Choice can head off gas hikes

Detroit News
November 20,2005
By Nick Bunkley

While most Metro Detroiters fret about ballooning winter heating bills, George Owen can relax, knowing the price he pays for natural gas won't change until 2007.

Last spring, Owen took advantage of a little-known program that lets Michigan residents buy natural gas from a supplier other than their local utility.

The fuel that heats his seven-bedroom home in Detroit gets piped in from a small St. Clair County company instead of Michigan Consolidated Gas Co. Owen agreed to a two-year contract that set his rate a penny below what MichCon was charging.

Since then, a pair of powerful hurricanes and soaring demand for natural gas worldwide has driven prices to unprecedented levels—MichCon's rate has increased 42 percent.

Because Owen's rate is fixed for another 18 months, he can expect to save about $500 this winter and probably more than $1,000 by the time his contract ends.

"Thank God I locked it in," said Owen, 61. "It just takes a little time, but you can save a lot."

The alternative supplier option has been offered to businesses for a number of years but became available to all homeowners only recently.

About 234,000 of the 2.9 million MichCon and Consumers Energy customers receive their gas from an alternate supplier.

Nationally, about 4 million consumers in 18 states and the District of Columbia use a secondary supplier, according to the Department of Energy.

By switching to an alternative, unregulated supplier, homeowners can temporarily protect themselves from rising prices, although they must accept another risk: If natural gas prices had fallen, Owen and the dozen or so friends he persuaded to switch would have been stuck paying more than their neighbors.

"With prices as volatile as they are, the utilities can change their prices quarterly," said Terry Junga, general sales manager of My Choice Energy in Marine City. The company, a subsidiary of Foster Blue Water Oil LLC, has about 800 customers, including Owen.

"We give them peace of mind and stability of price," Junga said. "It's a way for people to budget."

My Choice Energy and other alternative suppliers tell potential customers that savings are possible but not guaranteed. They primarily pitch themselves as an opportunity for people to better control their energy costs and avoid rate shock.

"We don't promise savings," said Jeffrey Mayer, founder and CEO of MXenergy in Stamford, Conn. "Our objective is to help customers control their bills the same way a fixed-rate mortgage helps to control a homeowner's interest costs."

"I have a fixed-rate mortgage, and even though I've paid a lot more money throughout the years than I would have with an adjustable, I have it because I want to sleep at night and not worry about losing my home."

Alternative suppliers can offer long-term fixed rates because they buy all of the gas they expect a customer to use ahead of time. Utilities such as Consumers Energy and MichCon only have enough storage for a few months' worth of reserves, so their rates are more vulnerable to market fluctuations.

Under Michigan's customer-choice program, the local utility still pipes in the fuel and handles billing, so there is no change in service. Monthly bills look the same, except the alternative supplier's rate replaces the utility's gas cost.

Customers can switch suppliers once in a 12-month period but have 30 days after they sign up to cancel and return to their regular utility. After that, most suppliers charge about $150 to terminate a contract early.

Michigan Public Service Commission spokeswoman Judy Palnau said customers should fully research their options and read the fine print of a supplier's contract before agreeing to it.

When comparing rates, customers should find out whether a price is fixed or variable and remember that they will still have to pay billing fees, distribution costs and sales tax.

"What looks like a bargain today could change tomorrow," Palnau said.

Customers also must realize that even though natural gas prices have risen steadily since 2002, that trend won't necessarily continue.

Wholesale prices have fallen slightly in the months since Hurricane Katrina hit the Gulf Coast, and the U.S. Energy Information Administration predicts prices will decline from an average of $1.54 per 100 cubic feet in the fourth quarter of 2005 to $1.28 a year from now.

"Things in general are looking better," said Tancred Lidderdale, an EIA economist. However, another damaging storm, a prolonged cold spell or any number of other factors could push the market higher again because natural gas supplies are so tight.

How good a deal customers can get also depends on which local utility supplies their natural gas.

No alternative suppliers are offering rates below what Consumers Energy is charging its 1.7 million gas customers in the northern part of Metro Detroit and the central Lower Peninsula.

But several companies have lower rates than MichCon, whose 1.2 million customers live in Wayne and Washtenaw counties and other parts of Michigan.

My Choice Energy will charge homeowners 1 cent less than MichCon's rate per 100 cubic feet until April, then a fixed $1.073 for the next three years. MichCon's rate of $1.138 could go up or down in April. That's when the utility typically goes to the Michigan Public Service Commission for approval of a new annual rate that reflects current wholesale prices. This year rates went up more often as
prices soared.

Interstate Gas Supply, an Ohio-based supplier with 85,000 customers in Michigan, last week introduced a fixed rate of $1.099 through March 2007. In the spring, IGS was signing up customers at a rate of 78.9 cents.

"People were concerned that was too high, but now hindsight is 20/20," said vice president Doug Austin. "Now that the market has settled down, believe it or not we think that $1.099 might turn out to be a pretty good rate."

Ultimately, the decision comes down to little more than a roll of the dice. Customers such as Owen are enjoying a huge payoff because they signed up before natural gas prices skyrocketed, but the outcome is uncertain for homeowners who sign up now.

"You're gambling, that's for sure," Owen said. "Just ask yourself, 'Do you think gas is going to go up or down?' If you think it's going to go up, jump on board. I'm sure glad I did."

More information
- Call the Michigan Public Service Commission at (800) 292-9555 or visit "www.michigan.gov/mpsc and click on "Natural Gas," then "Customer Choice."
- MichCon customers can learn more at my.dteenergy.com/home/choice/gasChoice.do.

Source: Detroit News research

Customer choice