The Convenience of Paying More

Minnegasco's fixed-payment plan may be surprisingly costly

At first glance, the pamphlet tucked into hundreds of thousands of recent Minnegasco bills seems like an attractive, empowering option for consumers: The cover features an ominous photo of a snowplow and cars on a street during a storm. "Some things are hard to predict," the copy reads. "Your gas bill doesn't have to be." Inside the missive, Minnegasco assures that "The No Surprise Bill puts you in control."

The offer? "A guaranteed fixed monthly payment--NO mid-year adjustments or end-of-year balances to carry forward," explains a separate mailing to some Minnegasco customers. "Enrollment is limited and ends November 15, 2001. So sign up today."

In some respects, the timing of Minnegasco's offer--initially being tested as a pilot program, limited to the first 30,000 enrollees of the company's nearly 600,000 eligible customers--couldn't be better. Memories of the rolling blackouts that besieged California earlier this year have yet to fade, and the prices being offered under the plan are less than the average amount borne by consumers last year, when harsh weather and a relative scarcity of natural gas in the upper Midwest conspired to inflate heating bills. Coupled with the financial and psychological instability wreaked by the recent terrorist attacks, consumers are likely more amenable to paying a predetermined set price for natural gas over the next 12 months.

Becca Carr

But the fine print within the company's solicitations reveals some less encouraging details about the plan. Specifically, it states that those who sign up for the No Surprise Bill will be assessed a six percent program fee and a carrying charge. And it asks consumers to "Please note that depending on weather and natural gas prices, you may pay more or less for the No Surprise Bill than you would have under traditional billing options."

On the surface, it would seem that Minnegasco and those who enroll in the No Surprise plan are each bearing some risk in exchange for price stability. If the weather is severe enough to require ample amounts of fuel and the market price of gas is high, the fixed monthly cost would turn out to be a bargain. Conversely, if temperatures are mild and gas is cheap, those enrolled in the No Surprise plan would be locked in at an artificially high rate.

"We're trying to provide another service for customers, something that will give them some consistency in their gas bills. This offer is meant for customers who value predictability," says Jerry Daugherty, director of regulatory services for Minnegasco, which is still the name of what's now a subsidiary of Reliant Energy. "They may do better or worse in terms of the price they pay, but that's not the purpose. The purpose is to provide stability. And from our perspective, we are a utility company owned by investors who like to see some stability in our cash flow. So it really is a win-win situation."

Unlike its No Surprise plan enrollees, however, Minnegasco has been able to significantly hedge its own risks in the process. Over the summer, the company secured contracts with two natural gas suppliers who will provide them with enough fuel to meet the energy needs of the No Surprise plan's 30,000 consumers at a fixed price. One of the two suppliers is a company owned by Reliant Energy.

Minnegasco then went to WeatherWise, a Pittsburgh company that has developed a sophisticated computer modeling system used to calibrate a fixed charge for individual energy demand. Taking into account Minnegasco's gas costs and distribution charges, the weather patterns in the company's billing area over the past 20 years, and the energy use patterns of each consumer during the previous year, WeatherWise came up with what the firm's marketing VP, Doug Laderer, refers to as "an appropriate guaranteed annual gas bill" for every potential No Surprise consumer. Nearly all of the six percent "program fee" assessed to No Surprise customers goes to pay WeatherWise for its work, with the remainder used to supplement Minnegasco's marketing of the plan.

Programs such as No Surprise are a growing trend within the utility business: Minnesota is the twelfth state where WeatherWise has helped establish fixed-rate billing since 1996. "Customer response has been great," Laderer claims. "Typically, we have more than 90 percent of the eligible customers re-enroll in
the programs."

But most of that feedback was engendered during the flush economic times of the past five years. Now that money is tighter, will consumers be as likely to gamble on market conditions--and pay six percent extra for the privilege--for the convenience of a predetermined price?

Certainly owners of apartment buildings and small businesses, whose lives are especially simplified by a stable cash flow, and who are able to pass on energy costs to their tenants and clientele, are likely to be loyal to the No Surprise concept. Many of these storefront proprietors and owners of small rental properties will be able to meet the program's eligibility requirement that customers use no more than 5,000 therms of gas per year.

Others may simply be unaware of how much extra they might be paying. In the October 16 edition of the Milwaukee Journal Sentinel, for example, representatives from two of Wisconsin's largest utilities estimate a 30 to 35 percent drop in winter gas bills this season. Minnegasco's Daugherty estimates a more conservative, but still substantial, price decrease of 25 to 30 percent here in Minnesota. Normally, the state's Public Utilities Commission regulates energy prices on a monthly basis to ensure that consumers aren't paying significantly more than the market rate for fuel. But when a fixed-price plan has been agreed upon by the utility and the consumer, PUC financial analyst Jerry Dasinger says he is uncertain how that regulatory function will apply. Minnegasco, of course, would prefer No Surprises.

 
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