Promotions for cheaper energy flooding your mailbox? Here's how to understand the offers.
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About a year ago, a friend told Frank Fehn he could buy his electricity through a different provider than Atlantic City Electric without interrupting his service. “I thought that was kind of unbelievable,” admits Fehn, a Tuckerton resident. But the idea of saving money on his electric bill prompted the retired public-school superintendent to do some research online.
He compared deals from a number of third-party energy suppliers and chose to sign on with Direct Energy, which advertised initial rates that were lower than what he was paying and had a no-strings-attached policy. Fehn didn’t have to sign a long-term commitment, and there was no cancellation fee if he wanted to make another switch. “If another provider offered something better in the future, I could change,” he says.
But the proof was in the billing. “I still thought perhaps it was some kind of bogus marketing tool that had me switch over, and I wouldn’t realize a savings,” he says. “But there was no interruption [of my service] at all, and as I examined my bill, it showed that I was saving money on a monthly basis.”
Prior to 1999, only local utilities in New Jersey could generate electricity and transmit the power to homes and businesses in their service territory. But the Electric Discount and Energy Competition Act, which became law on August 1 that year, deregulated the generation sector, giving New Jersey electricity customers the right to choose which company would supply them with electric power.
But while electric choice has been available in all New Jersey service territories since 1999 (and many commercial and industrial customers have been comparison shopping for years), most residents weren’t aware they had options until 18 months ago. That’s when market conditions prompted a number of third-party suppliers to enter the residential market. Almost overnight, homeowners’ mailboxes began to fill up with brochures promising energy savings from a host of companies few people had heard of.
In New Jersey, if residents choose to remain with their public utility, they pay a fixed price for electricity that is determined at the annual Basic Generation Service (BGS) auction in February. “The fixed price is a combination of the results from the most recent auction, the auction from last year and the results of the auction from two years ago,” explains Jay L. Kooper, director of regulatory affairs for Hess Corporation, an energy supplier serving commercial customers in New Jersey. In other words, says Kooper, the fixed price is “not a market-reflective price. It’s a three-year average.” Currently, the price is based on an average of prices from the BGS auctions in 2009, 2010 and 2011.
Some maintain the BGS auction structure protects customers from market volatility. “Sometimes we’re a little below market price, sometimes we’re a little above,” says Tony Robinson, PSE&G’s director of electric and gas acquisition. “Right now we’re a little above.” But, Robinson adds, there will be a decrease in the fixed price starting in June, when the lower February 2012 auction results become a factor.
Third-party suppliers, on the other hand, base their energy rates on the current market price. “Competitive suppliers can give you the best up-to-date pricing on the spot; whereas with the default service, you’re stuck with what was obtained in prior years,” says Anne Lindner, vice president of energy policy at Constellation Energy.
Third-party suppliers say the BGS’s averaged fixed prices are what kept them out of the residential market until 18 months ago. “Until the latter part of 2010, the long-term supply purchased by the utilities was lower than the current wholesale market rate,” says Mike Beck, vice president of Direct Energy. “This flipped in late 2010 to the point that the utility price is now higher than market prices.” Third-party suppliers noticed the “flip” and entered the market.
While there’s money to be saved, most residents choose to remain with their public utility. According to the Board of Public Utilities, only 11 percent of New Jersey residents have switched from their default provider to a competitive supplier; Pennsylvania and Connecticut, on the other hand, have conversion rates of 27 percent and 42 percent, respectively. Even residents who are aware they have the option to switch are reluctant, because they are skeptical of the marketing offers and don’t feel educated enough about the system to make an informed decision.
There are 24 third-party electricity suppliers licensed by the BPU serving residential customers in New Jersey. Residents who have made the switch say they were hesitant at first, but their experience has been painless and they are saving money. “I haven’t had any issues,” says Gina Tews, a Branchburg resident who signed on with Dominion Energy Solutions last spring. “I figured if they could give me a better rate, electricity is electricity. And I’m saving money.”
There are multiple charges that appear on an energy bill, including basic generation service, delivery service and customer charge. Switching to a third-party supplier only affects the basic generation service charge; the other charges tend to stay the same. This can cause confusion and frustration for some consumers who expect a percentage of savings off their entire bill.
“Consumers may misunderstand how much they’ll save,” says J. Greg Reinert, the BPU’s director of communication. “There’s people who believe they’ll save [a certain] percent off their electric bill, but it’s not the total bill, it’s only the price of electricity.”
For example, a recent residential electric bill from Jersey Central Power & Light came to $176.66, but only $126.91 of that sum was the actual energy charge. The balance was a combination of a customer charge and delivery service charges. From February 4 to March 6, the customer’s electricity usage was 1,093 kilowatt hours. JCP&L billed at the rate of .11611 dollars per kilowatt hour, which came out to $126.91.
During that time, North American Power customers at the same usage level paid .0899 per kilowatt hour, which totals $98.26. That’s a savings of $28.65. Rates vary by usage and third-party supplier.
While there are savings to be had, customers may be disappointed if they don’t understand the terms of their agreement, which vary from supplier to supplier. “Everybody has to read what they’re being offered,” Reinert urges. “They have to read the contract and understand the contract.”
Gail McGuinness, a Branchburg resident, researched electric choice online before deciding to become a Viridian customer last summer. “It’s very easy to find information online,” she says. “You can go to the New Jersey Board of Utilities website and collect information there. They actually state in one spot that the variable rates that are offered through third-party utility companies tend to show you a savings. But you can get information on each one of the companies they approve of, and when you get the flyers, look at them, look at the fine print.”
One important question to ask is whether the rate is fixed (a set price for the term of the contract), floating (the price rises or falls on a monthly basis as it tracks the wholesale cost of electricity), or hybrid (a combination of fixed and floating). You should also know the length of the agreement; if there are any penalties for terminating the contract before it expires; if the quoted price includes state sales tax; and the billing options.
Taff Tschamler, senior vice president of business development for North American Power, likens the deregulation of energy to the deregulation of the telecommunications industry. “Companies like MCI and Sprint had similar challenges initially. People thought, ‘Why would I want to leave AT&T?’” he says. “It’s a natural reaction for customers to be skeptical because it’s completely new, and they’re used to having an old-regulated utility.”
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