For Energy Users, a Surprising Wrinkle

New York Times
December 29, 2005
By Matthew L. Wald

EVERY fall, as temperatures begin to drop, many homeowners who heat with natural gas find a flier tucked inside their utility bill inviting them to switch to a rival provider. Those who cool with electricity get a similar invitation come spring: dump the familiar old utility and buy your fuel or energy from a "third party" supplier, typically bearing an obscure name. Often the invitation includes an inducement, like a cash bonus of $25 or $50.

"Your gas, your choice, your rebate," read one insert sent by Con Ed, which serves New York City and most of Westchester County.

Confused? So are a lot of people. Con Ed says about 95 percent of its residential customers simply shrug and throw the fliers away.

The notion of offering a choice goes back to the days of energy deregulation, which opened up the market to allow any company, or third party, to generate or sell power. Delivery remains a local monopoly, which means Con Ed, for example, still delivers power and gas sold by its rivals, picking up a fee for its trouble.

Small wonder some consumers are confused.

In most states, utilities can sell gas at only the market price. Third parties, however, may offer a contract with a fixed rate that lasts a year or longer - a great deal for those who signed up in 2004. Some contracts are variable, prices rise and fall with the market.

Chris Olert, a spokesman for Con Ed who lives in Warwick, N.Y., switched to a different provider about three years ago. "I shopped around," he said, "and I know that I saved money." Those who roll the dice in 2006 may also save but only, of course, if prices continue to rise.

State regulators, who set up the competition, say their goal was simply to give the public the right to choose suppliers. But that is not necessarily a simple undertaking. "Consumers have no way of comparing price, environmental impact or reliability of the power they are switching to," said Anna Aurilio, an energy expert at the U. S. Public Interest Research Group, a national organization that lobbies Congress on consumer issues. After viewing Con Ed's Web site (www.poweryourway.com), she said its offers left her flummoxed.

Roger B. Cooper, the executive vice president for policy and planning at the American Gas Association, a Washington trade group that represents nearly 200 gas utilities, said that even he had a hard time in 2005 deciding whether to stay with his old utility or switch to a supplier offering a fixed-price contract.

"Guess what? I can't predict," he said. "It's a crazy idea that you can give people a choice on a commodity that's harder to predict than the stock market."

"That said," he added, "people like a choice."

Exactly, said David Flanagan, a spokesman for the New York Public Service Commission. "The commission's perspective, and the perspective of many others around the country, is that no matter what product or service you're talking about, consumers are always better off when they have a choice," he said.

Some consumer advocates think that the offer of a choice distracts from more serious issues, like providing incentives and help to people who want to use energy more efficiently, or reducing power plant emissions.

Another energy expert at the U.S. Public Interest Research Group, Rob Sargent, also noted that for third parties the cost of signing up new customers is high, and that when it comes to residential customers the profit margins are low. This means there are few incentives to woo homeowners with bargain rates.

"Utilities really are natural monopolies," Mr. Sargent wrote in an e-mail message. "We'd be better off getting off this markets-competition kick and replace it with smart regulation that balances the need of consumers, society and the opportunities for regulated entities to make a fair rate of return."

Some third parties are old-line utilities venturing outside their monopoly territories; others are companies that used to sell heating oil and have branched into natural gas. Some want a foot in the door because they also sell more lucrative Internet access or long-distance phone service or because they sell maintenance contracts on heating systems, which tend to be more profitable than selling fuel.

In all cases, though, the third parties are brokers who buy electricity or gas and resell it to consumers. Like commodity traders, who buy and sell pork bellies but never see them, third parties do not usually take possession of energy supplies.

They have made the biggest inroads among industrial users, who often have someone in charge of shopping around for the best deals on energy, and among residential customers in the Midwest, where the concept of choice has been pushed harder and for longer.

And some third parties do an especially good job of promoting the cause. Jeff Mayer, the chief executive and founder of MXenergy, a third party supplier based in Annapolis Junction, Md., said he started offering contracts to individuals after seeing how industrial consumers had benefited, asking himself: why can't my father in Philadelphia have the same protection that Ford Motor Company has?'

Today Mr. Mayer offers contracts that work like mortgages: some come with fixed rates, and others float up and down with the market, like a variable-rate mortgage. The company, which was founded six years ago, has signed up about 300,000 customers in 11 states and the Canadian province of Ontario.

In Mr. Mayer's view, the issue is not all that complicated. "We're offering the little guy what the big guy has had for years," he said.