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March 14, 2011

Should you take BGE Home's natural gas deal?

Thanks to the alert readers relaying news of BGE Home's offer of a one-year natural gas contract at 67.8 cents per therm. Is it a good deal?, they want to know.

It's certainly one of the lowest fixed-price gas contracts in years. The cost of natural gas has plunged in recent years because the bum economy reduced global demand and because newly available shale gas has increased the U.S. supply. Take a look at BGE's commodity gas price in recent years. In January 2011 it was 63.04 cents per therm. In January 2010 it was 72.59 cents. In January 2009 it was $1.0371, and at one point in 2008 it hit $1.5763.

These fixed-price offers from BGE Home, Washington Gas Energy Services and others are alternatives to the standard offer from BGE. (Don't confuse BGE with BGE Home. Yes, everybody does.) The standard BGE natural gas product floats from month to month depending on the spot market and on what BGE paid the summer before for stored gas.

I'll lay out the pros and cons of the BGE Home deal.

Pro: Although 67.8 cents per therm is about 10 percent higher than the standard BGE price for this winter and could well be higher than BGE's standard price for next winter, standard prices are not likely to fall much farther. By locking in for a year you'd miss out on potential savings of

10 or 15 percent, but you'd insure yourself against, say, another Hurricane Katrina, which sent prices up to $1.63 per therm in November 2005. Locking in at 67.8 cents isn't nearly as risky as locking in at, say, $1.60 in September 2008, as many hapless BGE Home customers did. (By the next month the standard, floating BGE price was 93 cents.)

Con: There is no reason to think natural gas prices will be substantially higher next winter. My rule of thumb for these things is to say no unless they produce immediate and guaranteed savings. BGE Home wants 67.8 cents. But this month BGE's standard price is a dime less: 57.26 cents. Hedging always carries a cost -- the cost of paying the counterparty who shoulders the risk and the (frequently high) cost of trying to outsmart the market.

I'm not taking the BGE Home offer. One these days a hurricane will nail the Gulf again, gas prices will spike and I may be sorry I didn't lock in at some point. But whatever my higher costs then, I hope I will have saved much more in money and aggravation by avoiding lock-in deals in the meantime.

Posted by Jay Hancock at 6:01 AM | | Comments (4)
Categories: BGE/electricity
        

Comments

Thank you Jay for explaining the role that risk plays in deciding whether to take BGE Home's offer, especially when the standard floating price is lower. Risk doesn't come free but sometimes it can really pay off.

http://www.bge.com/vcmfiles/BGE/Files/Rates%20and%20Tariffs/Gas%20Commodity%20Prices/GasCommodity_SchedD.pdf

Hey J,

Thanks for this post. My wife received this offer and panicked because she did confuse BGE Home with BGE. The offer made it seem as though we had to choose now; telling us that the offer was only open to the first 2k customers; so she signed up for it. Now we know it wasn't mandatory and are willing to take out chances on the open market how can we go about changing our mind?

Mo
Hi Mo. If that's what you want to do, call them back and ask them if they'll rescind the deal. If they really are limiting it to 2,000 households, maybe they'll agree. JH

I do not trust BGE Home. A couple of decades ago, I sought out three bids for replacement of the oil-burning steam boiler. The three prices I received were:
$5400
$4500
$3600

BGE Home was NOT the lowest bid, and their bid was 'contingent' (I don't remember all the details, but 'contingent' on what was found as the work proceeded), the other two were firm-fixed price bids, no matter what other conditions were found.

BGE Home also wanted a higher up-front deposit; work scheduled at their convenience, not mine; a shorter time after work was completed for final payment; and a shorter period of warranty on all work.

Guess who I did NOT contract with?

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.
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