Cool response: Few opt to lock in rate for natural gas by switching providers

Chicago Sun Times
December 9, 2005
By Mary Wisniewski

With natural gas prices in the Midwest rising as much as 70 percent this winter, Pinky Johnson is feeling warm and cozy about a decision she made two years ago to lock in her gas rate.

"I knew the price was going up and it was going to catch me," said Johnson, 54, of Hazel Crest. "I wanted to afford to heat my house."

She and her husband, Robert Lee Johnson, locked in the rate they pay for natural gas at 74 cents per therm through a three-year fixed-price contract with MXenergy, an alternative gas supplier out of Stamford, Conn. Because of her fixed-price contract, Johnson is paying about 38 percent less for gas than what Nicor Gas is charging.

"The gas bill has been so affordable, you wouldn't believe it," said Johnson, who compared locking in her gas rate to locking in the interest rate on her mortgage.

Illinois customers have had the option of choosing alternative gas suppliers in Illinois since 1998, when the Illinois Commerce Commission opened the natural gas market to competition. Customers can choose to buy their gas from a company other than the gas utility that delivers their service.

But relatively few Illinois customers have signed up with alternative suppliers. Of Peoples Energy's 1 million customers in Chicago and the North Shore, only about 16,300 use alternative gas suppliers.
Of Nicor's 2 million customers in northern Illinois, about 205,000 use alternative suppliers. The per-therm rate for both Peoples Gas and Nicor was about $1.19 in November.

The idea of paying a fixed rate for a fluctuating commodity like gas may be attractive to consumers who don't like surprises — and it looks smart now that gas prices are high.

But the Citizens Utility Board, a consumer watchdog group, said it is not clear that people can save any money over the life of these contracts.

"The offers we saw over the summer were locking people in at high prices they'd be stuck with over the next five years," said Rob Kelter, director of litigation for CUB.

Kelter said consumers may not have enough information about gas prices to make an informed choice.
"It's so difficult to know what's going to happen with prices from one month to the next — let alone one year to the next — and people are locking in the prices for several years," Kelter said. "It's hard for experts to know."

Two gas marketers — the Illinois Natural Gas Association and Santanna Energy Services — have been sued by the Illinois attorney general's office for allegedly misrepresenting themselves to the public. Illinois Natural Gas settled a lawsuit with Attorney General Lisa Madigan last summer and agreed not to raise the price of natural gas during the course of its contracts. Santanna Energy Services twice reneged on a fixed-price offer, citing unexpectedly high gas prices, and it has filed for bankruptcy.

Jeffrey Mayer, chief executive officer of MXenergy, said bad publicity about certain marketers and CUB's criticism of the alternative gas option have created "hurdles" in Illinois that MXenergy doesn't face in other states.

Mayer said his company doesn't promise savings, but protection from price hikes. Like Johnson, he compared locking in a gas rate to locking in an interest rate. Companies like MXenergy contract for the gas they need at the promised price over the life of customer contracts, so they can't go back on the promi  ed price. It isn't always the cheapest rate in a given month, but it provides customers with stability, Mayer said.

"Our philosophy is, we want to give the little guy what the big industrial buyers have had for years — namely, the ability to lock in their future energy costs," Mayer said. Because gas prices have been going up, MXenergy customers have the double benefit of stability and savings — 95 percent of MXenergy customers with Nicor are paying a third to a half of Nicor's prices.

MXenergy is offering a three-year fixed contract for $1.305 per therm, whereas Nicor's rate was $1.19 per therm for November. Customers who want to save money with a fixed-rate contract have to hope that gas prices keep climbing.

A CUB study in December 2004 showed that most northern Illinois customers who switched to alternative gas suppliers ended up paying an average of $172 more over the life of the contract. Current high gas prices make long-term contracts look better than they did last year, said CUB's Kelter.

U.S. Energy Savings is not trying to market savings, but peace of mind, said Tim Lang, U.S. Energy's vice president of sales and marketing. Lang noted that this is particularly important for businesses, which need to make precise budgets.

"Some businesses have a tough time when they suddenly get whopping natural gas bills," Lang said. Since energy prices tend to rise over time, Lang said, customers may end up saving money, but "no one knows for sure."

WHAT YOU'LL PAY NOW FOR FIXED-PRICE GAS CONTRACTS

Pay more now, less later?

Here are some current fixed-price contract offers by alternative gas suppliers in Illinois. By way of comparison, the November price per therm for both Peoples Gas and Nicor Gas is about $1.19. Note that contracts can include monthly service fees and cancellation fees.

- MXenergy, 800-785-4373: Three-year contract for $1.305 per therm.
- Peoples Energy Services Corp., 888-698-1730: Three-year contract for $1.19 per therm.
- Direct Energy, 866-266-2084: Three-year contract, $1.279 per therm (for business and small commercial customers)
- Dominion Retail, 800-260-7297: Two-year contract, $1.18 per therm.
- U.S. Energy Savings Corp., 888-674-7847: Five-year contract, $1.30 per therm.
- Other alternative gas suppliers listed by the Illinois Commerce Commission include Corn Belt Energy Corp., Illinois Natural Gas Corp. and Interstate Gas Supply, which are not currently enrolling new customers.