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Are fixed-price natural gas plans worth it?

Before the natural gas market was deregulated in various parts of the country, everyone got their natural gas through what are now called traditional suppliers, such as Enbridge and Union Gas in Ontario. You can still get your gas that way, or you can sign on with a supply company that offers a fixed-rate price plan.

But do those plans, often sold door to door, actually save you money in the long run? While some people save a lot, some save very little and others actually lose money by locking into a fixed-rate contract depending on when they sign up.

Sales tactics
Traditional suppliers are not allowed to offer fixed-rate contracts, so if you stay with yours, you'll pay the market rate for your natural gas. Market rates are approved by a provincial regulatory agency, such as the Ontario Energy Board. The price you pay is adjusted up or down, and you pay or get rebates depending on whether market prices were higher or lower than forecast.

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If you choose a private supplier, whose prices are not regulated by the government, you'll often get a fixed-rate plan. These plans are often sold door to door, and aggressive and unethical practices abounded in the early days of deregulation. "One of these was called slamming," says Greg Scott, president of Energyshop, a web-based energy broker that compares prices of the various natural gas suppliers.

"This was where a salesman at the door asked to see your gas bill, then used the account information to write up a contract. They would hide most of the page from the customer then ask them to sign as proof the salesman had called on them. Without even realizing it, the person had signed a five-year contract locking in their natural gas supply rate."

This doesn't happen as frequently any more, says Scott, because of what's called a reaffirmation regulation. This means that in most cases, except for when you take the initiative to sign a contract yourself, the consumer must be contacted within 30 days of being approached by a salesman and has to state that he still wants the contract.

Savings vary
But what of the savings to be had if you sign up for a fixed-rate contract? "You're likely to save, but the question is how much," says Richard Zarzeczny, president of Enerdata, an energy information and consulting company.

Supply companies and utilities all buy their gas on the market and pay the going rate. Note, however, that the distribution portion of your charges still comes from your regulated utility, whether you choose a supplier over a utility or not. The difference is that suppliers are also allowed to hedge their bets by buying and selling on the commodities market, something utility companies aren't allowed to do. "Natural gas is a volatile market. It's a commodity market, and as with all of these, there can be wide fluctuations in pricing."

Zarzeczny says the industry predicts a five-per cent to 10-per cent increase in natural gas prices over the next five years.

"Competition, generally speaking, is good for consumers, but you have to put everything in perspective and look at what are the potential savings over the long run," he says. "If you estimate the average consumer spends $1,500 a year on natural gas, supply (the portion that can be purchased separately) represents about one-third of the cost to the consumer. Assuming a savings of 10 per cent, that represents $50 a year."

Energyshop has a five-year comparison of natural gas savings that shows that your savings with a fixed-rate plan over paying the market rate varies dramatically depending on when you signed a contract and at which rate. For example, as of May 2006, savings were $1,200 if you signed a contract in May 2002 but only $120 if you signed in August 2003. This analysis assumes you locked in at the lowest rate available on the first of the month, so these savings don't apply to all fixed-rate customers.

But timing is everything. Since fall 2005, consumers who locked in at the lowest fixed-rate price have actually paid more than those using the fluctuating market rates offered by their utility company.

Canadian RiteRate Energy, a no-frills, web-based gas supplier, also offers a calculator on its website to estimate your savings with its five-year fixed rate contract. I plugged in my postal code and usage last year: 2,797 cubic metres, lower than the Canadian average of 3,000. It found that over five years, I would save $62 per year compared to their closest competitor or $98 per year compared to their second-closest competitor.

Buying peace of mind
Toronto musician Bernie LaBarge recently became a RiteRate customer. He used the Energyshop comparison chart for his research and signed a five-year contract with RiteRate at 39.4-cents per cubic metre. (Enbridge currently charges 34.07 cents with a rebate of 6.24 cents for a net charge of 27.82 cents per cubic metre).

Wikant says that for comparison purposes, consumers should focus on the utility rate before any rebates are given since these aren't guaranteed and can fluctuate up or down.

LaBarge says he decided to lock in "because I just assume the prices are going to go up" and he wanted "no surprises." Experts say budgeting is one of the main reasons consumers choose fixed-rate contracts.

LaBarge says he doesn't know about penalties if he wants to get out of his contract, but this is something consumers should check out. Information about contracts is available on provincial regulatory agencies' websites. You should also read the fine print in your contract, because cancellation charges can be substantial.

For those who want to understand the vagaries of the energy commodity markets, there is no shortage of information out there. Consultants and market-watchers regularly issue pricing information, including forecasts, and investigate conditions that have or might affect prices (these include such things as hurricanes, heat waves, oil prices, political events).

But for those content to budget a manageable amount each month for home heating, it can be as simple as the bottom line. "In the short run, people panic when they see a rate increase because of the volatility of the market," says Zarzeczny. "In the long run, there's no reason not to go with a plan, and the biggest reason is that people are buying peace of mind."

Diana McLaren is a writer in Toronto.

-- Posted: Aug. 21, 2006
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