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Municipal utilities increase sharply: Do utilities abuse the price brakes for surcharges?

Municipal utilities increase sharply
Are suppliers abusing the price brakes for surcharges?

By Christina Lohner

The state will soon take over part of the electricity and gas bill. The federal government wants to prevent by law that the providers use the price brakes for disproportionate price increases. Nevertheless, experts fear a “creative” design and deadweight effects.

Electricity and gas customers must now also expect significant price increases for basic services. At some municipal utilities, the electricity price even doubles at the turn of the year. Consumer advocates, market experts and even an industry representative are warning of deadweight effects, i.e. excessive price increases, because the price brakes for gas and electricity will soon take effect.

For a large part of the consumption, the state will take over the difference between the energy price demanded by the provider and the agreed “price caps” of 12 cents per kilowatt hour for gas and 40 cents for electricity, retrospectively from January next year. The law on the gas price brake is intended to prohibit surcharges that are not justified by the increased expenses of providers or normal market activity. But abuse is hard to control.

In the basic service, customers must be informed six weeks before a price increase, which is why many consumers received a message from their municipal utility last weekend. Research by the “Handelsblatt” shows some drastic increases in electricity prices as of January 1st. The energy price in Munich has risen from a good 29 to almost 62 cents per kilowatt hour. In Leipzig, a good 52 instead of just under 25 cents will be due. Other municipal utilities will also charge more than 50 cents per kilowatt hour in the future. Others raise significantly less, in Wuppertal, for example, a kilowatt hour will cost a good 42 cents from January – not even 5 cents more than currently.

Price range from 6 to 28 cents per kilowatt hour

Consumer advocates criticize the large price differences, which cannot be fully explained by different purchasing strategies. While the working price for gas as of December 1st is still less than 10 cents at 16 percent of the basic supply tariffs in North Rhine-Westphalia, it is 28 cents in the most expensive basic supply. This is shown by an investigation by the local consumer advice center. For family households, this means a difference of several thousand euros per year, as Christina Wallraf, energy market consultant at the NRW consumer center, calculates in an interview with ntv.de. “With an annual consumption of 20,000 kilowatt hours, the price range is 1314 to 5769 euros if you include the basic price.” The cheapest working price is 6 cents.

Consumer advocates expect further price increases on January 1st. Wallraf considers deadweight effects with a view to the planned price brakes “with one or the other provider” to be conceivable. Steffen Arta, Managing Director of Stadtwerke Dreieich in the Offenbach district, goes even further. “What we are seeing right now is an excessive increase in the basic service tariffs,” he told the “Handelsblatt”. The manager criticizes that these overpriced tariffs are ultimately financed with state money. He only considers up to 45 cents per kilowatt hour of electricity to be plausible. At “his” public utilities, the price of electricity is to rise from 30 to 37.5 cents – thanks to a conservative procurement strategy that will last several years.

Lion Hirth, energy policy professor at the Hertie School and member of the gas price commission set up by the federal government, also sees a risk of free-rider effects, not just for basic suppliers and private customers. “In fact, the design of the price brakes worries me,” he says when asked by ntv.de. “In industry, the problem is likely to be even greater because there is a lot more money at stake here – and because individual contracts are common anyway, where such excessive prices can be hidden better.” The Gas Commission “explicitly addressed” this problem and called on the federal government to find “effective mechanisms against such creative contracts,” explains Hirth. “Time will tell whether this has been successful.”

Antitrust authorities should take a close look

The federal government’s draft law, which is available to ntv.de, prohibits such abuse and provides for penalties. However, the law is not yet in force. That is, the current price increases do not fall under this rule. “Maybe the law comes too late for that,” says consumer advocate Wallraf. In the future, too, abuse will be difficult to control, since the procurement costs are classified as business secrets. In their opinion, it would therefore make more sense if the providers had to have particularly high prices approved, for example.

Wallraf demands that the antitrust authorities should take a close look at prices if they deviate significantly upwards. In the future, customers should be less deterred by high prices and tempted to switch providers than before. Because thanks to the price brakes, the difference between different providers will only be noticeable for a relatively small part of consumption, for the majority of which the same applies to all providers. “It might be easier to raise prices on January 1st without customers running away right away,” says Wallraf.

FDP energy expert Michael Kruse demands that providers must be prevented from “raising their tariffs preventively to the price of the lid”, as he told the “Handelsblatt”. According to the newspaper, Stadtwerke Leipzig justified its tariff increase by 108 percent with the increased purchase prices: “In order to continue to be able to guarantee safe and reliable supply in Leipzig and the region, we too have to pass on the price increases to our customers.”

Basic services are currently relatively cheap

Despite the current price increases, according to Wallraf, the basic supply is still often the cheapest offer – even if the prices are likely to approach the special tariffs again in the course of the coming year and possibly overtake them again. In the past, basic service tariffs were usually more expensive and offered security in return. Because municipal utilities mainly bought long-term. Currently, this means that they can offer cheaper prices than providers who buy at short notice at the recently massively increased prices.

The default supplier is the local provider who supplies most gas or electricity customers in a network area – often a municipal utility or a large provider. Customers cannot switch to the basic service tariff outside of their network area.

According to Wallraf, anyone who currently has a special tariff whose price is only slightly higher than that of the basic service should stay with their provider. Because there is no price guarantee in the basic service, which means that it could soon become more expensive. On the other hand, basic service customers can cancel every two weeks. For consumers with a special tariff, who are currently paying significantly more than the basic service costs, it could be worth switching. But maybe only for a short time.

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