For the first time since its inception, the alternative electricity supplier industry in Connecticut is losing customers.
After seven years of rapid growth, suppliers lost 8 percent of their customer base in the last 12 months as rising electricity prices and questionable marketing tactics have sent residents and businesses retreating back to utilities, regulatory data shows.
Borne out of the state’s 1998 utilities deregulation, suppliers serve as brokers between power plants and ratepayers, and were designed to offer customers a cheaper alternative to utilities, which charge a passthrough standard service rate established by the Public Utilities Regulatory Authority (PURA).
While utilities charged a default rate set annually based on three years of electricity prices, suppliers can negotiate rates with customers based on real-time wholesale market prices. That allows suppliers to be more responsive to falling market prices and typically offer cheaper rates than the state’s two utilities — Connecticut Light & Power and United Illuminating.
Suppliers had seen their customer base grow significantly over the years from 49,521 in 2007 when the industry first started picking up steam to 730,500 by Feb. 2013, which represents half of all electricity consumers in Connecticut, PURA data shows. Today, 64 companies compete as suppliers in Connecticut.
That price advantage, however, diminished over the past year as wholesale electricity prices spiked, exposing many suppliers’ tactics of signing up customers at low introductory rates and then hitting them with higher variable rates when electricity prices soar.
That led many customers to receive eye-popping bills earlier this winter.
As a result, suppliers’ customer base fell 8 percent to 672,440 in February, according to PURA filings. Even worse, the suppliers’ most lucrative customers — commercial and industrial businesses — left at an even faster rate: 9 percent retreated back to the utilities.
“It was a crazy market,” said Michael Fallquist, CEO for Stamford-based Crius Energy, a parent company for suppliers. “People saved a lot of money in this industry, and now in the short term, that has sort of gone the other way.”
Variable rates were a good deal for customers when wholesale electricity rates were falling, Fallquist said. Instead of being locked into a rate for a year, customers could achieve savings on a monthly basis as their rates were adjusted to coincide with the price drops.
The cost savings to customers was so significant that Gov. Dannel P. Malloy proposed in 2012 switching all the remaining utility standard service customers to alternative suppliers, but the state legislature shot down the idea.
Now with wholesale electricity prices rising — mostly due to natural gas pipeline constraints, especially in winter — the variable rate rises each month, Fallquist said.
Customers using suppliers now pay a premium over the utility rates, according to an Office of Consumer Counsel report. Suppliers’ customers in CL&P’s territory paid 3.19 cents per kilowatt hour more than the default rate in September, while supplier customers in UI’s territory paid 3.41 cents more in December.
It is important to note a customer’s contract with a supplier only impacts the generation portion of their utility bill, as opposed to other charges like transmission and distribution or taxes. Utilities, which still send the bill to customers, make no profit on the generation charge regardless of whether a customer uses a supplier or default rate.
In January, Consumer Counsel Elin Swanson Katz and Attorney General George Jepsen warned customers that suppliers were charging variable rates of more than 17 cents per kilowatt hour, nearly double the standard service utility rate. Jepsen and Swanson Katz specifically named 10 suppliers charging the higher rates.
“There is a lot of bad publicity out there, and it is important for the public to know there are companies here that are doing the right thing,” said David Feldman, executive vice president of Norwalk electric supplier Abest Power & Gas Co.
Feldman and his partners — former employees at other suppliers — founded Abest in 2013 in response to the rising complaints about the industry. Instead of worrying about variable rates and month-to-month profits, Abest wants all of its customers on a fixed annual rate, so they won’t have enormous price swings. The company has 3,098 customers.
“I have enough margin in the summer months where I know at the end of the day I will remain solid,” Feldman said. “If I try to make money in the wintertime, I’m not going to make it.”
In addition to deceptive introductory rates, PURA is investigating other supplier practices, such as aggressive door-to-door sales, telemarketing, and flat out lying to customers about the difference with the standard service rate.
“Everybody has fallen into the habit of call centers and door-to-door sales … and those are the customers who are going to switch and switch and switch, leaving you to always chase the next customer,” Feldman said.
More suppliers will switch their customers to fixed-rate contracts, said Fallquist, who had one of his subsidiaries, Public Power, lose 25 percent of its customer base and singled out for its high variable rates.
“It is an evolving industry, and we need to keep looking at our practices,” Fallquist said.
