It’s an unfortunate reality that once you find yourself in financial difficulty the effects of bad credit can snowball your financial hardship. Poor credit doesn’t just keep you from getting a loan. It often means you will pay more for everyday necessities such as insurance and utilities.
Texas is a deregulated electricity market which means that in most parts of the state consumers can choose from multiple retail electric providers. When electricity deregulation came to Texas existing monopolies were split up creating a system where separate entities became responsible for various aspects of the production, distribution, and sale of electricity. The key players are the electricity producers, the lines companies that maintain the infrastructure, and the retail electric providers who deal directly with the end consumer.
The retail electric provider must pay for the electricity it receives from the electricity producer regardless of whether the end consumer pays their electricity bill. In this way they are not much different than traditional retailers like department stores. They buy electricity at wholesale rates and resale it at retail rates. Generally their margins are fairly small and too many unpaid bills by their customers can have a real impact on their bottom line.
People who have good credit can usually find an electric plan with a good rate without having to put down a deposit. People with no credit or poor credit histories, however, will often be rejected by electric providers or asked to provide a deposit. No deposit electricity plans are available from some companies. Such plans usually feature higher rates but they have the benefit of requiring no credit check as part of the signup process.
Why electric companies often demand a deposit
There are two primary risks the retail electric providers must manage; rate risk and default risk. Wholesale electric rates in Texas are not fixed. They can fluctuate substantially hour by hour depending on the current demand for electricity and the current supply of available power in the grid. It’s important to note that although wholesale rates or not fixed there is a cap.
Retail electric providers sell fixed rate plans to consumers with terms of anywhere from six months to up to as much as 36 months. If wholesale rates go up in the short term they can’t immediately pass the extra cost along to their consumers. To protect themselves from that risk they must factor in adequate margins when they price their fixed rate plans to consumers. They must also adequately hedge their exposure to the wholesale electricity market.
The second major risk electric companies deal with is the risk of customers not paying their electricity bills. When this happens the electric company takes a loss on the electricity that they purchased from the producer to provide to the end consumer. This is why many providers focus on so heavily on credit scores. In general, the assumption is that lower credit scores mean higher risk of nonpayment on electricity bills. Some companies are able to offer no credit check electricity plans by charging a higher rate to account for the added risk.