With a recent hike in electric rates, Martha’s Vineyard residents report an increase in unsolicited offers from companies offering to switch their energy supplier and save the customer hundreds of dollars in electricity costs. Comparing plans can be a bewildering experience in deciphering arcane utility regulations, interpreting the legal nuance of fine print in contract agreements, and trying to outsmart the experts who predict future energy costs.
While competitive energy suppliers are regulated by the Massachusetts Department of Public Utilities, and subject to consumer-protection laws, consumer advocates warn that buyers should consider promotional pitches and long-term contracts with an abundance of caution, and carefully evaluate whether switching suppliers will actually save money. Many come with onerous termination fees, temporary “teaser” rates, or monthly service charges in addition to the standard per-kilowatt-hour (kWh) charge.
A recent $4 million settlement agreement by Just Energy, a competitive energy supplier licensed to sell energy plans on Martha’s Vineyard and in many other Massachusetts communities, illustrates the pitfalls facing consumers.
According to the Massachusetts Attorney General’s Office, Just Energy engaged in deceptive marketing and sales that misled consumers into signing contracts based on attractive introductory pricing, only to later increase their electricity supply costs.
“We allege this competitive supplier engaged in widespread and misleading conduct that lured consumers into costly contracts in the form of high electricity rates and termination fees,” wrote attorney general Martha Coakley in a Jan. 6 statement. According to the agreement, Just Energy will pay $3.8 million in restitution to certain customers, and $200,000 to the Commonwealth of Massachusetts.
Deregulation complication
Before Massachusetts lawmakers deregulated the energy industry in 1998, most consumers got electricity delivered to their homes by the same company that purchased energy from power plants and resold it to consumers. The prices were set through a complex process overseen by state regulators, who granted companies a near-monopoly on retail energy sales in exchange for control over prices.
Deregulation split the two components of retail energy into separate parts: delivery and supply. The large energy companies (NSTAR, in the case of all Island consumers) still deliver electricity to individual households and businesses. They maintain equipment, handle billing, and repair infrastructure after storms.
But NSTAR and other companies no longer have the exclusive right to buy electricity from power generators and resell it to consumers.
Lawmakers separated the two functions in order to increase competition. Deregulation certainly accomplished that goal. Consumers are now free to choose any state-approved competitive supplier to provide electricity to their home or business. Instead of a monopoly, there are currently 19 independent companies authorized to supply electricity to NSTAR residential consumers in Massachusetts, and 57 others that supply electricity to small- and large-scale commercial consumers. Most of these companies are intermediaries between the firms which own power plants fueled by natural gas, nuclear energy, coal, oil, hydro power, or alternative energy sources including solar or wind, and retail consumers.
The increased competition is intended to benefit the consumer, but with the benefit comes a burden. State regulators are no longer mostly responsible for setting the price and choosing a supplier. That responsibility now falls on the consumer, and it can be an extremely complicated decision.
Seeing the light
Electricity consumers on Cape Cod and Martha’s Vineyard have an extra layer of complexity added to the cost equation, a layer intended to protect consumers by using economies of scale to negotiate a better price. Cape Light Compact is a municipal buying group for 13 Cape Cod towns, the seven towns (including Gosnold) of Dukes County, along with Barnstable and Dukes County. Governed by representatives from each town and county, Cape Light Compact delves into the complicated energy market, and using the power of about 200,000 individual customers working collectively, chooses a competitive supplier and negotiates a short-term contract price for electricity. That company becomes the default supplier. If a new customer opens an account with NSTAR, the designated default company supplies the electricity at the price and terms negotiated by Cape Light Compact. Any customer has a right, with no penalty, to opt out of the default arrangement, and choose his or her own energy supplier. NSTAR handles the switch, and bills the consumer according to the price and terms of his new competitive supplier.
The fundamental difference between customers under the Cape Light Compact umbrella, and competitive energy suppliers operating independently, is that Cape Light Compact is bound to make its best effort to act in the interest of its members. An independent competitive supplier is motivated to make a profit for its owners or shareholders.
Interest and penalties
For the seven-month period from December 2014 through June 2015, Cape Light Compact chose the competitive supplier Con Edison Solutions, a New York company, to supply electricity to residential customers at a price of 15.371 cents/kWh. That is a sharp jump from the previous price of 8.892 cents/kWh.
In other parts of the NSTAR service area, NSTAR chooses a default supplier. Currently the default price of customers not a part of the Cape Light Compact is 15.046 cents/kWh, a few tenths of a cent lower than the Cape Light Compact price. Often, Cape Light Compact negotiates a price lower than the default NSTAR price.
“The compact’s price is always being set by someone who is hired just to make sure you’re getting the best price,” said Stephan Wollenburg, a power supply planner for Cape Light Compact. “People have to be really careful and be really willing to do their homework before they sign up with a [new] supplier. All of them play very clever games.”
Viridian Energy, a firm based in Stamford, Conn., is among the competitive suppliers aggressively pitching Island consumers on switching companies.
But it is difficult to make an apples-to-apples comparison. On the company’s web site, a three-year contract is offered at a fixed price of $12.99 cents/kWh. The fine print advises consumers that if they cancel before the end of a three-year contract, they will have to pay a termination fee, but it does not say what the termination fee will be. It says only that the “termination fee is as listed in your enrollment documentation.” The termination fee is actually $50. Other companies impose termination fees of up to $200. Some also charge monthly service fees, typically about $5 per month. Still others offer a low introductory fixed rate for a short period, then switch to a variable rate for the rest of the contract term.
In order to compare Viridian’s price with the Cape Light Compact price, a consumer would have to know the Cape Light Compact price for the next three years. That, however, is impossible, because Cape Light Compact only sets prices in the short term, about every six months. The current price reflects the high cost of electricity during the winter months. On July 1, Cape Light Compact will set a new price, based on new negotiations with a competitive supplier. No one can predict with certainty the market conditions that will determine that price.
“It’s our expectation that it will be considerably lower,” Mr. Wollenburg said. “When we reset our price, our price will be for the second half of the year, which doesn’t have those really expensive months. So it’s going to come down pretty considerably from where it is now. The 13 cents [Viridian’s price] looks really good now, but in July it might not look so good. Even next January it might not look so good.”
Some consumers see value in locking in a fixed price, but the vagaries of the marketplace, where electricity costs can fluctuate wildly, will eventually determine whether the fixed price is a bargain or not.
In the service area covered by Cape Light Compact, about 40,000 customers have opted out, to choose their own competitive supplier. The rest, about 160,000, simply stay with the default supplier designated. But Mr. Wollenburg expects the aggressive marketing campaigns to have an impact.
“We have a lot of churn,” Mr. Wollenburg said. “I would expect we will lose more customers than we have in the past. I expect we’ll get some back, too.”