How to Read Your Energy Contract Like a Professional

Article by Constellation

Ask Yourself, “Is My Fixed Price Product Truly Fixed?”

The energy market has experienced a period of sustained, lower prices and growing volatility in some markets impacting many energy cost components. Changes to oil production, weather and the coronavirus pandemic continue to impact industry prices, creating persistent uncertainty for energy managers. As a result, customers are increasingly being strategic about their energy purchasing strategies, such as choosing fixed price energy products, to endure all of these circumstances.

While fixed price products seem like they can offer greater budget stability, it’s important to educate yourself about all cost components that make up your total energy costs.

Some supplier offers seem to have attractive prices, but these may exclude unknown, uncertain or unrealized cost components that are required for service. Instead of including these costs in the fixed price, these unknown costs may be deferred until they are realized and reflected on the customer’s invoice.

These pricing adjustments are often related to non-energy cost components, such as capacity, transmission and ancillary services. Without a proper understanding of the cost of these components and your risk tolerance, choosing a fixed price option based on price alone could prove to be detrimental to your bottom line.

At Constellation, we aim to educate our customers to minimize surprises on your bills and enhance transparency.

How do I spot these in a contract?

One common way prices can be changed is via a “regulatory change” or a “change in law” clause in the contract. While this language has been used to cover items related to an unknown or a future change in law, or a regulation impacting the cost to supply electricity to customers, some suppliers are revising or broadening their application of this contract language.

Here are just a few examples where change in law clauses have been used to change “fixed” price products to pass through costs to customers:

• Broadly labeling these changes as any change in governing laws, regulatory changes, independent system operator (ISO) rules and protocols, market rules, load profiles, or how a utility or ISO may calculate usage, or a change in interpretation or application of certain rules.
• Any utility change to a customer’s monthly capacity or transmission obligations.
• Change in fees or costs imposed by an ISO or government authority, or a change in application or interpretation of these changes.
• Any change by a utility, including a change in tariff, rate class, procedure or other process or change, that alters the supplier’s cost.

Here are some questions you can ask when reviewing the language in your contract:

1. What circumstances trigger a price increase? The broader the language, the less “fixed” the price tends to be.
2. Do I get the benefit if a change in law decreases a cost component?
3. What rights do I have as a customer to challenge a pass-through cost? What are the consequences if I refuse to accept the change?
4. What is the best practice of a particular supplier in invoking a regulatory change provision?

Two suppliers may have almost identical language but may have a very different history in terms of invoking the language. It’s very important to ask your potential suppliers to describe examples of invoked price changes.

Consider Your Options

By choosing a contract based on the lowest price without a full understanding of potential pass-through costs, you could be leaving your business exposed to more risk than intended. As an energy buyer, you can minimize your risk with various product solutions — especially during uncertain times — and by gaining a better understanding of your contract terms.

Constellation is here to equip you in managing your electricity costs and risk over time. Understanding capacity markets and other non-energy components will help you make an informed energy purchasing decision. Reviewing different ways to look at a “Fixed” price, including pass-through or price-adjust costs on transmission, capacity and ancillary services can greatly impact your invoice and actual costs. We will discuss these in more detail in the next blog post in the series.

Customers who choose from Constellation’s wide variety of solutions can expect a contract with clearly defined terms. To get access to more helpful Constellation communications and resources, subscribe to constellation.com/subscribe.