jack your monthly rate.  Oh, and there is a "convenience fee" attached as well.  So you don't really come out ahead.  You just pay more for electricity for "peace of mind" - and you know I feel about people selling "peace of mind".

So I don't feel too sorry for Greedy Griddy customers - they wanted cheap power and didn't want to read the fine print.  In exchange for cheap power during low-usage periods, they were signing, in effect, a blank check for power (with no apparent cap) during high-usage periods.

The real question is, why do we allow such plans for ordinary people?  Commercial customers, who are sophisticated, can understand these billing practices and are held to a higher standard.  But in the interests of "deregulation" we are offering plans to ordinary folks that are far too complicated for them to understand.  They sign up, out of greed, not realizing there may be a hidden catch - and there is always a hidden catch.

But the same can be said for car leases, high-interest credit cards, variable-rate mortgages, and so on and so forth.  Shitty deals abound, and people think they are being clever and "stealing the cheese" by biting on these deals.  But when the deal blows up in their face, who do we blame?  The guy offering the shitty deal, or the consumer, who thought he was pulling a fast one on a major corporation (nice try!) and what's more, mocked the rest of us for being cautious with our money?

Like I said, the point is moot - the government will step in, once again, and bail out a select number of individuals (but not all) in a very uneven and unfair manner, much as "mortgage adjustments" were done.  Probably would help, in Texas, if you contributed to Ted Cruz's Margarita fund.  That is how these things work, in a kleptocracy.

UPDATE: A reader writes with an interesting perspective on this:

I have an interesting experience on this. We run a factory here in Texas.  About two years ago, I had a young salesman canvassing the block (it's all factories in this section of town), selling 'wholesale' electricity. These guys were middlemen to the energy companies. Since we run heavy machinery, our electric bill is about 2000-2500 per month and was only increasing with company growth. If I provided our estimated annual consumption and signed to a 4 year contract (with early termination fee), I could get lower wholesale rates. I didn't like the salesman much but liked the idea and made a quicker decision than I should have. For the most part, our electric bills went down even with increased use, but we did hit a summer price spike last year that scared me. Luckily we didn't work during this winter storm, so the factory wasn't in use (even then, power in our area was mostly down), but I'll have to wait and see what the bill is. At home, we use static rates.

Even as a finance guy, I didn't know about the extreme market rate cap and the probability of failure like what occurred. They sell you on the historical average price, not on the volatility or once-in-a-lifetime extremes on price. They don't even mention that the chassis or infrastructure of the grid needs major upkeep. I couldn't possibly expect a retail consumer to know about these intricacies and it doesn't make sense to have variable rates for such low retail consumption. And I'd bet Griddy customer support is nonexistent or not as informed on these details as well.

Market rate electricity basically requires being knowledgeable in options pricing and insurance writing. You're being paid a little bit every month in the form of savings, in order to insure the grid in case of catastrophe. You get a little bit of savings upfront with almost unlimited loss in case of disaster. The grid and energy companies knew we'd have to back-up their lack of investment in the grid. It's like they drove recklessly because they now had insurance. Consumers were hedging the electric firms' bets.

Many financial lessons to learn here. The market rate deal didn't intuitively feel right to me so I should have declined it. For retail consumers, saving $50 per month isn't worth the anxiety in exchange. Who wants to check electric spot prices every time we have a heat or cold spike? Having to turn off all your appliances, just in case the spot price swings! 2nd lesson is if the contract is too complex to understand then don't sign! Hopefully, we all learn from this and you're right, I was greedy in this! Nothing is free, so if I was receiving a bit of something for nothing that's greed.
I think that is an interesting way of looking at it - with all this talk about hedging and short-selling these days, it seems the electric companies have found a way to hedge or insure their bets - using our money.  As another reader noted, the system would be "fair" if there was some way to send users messages showing them their cumulative energy usage, rather than waiting until the bill arrives to find out how much you owe.  $9kW-h is scandalous!

Maybe $0.03 a kW-h is a "good deal" compared to the ten or eleven cents I pay.  But then again, I never have to worry about nine bucks!

UPDATE:  The media is awfully vague about the Texas Utility Bill Massacre. In fact, they've moved on - new news cycle!  Story is OVER!   Ted Cruz in Cancun, big utility bills, pipes froze - that's all ye need know, right?   Particularly if you don't live in Texas, I guess.  But I think there are valuable lessons to be learned here - particularly about the "free market" and utilties.  Say, isn't Texas the people who brought you ENRON?

Anyway, another reader writes with more insight:
This cold snap was an ordeal, and it made history by breaking a lot of records for Texas. I feel especially sorry for people in south Texas, who are used to living in a subtropical climate. Abilene, being on the south end of the great plains, actually gets pretty cold in the wintertime, we have at least two or three stints below freezing every year, and yearly ice and snow storms that turn the roads into an inch thick sheet of ice.

The town that we live in has a population of about 600 people. They are nice people for the most part, but it definitely has the small southern town vibe (uber conservative, i.e. a majority of the town still believes that Trump is president). The town has a "community forum" page on Facebook, and it was both entertaining and nerve grating to read the things that people were saying on the page during the snowstorm.

When the storm hit, it was announced that rolling blackouts would be starting. For the first couple of hours everyone nervously waited, and then they started. Inconvenient at first, but scary when some people realized that their power wouldn't be coming back on anytime soon. We ourselves went to bed on Sunday night and woke up to a freezing house the next morning, and our power wouldn't be back on until Thursday morning.

The complaints on the community forum started before too long, ranging from, "This is ridiculous! Don't they know we have small children?" to "We can't finish our movie because of these rolling blackouts! Nghyuuuhh!" There were plenty of people suffering in the cold and the dark to be sure, but as many were whining and complaining because of the inconvenience, and it was off-putting. Southern self-reliance is a bit of a farce, living in Georgia you have probably seen that by now. The same people who rail against the government on a daily basis are now asking for (demanding loudly) help from the government. ERCOT, the grid authority in Texas, is now the new villain of the day, even though before all this none of us knew that they existed. But they are evil personified, that is for sure, a guy from work said, "I bet the ERCOTs have power and water in THEIR homes!" And it goes without saying that Joe Biden and the gang are the cause of all of it, with their green energy policies. (Only 20% of the energy in Texas comes from solar and wind power, but whatever) Anyway, not trying to give you every minute detail, but it is funny and ironic to see, and it also irks me a little.

Ourselves, we went to town and found an old Dearborn propane heater that someone was selling, and that was more than adequate to keep us warm. We made snow packs for the fridge to keep our food cold. I ran an inverter with my car a few hours a day so we could watch movies and have a lamp, and we cooked on a 70 year old camp stove that I bought at a garage sale 10 years ago. (Eagle Scout ) It didn't take that much imagination, and it was a heck of a lot better than cowering in our cold house waiting for someone to bring us a free generator. (It sounds funny, but there were people asking for people to donate them generators and firewood because they couldn't leave their house because of the ice. We drove our Toyota Camry all over town that day)

As for the Griddy thing, it was funny to read your blog post, because I had actually checked into that last year. Our electric bill is not bad, but just wanted to check anyway. At first glance it seems like a good deal, but if you think about it a little bit, it falls apart. There were plenty of people that had posted pictures of their low, low energy bills, but the killer is in the policy. You are giving Griddy the permission to charge you an unlimited amount for electricity based on second to second wholesale prices, and that is exactly what they did, and are doing even right now. I didn't like the historical records of summer electricity prices, and that is what turned me away from them, but those prices pale in comparison to the current ones. Scary, but whose fault is it? It's definitely a "steal the cheese" situation. You can blame Griddy, but they are charging the customer the prices that they are purchasing the electricity for, or so the policy says. The money that they make is from the delivery charge alone. I lean more towards the greedy consumer idea. Talk about playing with fire!

What is interesting to me is that Georgia Power has treated us pretty well over the years.  We've had outages with hurricanes and storms and they show up in a matter of hours - sometimes minutes - and fix things.  These guys are freaking heroic!  You get text messages telling you when the power will come back on., too - and it comes back on, right on schedule.   The rates are reasonable and they offer rebates if you conserve energy.

But our power outrages are rare - even in storms - as they are very proactive in having Asplundh trim all the trees around the power lines.  They spend the money to prevent problems, rather than wait for them to happen.  Do we pay a little more?  Yea, but we've never had a five-figure utility bill.

Yes, those publicly-regulated utilities are dinosaurs!  We need to let the "free market" take over and cut costs to the bone, bankrupt the pension plan, and then bust the unions for good!  They'll cut $5 or $10 from our electric bill and the power company will be less reliable!   Oh, and the guy who takes over will make billions.  What's not to like?

They tried to do this in Jacksonville, but fortunately, the citizenry caught wind of it in time.

There are some things the government can do well - or quasi-government organizations can do well. The Patent Office regularly turns a profit.  Amtrak would do the same, if Congress would let them close unprofitable lines.  Ditto for the post office - if they let them set rates and canned Saturday delivery.

Privatizing isn't always the answer to everything. Texas decided to go its own way with an "independent" grid network, so as to avoid Federal oversight.  Was it worth it?  How's that working out?

Republicans used to have a saying, which I think Ronald Reagan popularized, "Beware of anyone who says, 'I'm from the government and I'm here to help you!'".  Ha-ha.  Very funny, Ronny.

Since those days, I think a better saying is, "Beware of anyone who says, "I'm from the private sector, and I'm going to help you by privatizing the government!'".   Because those private sector people aren't doing this out of noble intentions, but to make money - and a lot of it.

UPDATE:  The Griddy saga continues, with the company no longer allowed to sell power because, of course, they haven't paid for their share of power at $9kW-hr (who could?).  Could Griddy go bankrupt?  What about other power suppliers?  If they were selling power at fixed rates (e.g., 10 cents a kW-hr.) they are on the hook for $8.80 for each ten cents sold.   Will this bankrupt other Texas utilities?  The whole thing seems bizarre.

And like everything else, I suspect that we won't know the real story for years.