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An Explanation of Retail Energy Contracts
The following describes the variety of pricing options and terms for electricity and gas offered by energy suppliers, and utilities.
Buying Gas or Electricity from a Utility
Also known as system or default supply, system gas or Standard Supply Service
If you have not signed a contract with a deregulated marketer and are still paying the local regulated utility for gas or electricity supply, you are on what's known as system gas, or default supply electricity. The utility is by regulation required to simply pass through the cost to you with only their administration costs added. The cost is totally variable since it is based on the short term market rates, or the portfolio of energy supply that the utility has purchased. See Spot Market definition. The utility must get approval from the regulatory board for rate changes, but they can apply price increases retroactively if they can prove that it cost them more to supply the energy than they have charged. This is done either through an annual "settling up" when a balancing is done or through a surcharge on gas/electricity over the next 6-9 months. In a market of rising energy prices, this usually means you have to pay extra because the approvals tend to lag the market. In a declining market, it sometimes means a rebate to you.
This price is set monthly by a marketer based on the price they have to pay in the wholesale market, which is dictated by supply and demand. That price is passed along to the consumer, with admin costs and a profit margin built in. A few marketers offer a rate that is tied to a "Posted Monthly Wholesale Price", such as the Transco Zone 6 midpoint published in Inside FERC's Market Report. Consumers should look at a marketer's track record of beating the utility price before signing this type of contract.
Discount Rate, or % below Utility Price
If a marketer is offering this type of contract, it is usually a price that is based on the utility regulated price, less a certain amount. For example, it would be stated in the promotional material and the contract as "Always 5% less than the utility". A marketer can do this by buying gas or electricity more cheaply than the utility, or by having substantially lower administrative costs.
Fixed Rate Contract
This is a fixed price for gas or electricity supply for a fixed period of time. The price and the term are set out in the contract. Your price for Gas Supply will be fixed. The regulated charges from the utility may change if the regulator gives them permission. This type of contract gives you the benefit of knowing your energy costs for that period of time. If prices rise above your contract price, you benefit. The marketer is at no risk if prices rise because they buy a fixed price long term gas contract from the wholesale market. So for example, they buy a wholesale contract for 23 cents/M3 and retail it for 25 cents.
In this pricing plan, the ABM will supply natural gas or electricity to the customer at the best price it can. However, the ABM guarantees that the rate will not rise above a certain amount, regardless of the current market price. This protects the customer from extremely high prices, and allows them to benefit if prices go down.
Agency, Billing, Collection-Transportation ("ABC-T")
ABC-T is a relatively new service approved by the OEB and offered the Utilities. The Utility bills and collects the money for the energy commodity that an ABM has offered to the customers. The utility includes the cost of the energy supplied by the ABM, at the agreed upon price, in the monthly bill that it sends to its customers. Customers who have an ABC-T arrangement, see the name of their ABM and the price of their energy supply (the energy supply charge) on their Utility bills. The Utility collects the money from the customers and remits it to the ABM. The Utility guarantees payment of this money to the ABM, and charges the ABM a fee for the service.
This applies if you have been offered a rebate program by a marketer. This is a rather complicated sales option, but is essentially an offer from an ABM of a rebate on the regulated utility price. It could be a fixed percentage rebate, or the rebate might vary depending on the ABMs success at buying cheaper energy supply.
In detail, it goes something like the following. An ABM purchases directly from a supplier (for example, a gas producer in Alberta, or an electricity generator in Ontario) on behalf of its customer. The ABM then sells back to the Utility at the OEB regulated 'buy' rate. The Utility delivers and resells the energy to the customer at the OEB regulated 'sales' rate. If the ABM has purchased the energy from the supplier at a price below the OEB regulated rate then the customer could also realize a benefit by getting a share of that savings (depending on their contractual arrangements with the ABM). These benefits will usually be in the form of a cheque sent by the ABM on an annual basis.
"Weather Protection", or Fixed Bill Contracts
The ABM will guarantee that the customer won't pay any more than a fixed dollar amount for their energy for the year. This is based on the customer's usage pattern over the past year and adjustments for weather. This contract type transfers the risk of a long cold winter to the energy marketer. It's a form of insurance for which the customer pays a small premium.
Full Requirements Contract
An electricity supplier agrees to provide all of a company's electricity needs at an agreed price. The supplier does not require that you buy a set amount or buy any electricity on the spot market. This type of contract is common for residential customers but rare for larger customers. Its also known as a "load following" contract.
Fixed Volume Contract
In this type of contract, suppliers pass the volume risk and some spot market exposure to the customer. A customer estimates their monthly consumption based on past years and any expansion plans. The supplier then contracts for that amount on the customer's behalf. The customer is financially responsible for differences between estimated and actual use bought for them on the spot market by the supplier. This spot market buying and selling happens for each hour by comparing actual consumption with the electricity purchased for that hour.
Structured Block Contract
Purchasing a series of blocks of electricity to match as closely as possible the consumption of a facility. Electricity trades in blocks of a number of kilowatts for specified periods of time:
7 × 24 - 7 days a week, 24 hours a day
They are stacked to meet the electricity needs.
Single Block Contract
This is a buying strategy more than a type of contract. It involves the purchase of a single block of electricity (see Structured Block above) to cover the period of greates electricity need, or to cover the period in which electricity is expected to be most expensive. For example, it could be the purchase of a 5 x 16 block to cover week day, daytime.
Declining Rate Contract
The rate declines each year of the contract. An example is a gas contract that starts at 31 cents for the first year, but declines to 30 cents in year 2, 29 cents in year 3, etc.
Blended Rate Contract
A contract that is a combination of fixed and variable rate. Typically, half of the rate is guaranteed for the term of the agreement, similar to a Fixed Rate, and the other half of the rate is variable. The variable portion is usually reset periodically based on market prices. The result is some protection against price increases, but some opportunity to benefit if prices decline.
A type of variable rate based on amount consumed over a given period (like a month). An example is a gas contract that starts at 31 cents for the first 300m³ used, and drops to 29.5 cents for use over 300m³ in a month.
For more information, contact Debbie Barnett.
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