Over the past couple of years, we have seen electric suppliers’ fixed rate offerings devolve into agreements that are less and less fixed. The Public Utility Commission of Ohio recognized the broken “fixed” rate situation, and this past November mandated guidelines for electric contracts being marketed as fixed.
We initially reported this development in our last newsletter, but what about the underlying issues that led us here, and what should customers expect going forward?
The Roots of Pass-Through Charges in Fixed Rate Contracts
Occurrences over the past few years, such as the 2014 Polar Vortex and the 2015 PJM capacity performance reform, have encouraged suppliers to adopt clauses within their agreements to protect them from the financial risks of events outside of their control. These clauses allowed suppliers to pass-through additional costs to fixed rate customers based on certain events, potentially making the rate not so fixed. Regulatory change clauses have become common among the majority of supplier contracts, as it protects and allows them to pass through cost increases based upon unforeseen governmental or regulation changes.
The devolution from supplier protection to price manipulation
In a free market, businesses must often adapt or die, and this has been true of the deregulated electric market. Suppliers who have become less competitive, have had to make business decisions into finding ways to lower their rates to appear in line with their competitors. Until this past November, there was little regulation to these pass through clauses within fixed price agreements. This created opportunities for noncompetitive suppliers to further broaden language within their fixed price agreements. In doing so, these suppliers were able to move risk to the customer and shave costs off of their quotes, making their rates seem more appealing. Material adverse change clauses allow rates to be adjusted or costs to be passed through based on component costs that are not yet realized, or even ones that are likely to change. Examples of such would be changes in initial contracted amounts of usage and/or capacity obligation (PLC’s).
Is the fixed price issue fixed?
The PUC’s new “fixed means fixed” guidelines are now active as of January 1st, 2016. While the commission attempted to make buying electricity less cryptic and deceptive for customers, the only real change we expect to see is the title of supplier offerings, formally known as “fixed”. For the most part these programs are suppliers’ standard offers, and whether they are now named Fixed Introductory, All Inclusive, Fully Bundled, Full Requirements, what have you, nothing has really changed, and the nature of power buying will still be as confusing for customers as before.
What’s important to take away from all of this is the same issues of evaluating; what’s included in a supplier’s rate, what’s missing, what could be passed through, all are expected to continue. A trained monkey can give you a piece of paper and point you to the lowest rate, but now more than ever it’s imperative for customers to understand the lowest rate may not be the lowest cost option.