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Breaking Down Your Electricity Bill

Have you ever opened your monthly electricity bill and said, "Wait! Why is this so high? Did someone leave the lights on all month!"

While the bulk of your electricity bill certainly is determined by the amount of electricity you use in your home or business — and therefore running that air conditioner longer certainly can affect your bill — other charges can also affect your overall bill. It's important to understand these charges as well when trying to decipher an unusually high bill or trying to discover how you can lower your monthly electricity bill. Usage you can control; the cost of getting the energy delivered to you is out of your hands.

Your general bill includes three basic components:

  1. The cost of the electricity itself: This is what you pay per kilowatt hour for your usage. The most effective way to manage costs here is to be on a fixed-rate plan, in which you lock in a rate for the term of your contract.

  2. Capacity costs: One of the biggest challenges of the electricity system generally is managing use against capacity, i.e. how much energy is available. If not enough electricity is available, the result can be brownouts or, worst case, blackouts. The way suppliers ensure that electricity is available at all times is to create a capacity market. This ensures that enough electricity is available on the hottest and coldest days of the year for everyone to use. There is a cost to maintaining this capacity and part of each month's electric bill goes toward maintaining the appropriate capacity for all users. We all pay a little to help the overall whole have adequate electricity. Consumers can sometimes lower their capacity costs by operating equipment during off-peak times, such as timing a dishwasher to run late at night when electricity demand is lower.

  3. The cost of getting your power to you: The last part of many electricity bills is the cost of getting the electricity delivered to your home or business. Transmission rates, as they're often called, cover the cost of the basic infrastructure involved with getting electricity to you. It's a little like being, say, on a municipal water or sewer system. You usually pay something toward the maintenance of that infrastructure. That's essentially the same concept behind electricity transmission costs. Rates are approved by the Federal Energy Regulatory Commission. Regional groups then bill local utilities, which in turn bill customers either directly or through the electricity supplier.