Joe Buyer from ABC Company needs to sign a new electricity supply agreement. He does his due diligence and signs up with Superman Energy Supply for a 3 year fixed rate of 5 cents per kWh. Superman Energy Supply properly enrolls the account to its service and issues the first invoice. Joe Buyer reviews the bill and all looks perfect. He reviews the next few months diligently but then something changes. Joe Buyer gets lulled into a satisfaction trance. From this point forward his eyes barely glaze over the invoice before stamping his approval. Suddenly it is budget season and his boss wants to know why they blew their electric budget. He pulls recent invoices and realizes he has been paying 11 cents per kWh for the past year costing his company $50,000.
This sounds like a totally farfetched scenario except that I saw it happen last week. While most electricity suppliers in the market care about their customer’s experience, there are some suppliers that do not have the integrity you’d expect. Their business models are built around high margins realized when customers continue to receive supply beyond their original term. This is a huge gravy train for these suppliers as the contract language for rates beyond the original term is often vague … cha ching!
There are two provisions that suppliers commonly use in your electric supply agreements that allow them to charge a price beyond the price in the original term:
Hold Over Rate – Variable each month
Auto Renewal – New fixed rate for a new term to be determined by the supplier if customer does not reject offer by supplier
The more problematic of the two for customers is the auto renewal. This contract provision places the burden on the customer to formally reject the renewal rate offered by the supplier. If the customer does not provide the rejection in writing (reason does not matter … on vacation, sent to wrong contact, thrown away as junk mail, dog ate it), then it is deemed acceptance of the offer.
This is obviously a renewal booby trap set for customers by the supplier. The supplier has all the knowledge and control and will use this asymmetry on the customer at their option. I have heard horror stories of outrageous auto renewal rates. Depending upon the supplier, there may be early termination fees if the customer tries to terminate the then-renewed agreement.
Hold over rates vary each month typically with an escape clause allowing customers to terminate without penalty. These rates follow the market up and down plus add a sizable margin from the supplier. There are two benefits to hold over rates for the supplier. Monthly variable prices pose much less risk and are easier to manage than fixed rates and they usually contain more margin since they are not in competition with another supplier. For the customer, these rates can be a benefit depending on the market at the time, however, good chances are they are paying more margin to the supplier and do not have the budget certainty of a fixed rate.
Both these contract provisions are activated when the customer takes their hands off the wheel and enters a dreamy state of trust with their supplier. Although most suppliers will value that trust, there are some that will take advantage of it.
Protection from overcharges when the term of your supply agreement has expired is a matter of contract negotiation and management. Here is what to do: First, if possible, negotiate with your supplier to remove any auto renewal language that exists in your contract. This will protect you against the possible worst scenario outcome. Second, stay engaged and aware of your supply contract term. This is a key service most professional brokers offer so insist that your broker keep you informed. Vigilance is key, otherwise the satisfaction trance can be costly.