|
In an effort to offer competitive prices and stay ahead of market fluctuations, deregulated utility marketers of natural gas as well as electricity offer variable rate plans. Variable rate plans allows providers to vary the rate per therm charged to customers each month based upon the wholesale market price for gas or electric service.
Prices for utilities are set by utility companies based upon several factors. Investor-owned utilities and utility marketing companies purchase gas at wholesale prices. Natural gas prices vary because of the limited sources available. Availability and extraction costs cause prices to fluctuate. Once the wholesale price is set, for-profit utility companies factor in administrative costs and profit margin to derive a target price per therm.
In a natural gas variable rate plan, at a given point each month, the utility or utility marketer sets the price per therm based upon these market variables, and customers using these plans are charged for monthly service based on this fluctuating rate. Competition keeps the rates from varying based at a single company’s discretion, and therefore prices generally fluctuate consistently across providers.
Variable rate plans are beneficial to a customer for several reasons, most having to do with the flexibility provided. First, customers are not required to contract with a utility for a given period of time. With fixed rate plans, owners pay a set rate (price/therm) over a six-month or yearly timeframe, with penalties paid for early termination. Second, home and business owners are able to switch from a flexible rate plan to another provider or to a different type of rate at any time without penalty or cancellation fees.
Plans with variable costs per therm can be challenging for customers living on fixed incomes or who budget very precisely each month. Due to changes in demand and wholesale prices, charges can increase fairly substantially and with little notice. Customers who cannot afford some fluctuation in utility costs month-to-month may find a variable rate to be unpredictable and frustrating. Others, who may be better able to reduce utility usage or who are willing to accept the risk of price increase for the chance of being able to pay lower natural gas prices, may enjoy the flexibility these plans offer.
In comparison with fixed rate plans, fluctuating rate plans provide flexibility and choice in service provider. With a fixed rate plan, customers will be paying more or less than the wholesale price for gas most of the time, which can be excellent if gas prices sore, but painful if wholesale prices drop significantly.
Variable and fixed rate utility pricing came into popularity with deregulation of utilities around the country. In areas where competition exists, certified utility marketers use a variety of formulas to calculate the price of gas or electricity and invest in the ability to convince property owners to choose one from another. In a market where the product itself varies very little, certified providers must use price, brand and customer service reputation to encourage selection. Therefore, understanding the fundamental principles in pricing theory and differences between variable and fixed rate pricing is key to selecting the product that best suits your needs.
|
