How Does Your Electricity Bill Work?

The Average Small Business Spends: $7,807 On Electricity Each Year.

Every month, we all pay our respective electricity bills. And if you are like most of us, it is sometimes a painful experience. Just last month my bill was $105, and this month it’s $260? What gives?

How did my bill more than double in the last 30 days? To answer those questions, you need to understand how your electricity bill works.

The competitive electricity industry is a complex beast. Generators, utilities, and suppliers are in all in the mix. It’s hard to make sense of all the factors affecting your monthly electricity bill.

Simply put, it works like this:  electricity suppliers buy power from electricity generators (the wholesale market) and then re-sell the electricity to you (the homeowner, the renter, the business owner, etc.). The utility, which maintains the electricity grid, then delivers the power over the wires to your home or business.

When you sign up with an electricity supplier, you agree to pay a set rate for your usage over a set contract term. It’s true that location, weather, and the balance of energy supply/demand can impact your monthly electric costs. But, it’s also important to know the basic building blocks of your electricity bill. Let’s focus on the main two parts of your monthly bill: one part utility and one part supplier.

Understanding Your Electricity Bill

It’s Saturday night and you decide to order a pizza and have it delivered. When the pizza guy arrives at your door, you will pay two fees. One for the pizza, and one for the delivery.

The same is true for your electricity bill. You will pay one fee (that the electricity supplier will receive) for how much energy you used. Then another fee (for the utility) for the delivery of the power to your home or business.

On your bill these are labeled as Supply (Supplier) Services and Delivery (Utility) Services.

Electric Company Jargon

Your bill is full of vague fees and terms. They stack on top of each other, nickel-and-diming you to death. Here are some of the most common terms customers see on their bill and what they actually mean.

Meter Multiplier

When your energy usage is too large to be displayed on the meter they revert to displaying a fraction of your actual use. The meter multiplier is then applied to revert the fraction back to your usage.

Meter Reading Type

The method of how an electric meter reading was conducted. There are three types. Actual, someone from your utility comes and reads your meter. Customer, when you submit your meters data. Estimated, uses historical data to determine what your usage would most likely be.

Metering Charge

This is a fee for maintaining and reading usage on your electric meter.

Purchased Electricity Adjustment

When a supplier charges you a different rate vs what they actually paid they use this fee to balance the books. ComEd is famous for this one.

Customer Charge

An administration fee. It is intended to cover their costs to provide customer service. It does not fluctuate with usage.

Consumer Education Charge

A monthly charge for ongoing consumer education concerning your bill, shopping for electricity, energy efficiency and conservation.

Distribution Charge

Charges for the use of local wires, transformers, substations, and other equipment used to deliver electricity from high voltage lines.

Environmental Cost Recovery Adjustment

A computer charge from the amount spent by your utility on environmental activities. If your utility spends money on anything related to improving the environment, like disposing of waste, they recover that costs with this fee.

Franchise Cost

Recoups the fees that your municipality charges the utility to operate in their space.

Energy Efficiency Programs

Recovers costs associated with green initiative programs that local, state, or federal laws have mandated utilities to follow.

Who Is Actually Getting Your Money?

The amounts that you pay for both the supplier and utility charges will vary depending on where you live (by state and utility service territory) and, of course, the supplier that you selected.

For example, if you live in one of the 16 competitive electricity markets (Ohio, New York, Pennsylvania, Illinois, Texas, etc.), your supplier fee will be based on the electricity supplier you selected and your contract rate. If you live and/or work in one of these competitive markets, you can research and choose the best electricity plan and supplier for your home or business.

When it comes to the utility company, you will pay a monthly fee for the costs related to delivering the electricity to your home or business. It’s worth noting that these fees will vary based on the utility servicing your area and can change from time to time. Despite electricity competition, utility companies are still highly regulated with strong government oversight. Any adjustment to utility rates, whether an increase or decrease, must be approved by the relevant state utility commission.

In general, utility fees make up just over half of your electricity bill and the rest will be paid to the supplier. That means you have “some” control when it comes to your overall electricity bill. Taking time to do your research and select the best electricity supplier (and best rate possible) for your home or business can mean real savings on your electricity bill.

Now that you know that you have "some" control over about half of your total electricity bill, you may be asking yourself, “how do I choose the right supplier?”

Getting The Best Rate For Your Home Or Business

If you live in a competitive electricity market and spent just 15 minutes online researching suppliers and rates, you will quickly realize that it’s not so easy to compare electricity plans (think apples-to-apples). Between the supplier websites, rate aggregation websites, and brokers pitching you “a great deal”, it can be very confusing.

To get the best rate and the best long-term electricity plan, you need to take the same approach you use when getting insurance or a mortgage. Learn about the market. Research suppliers in your area. Compare rates and make the choice that saves you money.

Now that you’ve got a high-level view of how electricity rates work, it’s time to make them work for you.

Written by Team EnergyBot

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