During a particularly cold winter or hot summer, you might wonder if signing up for your utility's budget-billing plan would be preferable to the unpleasant suspense of opening your energy bill.
Here's how a utility company's budget-billing plan generally works. Your chosen utility considers your energy usage patterns over a given period, their institutional wholesale energy costs and your region's future weather patterns. Based on their numbers, the utility company comes up with an average monthly payment that allows a customer to even out monthly utility payments over a specific time period, usually a year.
Sounds great, right? Here's where choosing a budget-billing plan can go wrong. If you see that fixed monthly payment and think you don't have to watch your energy usage at all, think again. You might be in for a rude awakening at the end of the year or whenever your budget-billing period ends. That's because utility companies continue to read meters and measure usage throughout the year as normal, and if your actual usage is significantly higher than the total you've paid, you'll likely have to pay the difference. What if you use less? Well, depending on the rules of your plan, you may or may not see the savings you've worked so hard to generate.
So here are some questions to ask yourself before signing up:
Do you understand your current energy costs and providers? Every utility company designs its bills somewhat differently based on state regulations and the type of energy product being sold. Depending on the community, a variety of utility companies might be competing for your business. Still, many of us rip open our gas, electric or other energy bills without understanding the basics of what we're being charged and why. But it's important to try. Take electricity for example. There are two main components to most electric bills -- the charge per unit (generally, a kilowatt) of use and charges and fees specific to your provider, including controversial ones that can be fixed and have to be paid no matter how energy efficient you are trying to be. It makes sense to study your local utilities company's charging practices in general, including those specific to competing providers. Also, if there are qualified energy advocacy groups in your state or community, see whether they offer any specific advice on local utility company practices and how to keep your cost of service low.
How energy-efficient is your home? Indeed, it might be disappointing to learn that having the most energy-efficient house on your block may not guarantee the lowest utility bills possible. But cutting energy use is important as an overall money-saver, and it could add value to your property too. Start by consulting the U.S. Department of Energy's Energy Star site on basic ways to make your home or apartment more energy efficient. Also, it's possible to hire independent professionals, called energy auditors, to tour your home, examine its energy efficiency and make recommendations where you can save more. But before you make that call, understand what they do.
How can you budget? Again, determining the value of a utility budget-billing plan in your community can be challenging because every state's practices may be different and every utility company's program may be unique in terms of structure, fees and other factors. Here are some questions you might ask your utility company before you commit:
•What happens if my actual utility costs exceed the amount I'm paying each month on the budget-billing plan? As mentioned, your utility company will continue to measure your usage on its metering system. If your usage exceeds that budget estimate for any reason, you could face what amounts to a balloon payment covering what you still owe at yearend. If so, your budget-billing plan could put you in debt.
•Are there monthly or annual fees in connection with this plan? What are they and what do they cover? Paying anywhere from $5 to $10 a month to be on a "budget" plan should give you pause. Understand any and all fees before you pay them.
•What factors go into setting my monthly average? How many years of payments go into that calculation, and what other factors apply to set the amount you want me to pay? In the way many normal utility bills can be a mystery, so can your budget-billing payment. See how well your utility company can explain how it would set your bill.
•If my budget-billing plan and my actual utility costs are getting seriously out of whack, do you let me know, or is there a way I can check that? Remember the "balloon payment" line above -- if your budget-billing payment is actually putting you in the red due to a cold or heat snap or some other factor, it's best to know that before the end of your term.
•Are you building any weather forecasting into my budget-billing estimate? Are you projecting any weather extremes in the coming year?
•Say I manage to come in under your monthly budget-billing estimate. Do I get my money back?
Consider an alternative -- your own budget plan. There might be one thing you might want to try -- coming up with your own utility budget plan. Average your monthly bills for a year or two and plug them into your overall monthly household budget. On the months where your bill comes in under your average, deposit the difference into a savings or money market account to cover future months where there could be overages. See where you finish the year. It's clearly an experiment -- after all, no one knows whether the year ahead will bring mild or ferocious weather or how world events might affect wholesale energy prices. But you'll be in control of every dime and potentially earning a little interest on anything you don't spend -- your utility's budget-billing plan probably won't do that for you.
Bottom line: Utility company budget-billing plans satisfy many customers. However, it's important to understand what you currently spend on energy and how you can lower those amounts first. Then, understand how the plans to save you money; sometimes a "budget" plan might end up costing you more.
Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.