Power shopping: Is switching providers worth the risk?
Public utilities used to have monopoly power. But now that Texas, Pennsylvania, New York and other states have deregulated their energy markets, many homeowners are free to shop, compare and select an electricity or natural gas provider that meets their own preferences.
Whether it makes sense to shop around depends on which state you live in, how much energy you use and whether you have a personal preference for renewable or so-called "clean energy" sources, says Tyson Slocum, director of the energy program at Public Citizen, a nonprofit public advocacy organization in Washington, D.C.
Saving money is less likely to be a top factor, Slocum adds, since the lowest rates typically are negotiated only by large commercial and industrial companies that use mega amounts of electricity.
"The ability of individual households to save money in the current market is limited," he says.
What's more, the risks of a bad choice are real.
Selecting an alternative provider means you'll be "leaving the fully regulated protection of your state PUC [public utility commission]" and any consumer protections will be "largely articulated by the terms of whatever contract you sign," Slocum warns.
Most PUCs are quasi-governmental agencies that can regulate terms of service, impose safety requirements, help to ensure adequate supplies and resolve consumer complaints. But their powers are state-specific, so depending on where you live, you might get a lot or a little protection. That means leaving the PUC might be a big loss or a small one.
"There is," he says, "a shift of responsibility onto the consumer to fully understand what can be a legal disclaimer document, which sometimes isn't easy to decipher." This technical legal language might include complicated pricing rules that could affect your mortgage rate.
Slocum says another risk is that wholesale energy price fluctuations could expose you to significantly higher rates in the future, even if your initial new rate appears attractive. While all energy customers are vulnerable to rate increases, some PUCs can quash increases they deem unjustified. If you leave your PUC, you no longer have that protection.
Questions to ask
If you want to shop around, find out which markets are deregulated in your state, which companies offer service in your area and what options you'll have if you make a switch and aren't happy. Some companies require multi-year commitments and some states prohibit switching back to your current company, known as the "incumbent utility," Slocum explains.
Also, research what has changed in how energy services are provided in your state. In many cases, the current utility company continues to provide your power behind the scenes even if you technically purchase your electricity or natural gas from an alternative supplier. The sales and customer service departments change, although the power source is the same.
Other questions to ask, according to various state PUC websites, include:
- Is the supplier licensed by the PUC?
- What's the price of electricity per kilowatt hour (kWh)?
- Is the price fixed or variable (or floating) based on usage or the time of day?
- Does the company charge a monthly minimum even if usage drops?
- Are all taxes, charges and fees included in the price?
- How long is the contract term?
- Is the rate fixed for the contract term or can it vary?
- Is a deposit required?
- What are the payment options?
- Does the company offer energy from renewable or clean sources?
- Does the company offer a billing plan that spreads the cost of higher-usage months throughout the year?
- If you choose the provider, when will the switch become effective?
- Does the company charge a setup or other fee at the time of the switchover?
- Does the company charge a cancellation fee or penalty if you later want to switch providers?
Some PUCs offer shop-and-compare websites for consumers. Examples include the ElectricChoice.com and PAPowerSwitch.com. These websites are a good place to find state-specific consumer information, FAQs, tips and customer service scorecards, in addition to search functions that can help you research and compare offers.
Third-party websites such as SaveOnEnergy.com and WhiteFence.com also offer shop-and-compare search functions. Slocum says these websites are a "great resource for comparison shopping."
WhiteFence.com CEO Bob Harris says budget-conscious homeowners can use the website to find a plan and provider that can save them money while eco-conscious homeowners can shop around for sustainable or renewable energy sources.
"We now have a choice," Harris says, "and there are resources on the Internet to help you find the right plan."
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Marcie Geffner is an award-winning freelance reporter, writer, editor and blogger whose work has been published by MSNBC, CNBC, Yahoo! Finance, Fox Business, Bankrate.com, AOL Real Estate, ThirdAge.com, Fidelity.com, Inman News and dozens of major U.S. newspapers. She holds a bachelor's degree in English from UCLA and MBA from Pepperdine University. You can follow Marcie on Twitter: @marciegeff.