Look Closely When Comparing ‘Fixed-price’ Products

By Richard D. Rathvon, ConEdison Solutions

Fixed prices are not always as fixed as they seem.

In recent years in the deregulated electricity markets, growing numbers of electricity suppliers are selling “fixed-price” products to commercial customers, only later to surprise those customers by passing along unexpected, additional costs.

ConEdison Solutions has fielded calls from frustrated buyers who had selected suppliers based on what the buyers believed were fair apples-to-apples comparisons of fixed-price offers. These buyers now regret that they did not scrutinize the competing offerings and contract language more closely.

Many nonenergy components, such as capacity charges, transmission charges, renewable energy certificate prices or ancillary services, constitute a growing proportion of total electricity cost. These are the types of cost components that most often are passed through unexpectedly to customers.

In this pricing environment, as retail suppliers find fewer opportunities to beat prices offered by competitors, some suppliers are seeking ways to lower customers’ perceptions of the offered prices.

Instead of quoting prices in a transparent way, a supplier might cite prices that exclude unknown, uncertain or expected but unrealized cost components. Sometimes these missing components are likely or highly likely to raise a supplier’s cost over the contract term. Suppliers then pass through these additional–yet anticipated–costs to customers when the price changes take effect, citing contract language to justify the increases.

Consultants sometimes contribute to this problem. Although they have the responsibility to be diligent about presenting objective price comparisons to clients, consultants face similar pressure to attract new customers. Therefore, some devote less time to reviewing contracts’ precise language. Other consultants do not look closely enough at the ways suppliers have interpreted and applied this contract language in the past–a level of analysis that could foretell pricing changes.

Suppliers are the experts here and should not leave it to customers to assume how much of their bills will stay fixed and how much might change because of these added factors. And, happily, many suppliers responsibly and carefully estimate a value for these elements.

Still, before signing a fixed-price contract, suppliers and end users should come to an explicit agreement regarding the entire, reasonably anticipated amount of any added risk premiums. Alternatively, if a customer opts for other than a fixed-price contract, the supplier should clarify the potential risk for price increases and the conditions under which they might occur.

This accommodates for contingencies in either direction. If actual costs exceed projections on a fully fixed-price contract, the supplier assumes the added expense. If final costs are lower than projected, the customer still pays the agreed amount. For this approach to work effectively, however, customers and consultants must review all regulatory and material adverse change language carefully before finalizing an agreement.

To keep “fixed” price as fixed as possible, customers should take these five steps when comparing fixed-price products:

  1. Users should examine contracts to identify circumstances under which increases may be imposed. The broader the language, the less “fixed” a final price is likely to be.
  2. Customers need written assurance that they will reap the benefits if legal or regulatory changes result in lower costs if they also are exposed to cost increases.
  3. End users should understand their right to take issue with pass-through costs. Customers who refuse to accept this cost should be clear about potential consequences.
  4. End users should consider a supplier’s track record in invoking regulatory change provisions. Customers have the right to this information. They should ask suppliers to disclose in writing prior circumstances under which they have instituted price changes over a reasonable prior period.
  5. Customers should be careful when suppliers adopt a price-adjust approach by including a cost component estimated at either its current or a stipulated level. This level might even be lower than current costs. If actual costs end up higher than stipulated or current levels, that cost passes through to the end user.

This clause often causes confusion. Asked if a particular cost component has been included in a quoted price, a provider can say “yes,” even if it is only included up to a certain level.

Yet the price-adjust concept can help customers and consultants when there is uncertainty around the timing or cost of new price components. In this case, the concept can facilitate a knowing transfer of risk and help avoid a premium, which might benefit customers; however, when the concept is used less transparently, clear-cut price comparisons are harder to make.

Commercial energy users can enjoy significant savings when they purchase electricity from reputable, transparent suppliers in a fair and open market. But customers should exercise diligence to ensure comparisons are genuine and legitimate. Energy users should demand clarity and full disclosure when making price-based decisions. That is the best way to ensure a “fixed” price remains fixed.

Author

Richard D. Rathvon is vice president for retail commodity services at ConEdison Solutions. He is responsible for leading the company’s retail electric and gas commodity businesses and provides leadership for all aspects of the retail business including sales, marketing, product development and support operations.

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