Fixed vs Variable Electricity Plans: The Deregulated Market Trap

In deregulated states, electricity service is split into two parts:

1. Generation/supply: the actual electricity, sourced from a power plant. You can choose your supplier from a competitive market.
2. Distribution/delivery: the wires, poles, meters, and customer service. Your local utility provides this and you cannot choose.

You receive one bill that includes both supply and delivery charges. The supply portion is what you can shop for; the delivery portion is fixed by your utility regardless of which supplier you choose.

Each state has a default supplier (usually the local utility) for customers who don't actively choose. Default rates are often higher than the cheapest competitive options because the utility has to pre-purchase electricity months or years in advance and recover the cost averaged over time.

The two main contract types in deregulated markets:

• Fixed-rate plans: the price per kWh is locked in for the contract term (6, 12, 24, or 36 months). Predictable, but you may pay more if market rates fall.
• Variable-rate plans: the price per kWh changes monthly based on market conditions (or, more commonly, at the supplier's discretion). Looks cheap initially but can spike unpredictably.

Variable rate plans are the source of most consumer complaints in deregulated markets. Many "introductory" rates start at $0.06-0.08/kWh and rise to $0.12-0.20/kWh after 1-2 months. Some have spiked to $0.50+/kWh during weather events (Texas Winter Storm Uri 2021 saw individual customer bills above $9,000 for a single month from variable-rate plans tied to wholesale spot prices).

Always choose fixed-rate unless you have a specific reason to bet on falling rates. The risk-adjusted return on variable plans almost always favors the supplier, not the customer.

Federal regulations (and some state rules) require electricity suppliers to provide a standardized "Electricity Facts Label" or "Energy Facts Label" disclosing the rate structure. Texas (PUCT-regulated) has the most rigorous version. Key items to check:

• Average price per kWh at 500, 1000, and 2000 kWh usage levels: not just the headline rate. Some plans have low rates only at specific usage levels and become expensive outside that range.
• Base monthly charge: a fixed fee regardless of usage. A plan with a $9.95/month base charge needs 500+ kWh of usage to be competitive with a plan with no base charge at slightly higher per-kWh rates.
• Bill credit thresholds: some plans give a $50-100/month bill credit but only if you use exactly 1000-2000 kWh. Use less and you lose the credit; use more and the marginal rate is much higher.
• Term length and early termination fee: typically $150-300 if you cancel before the contract ends.
• Renewal/rollover terms: what happens at the end of the contract. Most plans roll to a much higher month-to-month rate if you don't actively renew.
• Renewable content: percentage of electricity from renewable sources (some plans are 100% renewable at slight premium).

Five common patterns that trap customers into overpaying:

1. Teaser rate that resets. Plan starts at $0.06/kWh for 1-2 months, then rolls to $0.14/kWh "variable" for the rest of the term. Always check whether the headline rate is for the full term.
2. Bill credit cliff. "Get $100 bill credit for using 1000-2000 kWh." If you use 999 or 2001 kWh, you lose the entire credit, making your effective rate jump dramatically.
3. Auto-renewal at uncompetitive rates. Your 12-month fixed rate ends and the plan auto-renews to a month-to-month variable rate at 50-100 percent above market. Set a calendar reminder for 30 days before contract expiration.
4. Hidden base charges. Headline rate is competitive but plan adds $9.95-$15/month base charge that shifts the math at low usage.
5. Door-to-door slamming. Salesperson at your door claims to be from your utility and signs you up for a new plan without clear disclosure. Always read paperwork before signing anything related to electricity.

The right process for shopping electricity in deregulated states:

1. Know your annual usage. Look at 12 months of bills to find your typical kWh usage. Most homes use 800-1500 kWh/month; large homes can be 2000+.
2. Use the state's official comparison tool. Texas uses powertochoose.org. Pennsylvania uses papowerswitch.com. New York uses Energy.NY.gov. These show all plans with standardized disclosures.
3. Sort by total cost at your usage level, not by headline rate. Most comparison tools let you input your average monthly kWh and show the actual 12-month cost.
4. Choose a 12-month or 24-month fixed-rate plan. Lock in predictability. Avoid variable rate and "intro rate" plans entirely.
5. Filter for no early termination fee if you might move during the contract.
6. Set a calendar reminder for 60 days before contract end. Switch to a new plan rather than letting the current one auto-renew.

Sometimes staying on the default utility rate is the right choice:

• Pennsylvania PPL, PECO, Duquesne, Met-Ed: default rates are often competitive, especially for low-usage customers
• Maryland BGE, Pepco, Delmarva: Standard Offer Service often beats most competitive plans
• Massachusetts National Grid, Eversource: Basic Service rates are sometimes the best available
• New Jersey JCP&L, PSE&G, ACE: default rates are often competitive

Default rates change every 6-12 months as utilities recompete supply contracts. Compare against current default before switching. If your default is competitive, "switching" to a worse plan loses money.