As oil prices fall, price caps become a hot-button issue

Heating oil prices are down from their fall peak, but some consumers with price caps are complaining that their dealers aren't passing along the savings to them.

Kathryn Wilson of Andover thought her price cap protection was finally going to come into play recently when her dealer, Alliance Express, pulled up for a delivery. She had signed a cap last fall guaranteeing her that she wouldn't pay more than $2.69 all winter and that she would pay less if the retail price fell below that level.

Just before her dealer arrived, Wilson had read in the newspaper that a survey by the state's Division of Energy Resources indicated the average price of heating oil in Massachusetts was $2.31 a gallon. The survey price was adjusted upward a week later to $2.35, but either way the price was well below her cap.

Yet when Wilson received her bill from Alliance she was charged her cap price of $2.69 a gallon. Alliance said its retail price -- what it's currently charging customers -- was $2.84 a gallon, nowhere near the statewide average. Wilson complained, but was told that Alliance was not included in the statewide survey and that its results had no bearing on the firm's costs.

''It's really hard for consumers to know what's going on," Wilson said. ''If you have a price cap, how do you know what the real price is for that company?"

Caps sounded great last fall, when energy prices were soaring in the wake of the Gulf Coast hurricanes, but they require a high level of trust on the consumer's part. Heating oil prices rise and fall on energy markets and in statewide pricing surveys, but what determines whether customers receive a price lower than their cap is the dealer's own internal costs, which only the dealer knows.

Thomas Kilgallen, director of customer service for Heating Oil Partners, the Connecticut corporate parent of Alliance Express, said the company's retail price is dictated by its cost of oil, the cost of insurance used to implement a cap, company overhead, and profit margins. Heating Oil Partners is currently operating under bankruptcy protection.

''What is the price of oil? Everyone thinks it's a simple question with a simple answer, but unfortunately, in this day and age, it's not," Kilgallen said.

He said thousands of the company's customers are paying less than their caps, but they have caps that are higher than Wilson's.

Jesse Caplan, head of the attorney general's consumer protection bureau, said his office would be interested in hearing from customers with cap issues.

Last fall, heating oil dealers warned Caplan there might be cap complaints this winter. The dealers said the volatile oil market had dramatically increased the cost of the insurance dealers use to offer oil at a price lower than the customer's cap. As a result, the dealers said, it would be difficult to offer below-cap prices unless market prices fell by as much as 40 to 50 cents a gallon.

According to the state's pricing survey, the average retail price of heating oil in Massachusetts has fallen 22 cents a gallon since the beginning of October, but half of that drop occurred in October with the other half spread over the last four months. The state survey gathers prices from 35 full-service dealers weekly.

The warm winter has depressed demand for heating oil, but it hasn't resulted in a steep price drop. Industry officials say geopolitical factors have kept the price of crude high, while slack consumer demand has stuck heating oil dealers with higher-cost oil, making it more difficult for them to lower their retail prices

Still, some customers have benefited from their price caps. Petro, the region's largest heating oil dealer, offered a different kind of cap this year. It set the ceiling very high ($3.20 a gallon) but promised immediate access to lower prices. Dan Donovan, president of Petro, said his cap customers are currently paying between $2.55 and $2.57.

Gary Anderson of Anderson Fuel in Scituate said his cap customers have paid less than their $2.80 cap all winter long. He said last week that his cap customers were receiving his current posted price of $2.46 a gallon.

Asked about a dealer with a much higher posted price, Anderson said: ''Theoretically, that dealer has some expensive oil that he's got to price out at a regular daily price."

Electricity prices shocking

Residential customers are paying the highest prices they've ever paid for electricity, and there's little relief in sight.

Because there's virtually no one trying to sell power to homeowners, the power distribution utilities are currently purchasing electricity on behalf of their customers. The utilities typically sign year-long contracts at six-month intervals for half their customer base and are moving toward even longer contracts.

The staggered long-term contracts tend to moderate price swings, lowering power prices when the cost of electricity is rising. But the opposite happens when electricity prices are falling, as they are now with the falloff in natural gas prices.

NStar, for example, signed a six-month contract for residential power in November, at the peak of the post-Katrina upheaval, that increased the power supply portion of a customer's bill in Boston by 83 percent, to 12.66 cents per kilowatt hour. Including distribution charges, the overall monthly bill for a customer using 500 kilowatt hours a month jumped to $107, the highest ever.

Natural gas prices have plummeted lately, but residential customers won't see any price relief until the distribution companies sign new power supply contracts mid-year.

Dominion Retail, one of only a handful of companies competing for residential customers, said it is preparing offers for the Massachusetts market, but they are no sure thing. The offers are expected to give a discount from existing prices but require customers to sign up for the rest of this year. There's no guarantee the Dominion deal will still be lower when the distribution companies sign new power supply contracts in June.

Bruce Mohl can be reached at mohl@globe.com.