Thirteen-Twelfths Isn't Average, or What to Do About the Increasing Price of Natural Gas
An FPU alum emailed asking if a utility company's average price plan is a good buy. This is a great question especially in the wake of increasingly higher natural gas prices.
According to the Energy Information Administration, the average residential price of natural gas will be 43% greater this winter than last. Plus, average consumption is predicted to increase, making your gas bill surge almost 50% over this time last year.
Average price plan's are a great budget keeping tool, spreading out the cost of what you pay over a year into monthly installments that are exactly or nearly the same each month. What you need to watch for is the integrity of the company (is their plan a gimmick to gouge you the consumer) and the balance sheet (do they audit your account on an annual basis).
I'm sure many of you are home owners and are familiar with escrowing your taxes and hazard insurance. You pay the same escrow payment each month along with your P & I payment (principle and interest), and the mortgage company pockets your interest, reduces the principle of the loan, and escrows the balance. Once a year they pay your insurance premium and taxes, and do a yearly audit to make sure your escrow payment doesn't need to be adjusted. After all, they don't want to collect too much money and have a large cash balance in your account, and neither do they want to have a negative balance and float your payment for you. This stuff is highly regulated.
How would you like it if your mortgage company overcharged your escrow, gouged you with a premium for this service, then pocketed the overages as a cost of doing business. You wouldn't stand for that, and neither would the government. But this very thing is happening with an Oklahoma utility company, Oklahoma Gas & Electric (OG&E). And it isn't your escrow payment they are overcharging; it is your average bill plan.
In May of 2002, OG&E entered the world of online billing and rolled out an average pay plan called "Average Billing." There is nothing "average" about it!
A year later, in September 2003, I inquired of OG&E what my "Average Billing" payment would be. Their answer was $84.32. As an informed consumer I asked how the calculation was derived and was told it was an average of the past 12 months. Their own website offered:
"Average Billing...helps customers manage their budget because their electric bill payments are averaged over the last 12 months. Their monthly payment will vary slightly but won’t have the abrupt seasonal jumps."
Hmm. Sounds kind of suspicious. A monthly payment that isn't fixed, and no mention of an annual audit or balance adjustments.
Armed with the last 24 months of utility bills, I shot a quick calculation from September of 2002 to August of 2003. My calculator showed an average of $73.63, a difference of $10.68. So I asked what the discrepancy was and was told I probably just made an error. They obviously didn't know my love, enjoyment, and precision with math.
After two follow-up phone calls to prove my suspicions, I couldn't believe what I had found. OG&E had a scam going that was ripping off poor people and those too stupid to do math: in order to arrive at THEIR calculation, you needed to add in the most recent month twice before dividing by 12. I asked "Shouldn't you divide by 13?" "No!" I was told, "It is a weighted average."
You don't have to be a math genius to know that an average is the result obtained when adding together several quantities, and then dividing by the number of quantities. There is no mathematical provision for an average that allows you to include a greater number of numerands (the numbers being added at the top of the fraction), than the resultant dividend (the number you are dividing by). This rip-off plan costs you an additional one month's payment per year (an extra one/twelfth per month). Sounds like an average plan until you do the math. Thirteen-twelfths isn't average!
What OG&E calls "Average Billing" I call "fraud" and "oppressing the poor." The Bible speaks clearly about oppression, especially the powerful who prey on the weak. Jeremiah was an Old Testament prophet who proclaimed judgement against an evil King of Judah:
"But your eyes and your heart are set only on dishonest gain, on shedding innocent blood and on oppression and extortion. Therefore, this is what the LORD says about Jehoiakim son of Josiah king of Judah...He will have the burial of a donkey--dragged away and thrown outside the gates of Jerusalem." (Jer. 22:17-19, NIV)
In contrast, his father Josiah was a godly King of whom it was written: "'He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?' declares the Lord." (Jer. 22:16, NIV)
I realize OG&E's billing practices may have changed in the past two years, but integrity doesn't change. Either you have it or you don't. And OG&E doesn't have it. One day they'll have the burial of a donkey.
Fortunately, my electric service is all I have with OG&E. My natural gas comes from another provider, Oklahoma Natural Gas (ONG).
As much as I detest OG&E's "Average Billing," I think ONG's "Budget Payment Plan" is an honest deal. They average your last 12 bills when you sign up and that becomes your monthly payment. It is not a "weighted average" and there is no gimmick or premium.
In addition they keep a balance of your payment (the monthly average) versus usage, and make annual adjustments (kind of like your escrow payment changing annually). According to the ONG website:
"The Budget Payment Plan eliminates the ups and downs of monthly natural gas bills that can fluctuate with the typically seasonal nature of the usage of our product. Using your past consumption history, your total annual cost of natural gas service is divided into 12 equal payments averaging the amount you pay each month.... Once each year, we review your account comparing actual usage to the previous pattern, and make any necessary adjustments plus or minus." (emphasis mine).
Several things strike me about this plan. First did you catch the word "equal?" That stands in contrast to OG&E's "payment will vary slightly." Second, I like the word "review." It happens annually so I know there will be a reconciliation of my account. Finally, notice the phrase "plus or minus." Yes, that does mean that after a year if your average payment ended up being more than your usage, your payment will be adjusted--kind of like an escrow analysis. The first year my payment was $49. The second year it actually went down to $42. I'm locked in until summer. Don't you wish your gas payment was that low this winter?
In summary, budget payment plans can be a great buy if it truly is an average plan, not some kind of faux-average-scam-laden formula, and if the company does an annual audit to adjust your plan. It is a great way to ride out the volatility in the market and keep your budget on track.
What can you do if your utility company doesn't offer an average plan, or it isn't a respectable one? Simple. Just compute your own twelve month average, and escrow the difference between each bill and the monthly average. When you budget properly, every dollar has a name, even the dollars in your bank account. Just give the appropriate ones the name "Utility Bill." Otherwise, the ants will run off with it.
According to the Energy Information Administration, the average residential price of natural gas will be 43% greater this winter than last. Plus, average consumption is predicted to increase, making your gas bill surge almost 50% over this time last year.
Average price plan's are a great budget keeping tool, spreading out the cost of what you pay over a year into monthly installments that are exactly or nearly the same each month. What you need to watch for is the integrity of the company (is their plan a gimmick to gouge you the consumer) and the balance sheet (do they audit your account on an annual basis).
I'm sure many of you are home owners and are familiar with escrowing your taxes and hazard insurance. You pay the same escrow payment each month along with your P & I payment (principle and interest), and the mortgage company pockets your interest, reduces the principle of the loan, and escrows the balance. Once a year they pay your insurance premium and taxes, and do a yearly audit to make sure your escrow payment doesn't need to be adjusted. After all, they don't want to collect too much money and have a large cash balance in your account, and neither do they want to have a negative balance and float your payment for you. This stuff is highly regulated.
How would you like it if your mortgage company overcharged your escrow, gouged you with a premium for this service, then pocketed the overages as a cost of doing business. You wouldn't stand for that, and neither would the government. But this very thing is happening with an Oklahoma utility company, Oklahoma Gas & Electric (OG&E). And it isn't your escrow payment they are overcharging; it is your average bill plan.
In May of 2002, OG&E entered the world of online billing and rolled out an average pay plan called "Average Billing." There is nothing "average" about it!
A year later, in September 2003, I inquired of OG&E what my "Average Billing" payment would be. Their answer was $84.32. As an informed consumer I asked how the calculation was derived and was told it was an average of the past 12 months. Their own website offered:
"Average Billing...helps customers manage their budget because their electric bill payments are averaged over the last 12 months. Their monthly payment will vary slightly but won’t have the abrupt seasonal jumps."
Hmm. Sounds kind of suspicious. A monthly payment that isn't fixed, and no mention of an annual audit or balance adjustments.
Armed with the last 24 months of utility bills, I shot a quick calculation from September of 2002 to August of 2003. My calculator showed an average of $73.63, a difference of $10.68. So I asked what the discrepancy was and was told I probably just made an error. They obviously didn't know my love, enjoyment, and precision with math.
After two follow-up phone calls to prove my suspicions, I couldn't believe what I had found. OG&E had a scam going that was ripping off poor people and those too stupid to do math: in order to arrive at THEIR calculation, you needed to add in the most recent month twice before dividing by 12. I asked "Shouldn't you divide by 13?" "No!" I was told, "It is a weighted average."
You don't have to be a math genius to know that an average is the result obtained when adding together several quantities, and then dividing by the number of quantities. There is no mathematical provision for an average that allows you to include a greater number of numerands (the numbers being added at the top of the fraction), than the resultant dividend (the number you are dividing by). This rip-off plan costs you an additional one month's payment per year (an extra one/twelfth per month). Sounds like an average plan until you do the math. Thirteen-twelfths isn't average!
What OG&E calls "Average Billing" I call "fraud" and "oppressing the poor." The Bible speaks clearly about oppression, especially the powerful who prey on the weak. Jeremiah was an Old Testament prophet who proclaimed judgement against an evil King of Judah:
"But your eyes and your heart are set only on dishonest gain, on shedding innocent blood and on oppression and extortion. Therefore, this is what the LORD says about Jehoiakim son of Josiah king of Judah...He will have the burial of a donkey--dragged away and thrown outside the gates of Jerusalem." (Jer. 22:17-19, NIV)
In contrast, his father Josiah was a godly King of whom it was written: "'He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?' declares the Lord." (Jer. 22:16, NIV)
I realize OG&E's billing practices may have changed in the past two years, but integrity doesn't change. Either you have it or you don't. And OG&E doesn't have it. One day they'll have the burial of a donkey.
Fortunately, my electric service is all I have with OG&E. My natural gas comes from another provider, Oklahoma Natural Gas (ONG).
As much as I detest OG&E's "Average Billing," I think ONG's "Budget Payment Plan" is an honest deal. They average your last 12 bills when you sign up and that becomes your monthly payment. It is not a "weighted average" and there is no gimmick or premium.
In addition they keep a balance of your payment (the monthly average) versus usage, and make annual adjustments (kind of like your escrow payment changing annually). According to the ONG website:
"The Budget Payment Plan eliminates the ups and downs of monthly natural gas bills that can fluctuate with the typically seasonal nature of the usage of our product. Using your past consumption history, your total annual cost of natural gas service is divided into 12 equal payments averaging the amount you pay each month.... Once each year, we review your account comparing actual usage to the previous pattern, and make any necessary adjustments plus or minus." (emphasis mine).
Several things strike me about this plan. First did you catch the word "equal?" That stands in contrast to OG&E's "payment will vary slightly." Second, I like the word "review." It happens annually so I know there will be a reconciliation of my account. Finally, notice the phrase "plus or minus." Yes, that does mean that after a year if your average payment ended up being more than your usage, your payment will be adjusted--kind of like an escrow analysis. The first year my payment was $49. The second year it actually went down to $42. I'm locked in until summer. Don't you wish your gas payment was that low this winter?
In summary, budget payment plans can be a great buy if it truly is an average plan, not some kind of faux-average-scam-laden formula, and if the company does an annual audit to adjust your plan. It is a great way to ride out the volatility in the market and keep your budget on track.
What can you do if your utility company doesn't offer an average plan, or it isn't a respectable one? Simple. Just compute your own twelve month average, and escrow the difference between each bill and the monthly average. When you budget properly, every dollar has a name, even the dollars in your bank account. Just give the appropriate ones the name "Utility Bill." Otherwise, the ants will run off with it.
posted by Jason Snyder | 11:14 PM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home