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‘Fixed Price’ Electricity: How to Make Sure It Really Carries a Fixed Price

November 18, 2013 By Richard Rathvon

Richard Rathvon

Sometimes a “fixed price” may not turn out to be as “fixed” as you think.

Over the last two years or so, it has become increasingly common for electricity suppliers to sell a so-called “fixed-price” product to their commercial customers – but soon thereafter, surprise those same customers by passing along unexpected, additional costs.

In other words, “fixed prices” have become less and less fixed.

A good way to think about this is to compare these unexpected charges to the increasingly common “energy surcharges” or “resort fees” travelers find on their hotel bills.

In the energy services sector, this sometimes eyebrow-raising “hotel fee” syndrome can grow out of a customer’s failure to “read the fine print” — combined with a supplier’s failure to draw attention to the existence and content of the “fine print” in the first place.

Sometimes this is handled in a direct and upfront way.  Added costs may arise with a customer’s prior knowledge.  End users know in advance that they may incur additional costs as the consequence of a fully discussed transfer of risk that a customer had previously agreed upon.

But, regrettably, we have been fielding a growing number of calls from frustrated energy buyers.  These organizations had decided to go with another electricity supplier based on an ostensibly fair price comparison between what they believed to be equivalent fixed price offers.  But now they are unhappy, and regret not having scrutinized the various product offerings closely enough.  These energy buyers also regret not having been walked through the contract language beforehand.

Bluntly stated, some market participants have created the appearance of a lower price as a way to induce a customer to sign a contract, only to unveil unpleasant, deal-changing surprises down the road.

Product innovation will ultimately benefit customers, and bad actors will eventually be identified and eliminated by an educated marketplace.  But in the meantime, customers and their advisers need to do the hard work necessary to determine whether Offer A is really better than Offer B, and to determine how “fixed” a “fixed price” really is.

Why would a supplier choose to pass through unanticipated costs on a supposedly “fixed price” product?  How can they?  How do consultants and the current market influence this practice?

Competitive pressures have encouraged some suppliers to search for ways to lower the customer’s perception of the price being offered for electricity.  Thus, suppliers have removed unknown, uncertain or unrealized cost components from their quoted prices, even components certain or highly likely to translate into higher prices during the term of the contract.  Suppliers will subsequently pass through such costs when the change in cost takes effect, using contract language that allows them to pass through changes that ultimately affect the actual, final cost of energy.

Consultants also have the duty to be diligent about addressing this situation with their clients.  Competitive pressures on consultants have encouraged some of them to concentrate excessively on securing new customers, and to trust suppliers to add in all the cost components the consultant has requested.

As a result, consultants may inappropriately pay less attention to the exact language in the supplier’s contract, or — equally importantly — how the supplier may have interpreted and applied that language in the past, which may pose future problems for the customer.

We have just emerged from a period of sustained lower energy prices and lower cost volatility for many energy cost components.  Non-energy cost components — such as capacity charges, transmission charges or ancillary services — make up an increasingly large portion of the total cost of electricity.

One responsible approach offered by many providers is to project — on an informed and transparent basis — an estimated value for all of these non-energy cost elements.  Prior to signing the contract, both the provider and the end user ought to agree upon the reasonably anticipated amount of the entire, added “risk premium.”

Under this approach, if the actual cost ultimately turns out to be an amount higher than this figure, the provider would assume that added expense.  If the actual cost comes in below the projected figure, the customer still pays the agreed-upon amount.

But in every instance, customers and consultants should review regulatory change and “material adverse change” language closely before entering into an agreement, and ask suppliers under what circumstances they have exercised those clauses in the past.

So, how does an energy buyer make sure a “fixed price” is really fixed?  Here are five key items a customer should consider:

1. Examine the circumstances a supplier’s contract says may justify a price increase.  The broader the language, the less fixed the price tends to be.  Customers should look for and demand specificity.

2. Confirm that the end user stands to reap the benefits if legal or regulatory changes trigger cost decreases.

3. Understand their rights to disagree with a pass-through cost.  If an end user refuses to accept this added cost, he or she should fully understand the potential consequences of such a refusal.

4. Consider a supplier’s track record when it comes to invoking regulatory change provisions.  Two suppliers may have more or less identical contract language.  But their track records may show that one supplier has a more frequent history of invoking the language, while the other supplier invokes it less often.  Ask potential suppliers to submit in writing each of the circumstances for which they have invoked a price change over some reasonable, past period of time.

5. This last “red flag” bears a little, fuller discussion for customers and consultants alike — be watchful about the use of the “price adjust” concept, in which a supplier includes a cost component estimated at either its current level or a stipulated level.  This stipulated level may even be lower than current costs.

If the actual cost incurred for that component is higher than the stipulated or current level, the supplier passes the difference through to the customer.  This concept is often used when a future cost increase is scheduled.

This clause is a persistent source of confusion.  When asked if a particular cost component is included, a supplier can say “yes,” even though it may only be included up to a certain price level.  For example, a fixed price contract in which a supplier is not going to increase the price when a known transmission increase occurs, is dramatically different from a fixed price that will be adjusted upward when increases take place.

The “price adjust” concept can be used effectively by customers and consultants when there is uncertainty around the timing or the exact future cost of a component.  In that circumstance, the concept allows for a knowing transfer of risk and the avoidance of a premium, which may work in the customer’s favor.  However, when the concept is used in a less-transparent way, the process can be confusing and lead to false and invalid price comparisons.

When competition occurs in a fair and open market, commercial users have the opportunity to enjoy significant cost savings when buying electricity from reputable suppliers.  But some extra effort and diligence may be required to ensure that comparisons among suppliers are being made on a true “apples-to-apples” basis.

Customers need to proceed with caution to be able to maximize the cost-saving benefits of shopping for energy on an open and competitive basis.  If energy users want to make the best purchase decision, they must exercise their right to get all the information they need – and truly understand just how “fixed” their quoted “fixed price” really is.

Richard Rathvon is vice president for retail commodity services for ConEdison Solutions.



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