Escape clause offers relief to energy price lock-ins
Ellen Roseman, Business Columnist
May. 15, 01:00 EDT
SIGNING a long-term energy contract is a gamble. If you guess wrong, you'll be stuck paying a higher-than-market rate for several years.
Buyer's remorse is common among those who locked in at the wrong time. Yet there may be an escape clause.
Aziza Rohoman, for example, signed a five-year gas contract with Direct Energy Marketing Ltd. on April 28, 2001, at an all-time high of 32.9 cents a cubic metre. That's for gas supply and doesn't include the additional delivery charge.
Direct Energy currently charges 21.9 cents for a five-year gas contract. And it's trying to boost business by offering a reduced price of 16.425 cents from now until Sept. 30.
Rohoman found her gas bills hard to handle last winter, so she sent an e-mail to Direct Energy asking how she could get out of the contract.
"Direct Energy saves money in the long term. We are not here to save you money every month," said the reply.
"Last summer gas was well over 30 cents. This could happen again this summer, or next."
Not very likely, says Ian MacLellan, vice-president of EnergyShop.com, an Internet buying and price comparison service.
"Direct Energy was the only gas marketer that got up as high as 32.9 cents and that was only for a three-week period," he says.
Gas prices are falling today and no one predicts a rebound to the 30-cent level any time soon.
If Rohoman had stayed with her regulated utility, Enbridge Consumers Gas, she would be paying 29.99 cents a cubic metre.
But Enbridge's gas supply charge is only 15.97 cents. The rest is the delivery charge.
Union Gas, the other regulated utility, charges 29.17 cents a cubic metre in southern Ontario (16.2 cents for the gas supply, 8.7 cents for delivery and 4.26 cents for transportation).
Since regulated utilities supply gas at cost, they make adjustments at the end of the heating year and give refunds to customers when prices are falling.
Direct Energy failed to tell Rohoman that she can pay a penalty to get out of the contract.
(The penalty, which Direct Energy prefers to call "liquidated damages," is laid out in the fine print under Section 7, Early Termination.)
Gas marketers' penalties range from 1.75 cents to 7 cents a cubic metre, MacLellan says. Direct Energy's is 7 cents.
"That's quite punitive," he says, "but it may be worth paying if the price difference is more than 10 cents a cubic metre."
Rohoman fits the profile. She would save 11 cents a cubic metre if she signed a five-year contract at today's prices.
The average household uses 3,900 cubic metres of gas a year. So a penalty of 7 cents a cubic metre would amount to $273 a year.
Rohoman's gas consumption is less than average. Her penalty would be $200 a year, Direct Energy told me.
But to get out of the contract, she'd have to multiply $200 by four (the number of years left) and pay $800 up-front.
That would save her an extra $455 she would otherwise pay over the life of her contract.
Rohoman is still trying to decide what to do. But at least she knows the facts.
There's another wrinkle. If you pay a penalty to get out of a long-term energy contract, you can expect to wait two to three months for the cancellation to come through.
But you can't lock in a new price while the old contract is still in effect. So you're gambling that prices won't go up in the short term.
Electricity is a similar story. Marketers charge a penalty ? generally 1.5 cents a kilowatt hour? for the remaining life of the agreement.
Toronto Hydro Energy Services Inc., the deregulated arm of Toronto Hydro-Electric System Ltd., initially offered contracts that could be terminated without penalty. But no longer.
The only exception, says MacLellan, is electricity marketer First Source (formerly Mississauga Hydro), which offers the right to cancel after 18 months with only a $100 administration fee.
If you have buyer's remorse, dig up a copy of your contract. Then call the marketer to ask what the penalty will be if you opt out.
It may be worth your while to bite the bullet and find a better deal.