Margaret C from Hartford, CT. Eversource delivery territory. Client is a large office complex that signed a 3-year competitive supply contract with a REP at what looked like a great rate — $0.072/kWh fixed. But the contract has a footnote that says capacity charges are passed through at actual cost and are not included in the fixed rate. During winter months the capacity pass-through added about $0.008/kWh. But during the summer capacity obligation months (June through September), the pass-through jumped to $0.031/kWh. So the all-in summer rate was $0.103/kWh — substantially higher than Eversource default service at $0.089/kWh. The client signed the contract thinking they were locking in $0.072 flat. They had no idea about the capacity pass-through.
REP contract had a hidden capacity adder that tripled during summer
Margaret, capacity pass-through clauses are the most common gotcha in competitive supply contracts. The base energy rate looks great because it excludes the most volatile cost component. REPs know that capacity prices spike in summer and by passing those costs through, they protect their margin at the customer expense. This is not technically a billing error — the contract allows it. But it might be a sales practice issue.
I see these capacity pass-through contracts all over New England. Some REPs are transparent about it and show the customer an all-in price estimate. Others bury the pass-through in footnote 14 of a 20-page contract. Margaret, does your client contract have an early termination clause? If the all-in cost exceeds default service, switching back mid-contract might be cheaper than riding it out, even with the penalty.
Vince, the early termination penalty is $25,000. The contract has 14 months remaining. If the all-in cost exceeds default service by an average of $0.014/kWh over 14 months at 500,000 kWh/month, that is $7,000/month or $98,000 over the remaining term. Even with the $25,000 termination penalty, switching back to default service saves $73,000. But the client is nervous about paying the penalty.
I ran a detailed comparison: remaining 14 months on the REP contract all-in vs Eversource default service. The REP contract costs $98,000 more. Minus the $25,000 early termination fee. Net savings from terminating: $73,000. I also got quotes from two other REPs for a fixed all-in rate (no pass-throughs) and the best quote was $0.081/kWh — $8,000 less than default service over 14 months. So the optimal strategy is terminate the current contract ($25,000 penalty), sign with the new REP at $0.081 all-in, and save a net $81,000 over 14 months compared to staying on the current deal.
Margaret, before your client terminates, check whether the REP contract has a force majeure or material change clause. Some contracts allow termination without penalty if there has been a material change in market conditions or regulatory rules since signing. If Connecticut had any capacity market rule changes since the contract was signed, that might be an exit path without the $25,000 penalty.
Yuri, great idea. Checked the contract. There is a material adverse change clause that allows either party to terminate if regulatory changes increase costs by more than 15%. The ISO-NE capacity market had a significant rule change in 2014 that increased capacity prices for the 2015-2016 delivery year. That change directly caused the higher summer pass-through. I believe it qualifies as a material adverse change. Sending a termination notice citing that clause.
The REP pushed back on the material adverse change argument for about 3 weeks. Their legal team eventually conceded that the ISO-NE rule change did constitute a material change under the contract language. Termination without penalty. Client is now on a new all-in fixed contract at $0.081/kWh. Annual savings vs the old REP: approximately $69,000. My fee is based on the first-year savings. Best deregulated market case I have worked.
From a hidden capacity pass-through to a $69K annual savings with no termination penalty. Margaret, this case shows why auditors need to understand competitive supply contracts as deeply as they understand utility tariffs. The contract IS the tariff in deregulated markets.