Monday, September 1, 2008

Energy Service Companies Offer Alternative Electricity

Alternative energy service companies (ESCOs) are offering to supply gas and electricity cheaper than large, established utility companies like Con Edison, which still delivers the power even if people sign with ESCOs. Part of the ESCO multilevel marketing business model is like Amway, people sell friends the natural gas or electricity service who then sell friends the service, with each seller getting a piece of the recruit’s spending in return. The approach is a byproduct of utility deregulation that began in the 1990's with broken-up utility monopolies now facing competition from companies such as Direct Energy Services, IDT Energy and Ambit. ESCOs are eager to capitalize on fears over high fuel prices and use mass mailings, Web sites and door-to-door salespeople to recruit customers from Con Ed by promising they will save 7 percent on their supply cost for the first two months, and avoid taxes on the delivery of that supply. Direct Energy estimates that customers in a typical New York City apartment can shave about $6.50 off their monthly electric bill. Companies offer perks, too. Energy Plus gives customers bonus miles on various airlines for every dollar they spend on electricity.

The network-marketing model is preferred by some companies, betting that people are more likely to buy electricity from someone they know than from a stranger at their door and that sales agents who earn residuals from those they enlist will be more motivated than those who work for a salary or straight commission. With some ESCOs, consultants pay $399 (plus $25 a month for a personalized Web site) and the initial $399 sign-up fee is recouped by signing up 30 new customers within 12 weeks. Each month, consultants get 5 cents to $5 for each customer, depending on when they signed up and their energy usage. There are bonuses for signing people up as consultants, and, as with so many network-marketers, free trips to Las Vegas or Atlantic City.

But ESCOs operating in New York have caught the attention of state regulators and consumer advocates, who say some sales representatives have inflated potential savings, misrepresented contracts and been overly aggressive with vulnerable constituencies like the elderly and nonnative English speakers. Some agents have been accused of exploiting the complex way gas and electricity is priced and the difficulty of deciphering which companies offer the best deals.
Con Edison estimates rates on each month’s bill and later reconciles them based on actual prices that fluctuate daily. ESCOs generally offer fixed-rate one- and two-year contracts, ignoring the volatile market; they also post average rates on Web sites like one from the State Public Service Commission,, potentially confusing people about their actual costs.

Since January 2007, the state’s Public Service Commission has received nearly 3,000 complaints about the 50-plus ESCOs operating in New York, In July, U.S. Energy Savings agreed to pay $200,000 in costs and penalties after customers complained to the state attorney general’s office about $600 termination fees they had to pay to cancel long-term contracts. Nationally, some ESCO customers have found themselves double-paying for power, when the some companies went out of business before the term of a prepaid contract was up, forcing them back to the big utilities. The Consumer Protection Board and New York City Department of Consumer Affairs have urged the Public Service Commission to make mandatory the voluntary guidelines that were developed by the ESCOs and the commission in 2006. (Thirty-one ESCOs in New York had signed on by March.)

Many customers should be very careful in considering the ESCO service because it can be a complex affair to calculate whether savings are really accomplished. Most people have a hard enough time just understanding their regular bill. According to Con Edison, savings are generally insignificant for residential customers, who use relatively little power.

Consultants earn money by getting people to sign up with a genuine gas and electricity provider, and by commissions on fuel and power purchases by customers, as well as by signing up new consultants. The service provides customers with a chance to save a few dollars on their electric bill. In one example one person recruited 10 people, who recruited enough people to build him a network of 1,030 customers. The person claimed to earn about $1,500 a month. Shell Energy Trading, a subsidiary of Royal Dutch Shell, sells energy to ESCOs. (The New York Times, 8/31/2008)

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