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Locking in energy fees is gamble that can pay

Kathy Meyers of Westerville, Ohio, locked in a two-year energy contract in July and is saving money now.
Kathy Meyers of Westerville, Ohio, locked in a two-year energy contract in July and is saving money now.
Kiichiro Sato, Associated Press

There will be no unpleasant surprises or scrounging for change when Paul Hietapelto opens his heating bills this winter.

Unlike most Americans, the retired machine operator from Geneva, Ohio, knows exactly how much he will pay for natural gas, and it won't be a penny more than the year before.

Since agreeing to an energy marketer's offer of a three-year fixed price for natural gas back in 2003, when the fuel was about half as expensive as today, Hietapelto has been immune to rising costs.

Contracts such as these may appeal to those seeking price certainty for budgeting purposes, but there is no guarantee that a roll of the dice will pay off like it did for Hietapelto, who lives on a pension and Social Security checks.

"The (fixed-price) offers in the market right now are pretty high," said Ohio Consumers' counsel Janine Migden-Ostrander. That said, "nobody has a crystal ball to know where gas prices are headed, so everybody gambles whether they switch to another supplier or not."

Consumer advocates say homeowners looking to save money should instead take concrete steps to reduce their energy consumption, whether it means adding insulation or turning down the thermostat a few degrees. Moreover, those seeking less volatility in their monthly natural gas bills should consider level-billing plans, which spread out estimated annual expenditures over 12 months.

Hietapelto is one of about 4 million consumers in 18 states and the District of Columbia who buys natural gas from a supplier other than his local utility. According to the Department of Energy, more than half of the country's 62 million residential natural gas customers have access to so-called customer choice programs, an outgrowth of deregulation.

Under these programs, the local utility is still in charge of delivering the fuel and billing, so homeowners notice no change in service. The only difference is that the price they pay for the fuel is set by an energy marketer rather than the local utility, which charges customers a regulated rate that can change on a regular basis.

For example, natural gas supplied by Hietapelto's local utility, Dominion East Ohio, will cost $13.779 per 1,000 cubic feet in November. That's 47 percent higher than the $7.25 per 1,000 cubic feet Hietapelto has paid since May 2003 under the terms of his agreement with MXenergy of Stamford, Conn.

Companies like MXenergy are careful not to promise savings. Instead, they say their primary goal is to give homeowners certainty about their monthly energy costs, while capping their potential liabilities.

"Locking in today's prices is a pretty frightening thought because prices are at all-time highs. But the problem is we don't really know whether the price is going to go up or down," said Irwin Popowsky, Pennsylvania's consumer advocate.

Popowsky said he is a proponent of consumer choice but that better energy efficiency and conservation at home "is the best way of saving money, no question about it."

Marketing executives say the best analogy to what they offer is a fixed-rate mortgage, which protects homeowners from fluctuating interest rates.

"Our principal reason for being is to help people budget their energy needs," said MXenergy founder and CEO Jeffrey Mayer, who previously worked on Wall Street devising energy supply contracts for large industrial and commercial users.

However, consumers have other motivations and some may not fully understand what they're signing up for.

In May 2004, Owen Dorsey of Cumberland, Md., signed a three-year contract with MXenergy because he figured natural gas prices would rise steadily from year to year, as they have since 2002.

"It was just like a little gamble," explained Dorsey, a 68-year-old retired facility manager for CSX Corp.

So far, Dorsey's decision to switch has worked out. He's paying $8.50 per 1,000 cubic feet, compared with today's regulated rate from Columbia Gas of Maryland of $12.82 per 1,000 cubic feet.

But both Dorsey and Hietapelto said they were initially mistaken about the terms of their contracts. Dorsey said he originally thought he had signed a lifetime contract, while Hietapelto believed the price he was quoted by MXenergy included the cost of piping the fuel to his home, which it does not.

"I didn't realize that they were adding all this other stuff onto it," Hietapelto said.

Kathy Meyers of Westerville, Ohio, in July signed a two-year contract with Direct Energy to pay $11.30 per 1,000 cubic feet. In contrast, her local utility, Columbia Gas and Electric, is currently charging $12.91 per 1,000 cubic feet.

But the 56-year-old Meyers, who manages grants for nonprofits from a home office, said she didn't do it to save money and acknowledges that the regulated price may fall below what she's agreed to pay.

"I don't like surprises. Maybe that's the reason" for agreeing to sign up after a cold call from a Direct Energy telemarketer, she said.

Meyers conceded that she signed up for the program at a time when energy prices were already high and that home-heating costs could drop considerably. "To me the peace of mind of knowing what it's going to cost, and the consistency, has value," she said.

Indeed, Hietapelto is quite worried about what to do upon the expiration of his agreement with MXenergy next year. He recently tried — and failed — to get MXenergy to extend his current contract for an additional two years.

"It's just getting ridiculous what it's costing," he said.