Why Switching to an Alternative Energy Provider Could Cost You Big If You're Not Careful

If you live in one of the nearly two dozen states or the District Columbia that allow residential utility customers to pick the company that supplies their electricity and/or natural gas, you may have received a letter, phone call or visit from an alternative energy supplier promising big savings or benefits if you sign up for its service. If you’re like a lot of people, you have no idea how to decide whether you should switch from your traditional electric or gas company’s standard service. Or if you did make the change, you may be wondering if you saved anything or even ended up paying more.


Energy choice is complicated. Energy choice, which is nearly 20 years old in some states, promises low energy prices for consumers, as suppliers buy electricity or natural gas on the wholesale market and resell it to retail customers in a competitive environment. But whether those lower prices actually have occurred depends on whom you ask.

In April, the COMPETE Coalition, an industry group that supports electric competition, released an analysis of electric rates from 1997 to 2014 that says residential rates have risen less than inflation in states with competition, while rates in other states have gone up more.

But that same month, the American Public Power Association, which represents more than 2,000 community-owned electric utilities, says electric customers in deregulated states pay more. For example, in 2014, it said, customers in deregulated states paid 3.3 cents per kilowatt-hour more on average than those in states that haven’t adopted competition. That’s about $30 a month more for an average residential customer, who uses about 900 kilowatts of electricity each month.

One thing is certain. Choosing an alternative supplier is a complicated and often frustrating task that has left some people in energy-choice states paying much more than they would have had they stayed with their traditional utility’s standard service. Part of the reason is that there can be many companies competing in a given market, offering different deals and rates that can change unpredictably and be hard to compare. Many customers of alternative suppliers don’t even know the rate they were charged in given month until they receive their bill.

Also, in their effort to pry people away from traditional utilities, some alternative suppliers have resorted to high-pressure and deceptive sales practices, sometimes offering below-market teaser rates for a short period and then moving customers to variable rates that can be many times those charged by their traditional electric or gas company.

How energy choice works. Thirteen states have electric competition for a large percentage of their residential customers, and 15 states have residential competition for natural gas, according to the American Coalition of Competitive Energy Suppliers. In many states, competition is available only in certain areas, usually those served by a traditional investor-owned utility instead of by a municipal power company.

With competition, homes and businesses can buy power and/or natural gas from a supplier at unregulated rates. The traditional utilities continue to be responsible for distributing the energy, including maintaining the power or natural gas lines. Those who opt for an alternative supplier receive separate supply and distribution charges. Those who don’t choose, typically remain on a regulated default or standard rate.

To figure out whether you’ll save by switching takes a lot of research, a good understanding of your bill and the ability to do some complicated calculations. If the very concept of a kilowatt-hour makes your eyes glaze over, choosing an alternative supplier probably isn’t for you.

Complaints are widespread. Responding to growing complaints about spiking prices, deceptive practices and a lack of disclosure about rates and contract terms, Connecticut, which has residential electric competition, last year enacted an Electric Supplier Consumers’ Bill of Rights. Among the law’s requirements, electric bills must show the amount customers would have been charged had they stayed with their traditional utility’s standard service. And beginning July 1, bills also must display the current rate, the state’s default rate and the rate that customers will be charged the following month.

The state also has passed new legislation that is expected to curtail, although not totally eliminate, variable rates for residential customers. Currently, low teaser rates must be good for at least three months.

Connecticut lawmakers hope these and other changes will prevent the supplier abuses that have left people with unexpectedly high bills.

“Predatory practices had turned what was supposed to be cost-savings into a fleecing,” said one Connecticut lawmaker in a statement announcing the new law.

Other states react. Connecticut is not the only state to experience abuses with energy marketing.

The New York State Department of Public Service announced in May (pdf) that its consumer advocate was investigating one of the state’s largest competitive energy companies because of an increase in consumer complaints about higher-than-unexpected charges and other issues.

The agency said it already had determined that some customers may not have been properly notified when their contracts ended, that the company incorrectly calculated promised rebates and that there was an apparent lack of renewal notices and customer disclosure statements.

The agency said it was concerned about the company’s practice of moving customers from guaranteed saving plans into variable-rate plans that had significantly higher rates than the local electric utility.

In New Jersey last June, the state attorney general and board of public utilities announced they had filed lawsuits against three alternative energy suppliers that they said lured consumers into switching by promising savings and then increasing bills to what the state called “unconscionable levels.” In some cases, the state said, the companies charged electric and natural gas rates that were more than 700 percent higher than those charged by the state’s utilities.

The state said that some of the companies switched peoples’ service without their knowledge and made it difficult for consumers to reach customer representatives or cancel their service.

In January, the Massachusetts attorney general announced that a retail electric supplier agreed to pay $4 million to settle allegations of deceptive marketing and sales.

The state said the company, through its telemarketing vendor and door-to-door sales agents, misled people into signing contracts based on attractive introductory rates only to later move them to rates that were higher than those charged by the state’s utilities.

As in New Jersey, Massachusetts alleged that the company changed people’s service without authorization.

What to do

Keep in mind that even in states with competition, you can stay with your traditional utility, under a regulated standard or default rate. That’s probably good enough for most residential customers, except perhaps those who use a lot of electricity – for example to heat their homes, who might save by switching to an alternative supplier. (In at least one state, Texas, the default rate in deregulated areas is very high and not intended for customers to remain on for a long period.)

If an alternative energy supplier contacts you or you want to research energy competition, start by visiting your state regulators’ website, where you’ll find advice and a summary of your rights.

If you’re unsure if energy competition is available in your area, check the list provided by the American Coalition of Competitive Energy Suppliers. The coalition site also has information on how to select an alternative supplier, including advice about understanding an energy offer and questions to ask. Click on the Consumer Tools tab.

Review multiple offers. Many states provide a list of approved suppliers. Some, including the Texas Power to Choose website, show current rates and plans. Others have links to the suppliers’ websites, where you can get more information. Also check with your traditional utility, which may have its own alternative supply option.

Examine plans carefully. Thoroughly examine the details of the plans you’re considering. You can do that on the suppliers’ websites and by calling and asking questions. Make a chart to use when comparing plans and companies.

Among the questions you should ask are:

  • Are rates fixed or variable? If variable, how much can they change and how are the changes determined? If you’re offered a fixed rate, find out how long it will last and what happens when it ends. If you’ll be switch to variable rates, for example, will the change be automatic or will you be asked for your consent?

  • Is there a deposit or any fees, including for enrollment or late payment? What are your payment options?

  • Is there a contract? If so, how long is it and is there an early termination penalty? Does it automatically renew and, if so, is it at a fixed or variable rate? How much notice must you give if you don’t want to renew?

  • Will you receive more than one bill? In some instances, you may receive separate bills, one from your distribution company and another from the supplier. In other cases, the charges will appear on a single bill.

  • Are you allowed to switch to an alternative energy supplier if you participate in your state’s energy assistance program? If so, does switching affect the assistance benefit? (Verify with your state.)

Compare carefully. Figure out how much you’re likely to save, if anything. You may be able to use your previous years’ electricity or gas bills to project your energy use. But remember that energy prices fluctuate, along with the amount you’ll use.

If you’re not sure how to calculate your bill, factoring in both the supply and distribution charges, ask your utility or check your regulators’ website. But don’t expect it to be easy.

Contact your current supplier. Ask your current utility if there are any fees, bill adjustments or any other charges if you switch to another company.

At least one state, Rhode Island, requires the major electric utility to retroactively recalculate the bills of customers who switch while on the utility’s six-month fixed-rate price option. As a result, those customers who switch during the fixed-rate period can end up with an unexpected one-time charge or credit. For some residential customers, the charge has been hundreds of dollars.

Rhode Island regulators are reviewing the bill adjustme​nt requirement. Massachusetts and New Hampshire eliminated so-called bill recalculation in their states in April.

Research the company. Some state regulatory websites provide complaint information about alternative suppliers. For example, New York regulators keep an annual residential scorecard that shows the complaint rates by company. Also look for a company report at the Better Business Bureau. Finally, try a web search using the company name and such terms as “reviews” and “complaints.”

Read the contract. Before agreeing to switch, read the contract fine print carefully to verify that it matches the plan details you received from the company or its representative. If there’s anything missing or you don’t understand, ask questions. Always get the answers in writing. Resist any contract that allows rates to vary unpredictably. For fixed-rate service, be on the lookout for high enrollment fees.

Check your bills. Once you switch, careful monitoring of your monthly bill is crucial to make sure there are no surprises.

If you want to compare the charges to what you would have paid had you not switched, try asking your traditional utility. Some state regulatory websites also display current and past default rates. But again, don’t expect a direct comparison to be easy.

Read communications. Don’t ignore any letters, email or other communication from your supplier. It could be a notice, for example, that your contract is ending and that your rate will change.

Complain. If you believe a supplier misrepresented its charges or service, complain to the company. If that doesn’t work, contact your state utility regulators and consumer protection agency. Also file a complaint with the Better Business Bureau.

Review your options. Revisit your energy choices at least annually, whenever a supplier changes its service or your contract ends.

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