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Risky Energy Contracts Can Cost Customers Thousands

It’s no secret the intense winter weather has taken a real toll on the electric grid. Record low temperatures spanning over a third of the country have forced all affected to crank up their heat and pray for an early spring. Yet for some homeowners, prayers are for a winning lottery ticket or new electric contract thanks to variable rate contracts.

As we’ve reported previously, there is only a certain amount of energy the grid can produce and the more energy demand, the higher the price. When temperatures take a major dip, everyone’s energy demand increases at once, forcing prices to skyrocket as utilities work to tap into emergency resources, and look to other energy producers to keep the grid afloat. Normally, electric suppliers cover the costs with a fixed rate for consumers. That means no matter what, the customer’s electricity prices stay the same. So, one month he or she could be paying more than the demand cost, but it means he or she could be paying much less during high demand times.

Unfortunately, some consumers opted for a variable rate contract. If weather is stable year-round and the grid operates perfectly, variable contracts would be a smart way to go in terms of energy agreements. Customers would just pay depending on daily demand and therefore, never pay more than what they should. However, in instances like this winter, when energy prices reached historically high rates, consumers were charged incredible amounts. In most cases, they didn’t even know how high their rates were reaching until their bills came.

So why and how did consumers end up signing these contracts? In most cases, convincing salespeople were able to show clients they will be saving money when energy demand is stable, without fully explaining the risks of high demand times. For others, they expected to be informed when daily rates increased so they could manage their energy use. But, nearly every consumer with this type of contract had no idea the rates hit extreme levels, so they continued business as normal, and then took a big hit when they saw their bills.

Consumers were not shy to disclose their feelings about variable pricing. Energy website, energychoicematters.com, posted many complaints from unhappy customers, who saw their bills more than quadruple during the polar vortex.

One customer wrote,

This energy company offered my mother-in-law with an introductory 7.9c per KWH rate. In December the rate increased to 10.9c per KWH. In January, my mother in law received a $750.00 electric bill.. When I examined the bill, she was charged 44.9c per KWH. This is a 400% increase in one month. They did not provide her with any warning of the rate increase. I will be contacting the PA attorney general to file a complain[t].

Another customer said of the type of contract,

Variable rates’ are what they say so they can triple or quadruple the average rate to charge you as they want. As a customer, I understand that ‘variable rates’ means there is likely a fluctuation. This is not a fluctuation. This is hundreds of dollars more than PSEG charges, and it is clearly written out on the bill. I’ve called and complained twice – only received a $12 credit both times when I’ve been over charged by hundreds! Not to mention, when you do cancel, it takes about 2 months for the transition and my bill this month is an even higher rate.

While it is rare for variable pricing to escalate so much, it is not the first time it has cost customers thousands of dollars. In the beginning of the millennium, a nuclear power plant went offline during a major heat wave, pushing prices to about $6 a kilowatt-hour in New England. Also during that time, energy restructuring in California forced sky-high pricing.

Since then, some states have capped pricing. New England, New York and PJM power pools only allow prices to hit $1.00, with NY and PJM temporarily allowing higher prices for limited periods. Texas also has a cap, but at $9.00, that hardly seems like a deal. In the meantime, Pennsylvania’s attorney general is investigating the current price debacle in the Northeast.

What can customers do to prevent these massive fluctuations? The easiest and most obvious option is to get a fixed rate energy contract. That way a customer always knows how much he or she will be charged.  If a consumer wants to go with a variable rate contract, he or she should make sure there is a price cap, or pay close attention to energy pricing. The Polar Vortex was extremely rare, so in a normal winter the prices would not have had noticeable changes. However, the customer needs to understand the risks involved if an exceptional weather occurrence does happen.

Customers can also participate in demand response events. If it is for a home, they can reduce their energy consumption during high demand times to keep their energy costs low without freezing. By simply cutting down on electronics, turning off lights and unplugging appliances, the customers can make sure their prices don’t go through the roof. Commercial energy consumers can enroll in demand response programs, where they get notified to reduce their electric use and then get paid to do so. That not only helps cover potential price increases, but also gives warning to when the market costs are surging. Unfortunately, there are currently no residential programs, but there have been talks about expanding the service to homeowners.

It’s important for energy consumers to simply know their options. Many companies specialize in providing customers with multiple contract choices and work to see what will be best for the consumer. It’s also vital for consumers to know what risks could occur and to take into account once in a lifetime weather occurrences. There are so many factors that could play into pricing and those with variable rate contracts are now seeing just how severe fluctuations can affect their bills.

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