Utility rivals woo customers with fixed rates

Boston Globe
July 3, 2005
By Bruce Mohl

Some Massachusetts homeowners are finally getting a choice when it comes to electricity suppliers, but unfortunately the choice isn't an easy one.

Most residential utility customers are now on what's called basic service, a power rate that changes every six months as utilities go to market and negotiate electricity supply deals for their customers.

With energy prices on the rise, two companies are starting to seriously woo basic service customers with long-term fixed rates, much like heating oil dealers who offer fixed-price contracts for the entire winter.

Dominion Retail, the sales arm of Dominion Energy in Virginia, is looking to double its business here by offering as many as 15,000 Massachusetts Electric customers a rate of 7.9 cents per kilowatt hour for the next two years. Participants have to sign up by July 15, and they face a $50 penalty if they withdraw early.

What makes the Dominion offer difficult to evaluate is that the current basic service price offered by Massachusetts Electric is 7.213 cents per kilowatt hour, or 9 percent less than what Dominion plans to charge.

The basic service rate is likely to rise in November with the run-up in energy prices, but whether it will rise high enough to justify a two-year bet on Dominion is unclear.

''We don't look at it as betting on the future," said Dominion spokesman Daniel E. Donovan, who said many customers want pricing stability as much as they want lower prices. ''It's for people who don't want to bet."

Jeffrey Mayer, president and chief executive of Connecticut's MXenergy, which quietly entered the Massachusetts market in April and plans to make a similar long-term offer to Massachusetts Electric customers in September, offered a similar perspective.

''Deregulation is not about lowering prices," he said. ''It's about protecting consumers from volatility."

Dan Tanner of Westborough, who recently received the Dominion offer in the mail, said he thought the sales pitch was misleading. The letter warned that there is no limit on how high the basic service rate can go and noted it is currently 20 percent higher than it was a year ago, but never said what the current basic service rate is.

Tanner said he checked his bill and discovered he was paying 7.2 cents a kilowatt hour, well below what Dominion is offering.

''Essentially, they're using scare tactics," Tanner said. ''They should do it in a full disclosure way and I don't think they are."

Donovan said the company tested several pitch letters in April and found the one that went to Tanner was the most effective. Dominion has mailed 340,000 solicitation letters to customers over the last two weeks, but won't know how many have signed up until mid-month.

The mere fact that companies are starting to compete for residential customers in a serious way is a breakthrough.

Massachusetts began deregulating the electricity business here in 1998, letting customers buy power from whomever they want and forcing utilities to sell off their power plants and become strictly transmission and distribution companies.

Competition among power suppliers has been fairly intense for large industrial and commercial companies, but homeowners have had almost no options. Most homeowners have continued to buy power purchased for them by their utility.

The new Dominion offer and the entrance of MXenergy into the market indicate the competitive climate may be starting to change. Until recently, most Massachusetts customers were on state-controlled standard offer rates. Those rates expired in March, and now all utility customers are paying more expensive and more market-sensitive basic service rates.

Still, basic service isn't whatever the current market price is. Massachusetts Electric, for example, buys a one-year contract for half its basic service load every six months so the price homeowners pay is always a blend of the current market price and the price from six months earlier. That approach tends to flatten prices, curbing dramatic swings upward and downward and making it more difficult for competitors to make inroads.

In the Massachusetts Electric territory, which generally encircles Boston outside Route 128, rates hit a recent peak in the summer-fall of 2001 at 9.2 cents a kilowatt hour.

Rates fell in 2002 and early 2003, but have been rising steadily ever since. The summer-fall rate has bounced around between roughly 6 cents and 7 cents a kilowatt hour. The winter-spring rate has risen to 7.1 cents earlier this year from 5.1 cents in 2002, an increase of nearly 40 percent.

With oil and natural gas prices surging, the expectation is that electricity prices will keep rising when Massachusetts Electric negotiates a basic service price for the winter and spring in October.

''Everywhere you look there's upward pressure on energy prices," said David O'Connor, commissioner of the state Division of Energy Resources.

MXenergy tested the waters here in April with a one-year, 7.1-cent offer to a small group of homeowners in Southeastern Massachusetts. It now is looking ahead to September, when it plans to roll out offerings with two- or three-year durations.

''If you like fixed-rate mortgages, you're going to love fixed-rate electricity prices," Mayer said. ''Energy prices are much more volatile.

Dominion, which owns two power plants in Massachusetts, one in Rhode Island, and a nuclear plant in Connecticut, has been offering longer-term rates for several years but it's latest offer is its most serious yet. The company is seeking to double its residential customer base to close to 30,000 from 15,000.

Dominion says customers who sign up would notice little change. They would continue to receive one bill from their utility.

If the current offer is well accepted, Donovan said, the company will probably expand into the Boston area and Western Massachusetts. He said the Massachusetts market is coming alive.

''We think Massachusetts is going to be a good market," he said. ''We think it could be one of the best in the country."