Many missing oil bill bargain
Contracts bind users to high rate; Homeowners, localities pinched
At least 10 cities and towns and thousands of Massachusetts consumers are paying more than $2 a gallon above market rate for their heating oil this winter after locking into prices that seemed like a bargain only a few months ago.
Experts were predicting last summer that rates could rise as high as $5 a gallon and thousands of panicked customers, including some local governments, signed on to a fixed rate - then watched the price of oil plummet as much as 50 percent.
They are now discovering that terminating or renegotiating their contracts will be costly, if it is even possible.
"This is a very unusual situation where fuel prices have dropped dramatically," said Jeremy Solomon, spokesman for the City of Newton, which buys its fuel as part of a consortium with nine other suburbs west of Boston each year.
In June, the municipalities agreed to a fixed heating oil rate of $4.28 per gallon. The statewide average as of Dec. 23, says the state Department of Energy's website, was $2.36 per gallon, down from the peak average of $4.71 a gallon in July.
"It obviously didn't work in our favor this time," Solomon said. "It's regrettable given these very tough economic times."
New England is far more dependent on heating oil than the rest of the country, where heating with natural gas is more prevalent. Massachusetts alone accounts for nearly 1 million of the 8 million US households that use heating oil. About 30 percent of the state's heating oil customers historically lock in to fixed rates each year, said Michael Ferrante, president of Massachusetts Oil Heat Council, a trade organization for about 350 dealers. This year, according to dealers, the number of fixed-rate customers dropped between 15 and 50 percent because consumers felt the price of oil had gone up so high that it had to come down.
The practice of offering fixed-rate plans, which gained popularity in the mid-1990s, allows consumers to take a gamble. They agree to buy a certain number of gallons at a rate that does not change with fluctuations in the market. Consumers save money if the price of oil goes up, but cannot take advantage of any dips in prices.
The consortium in the western suburbs, which comprises Brookline, Cambridge, Arlington, Belmont, Lexington, Newton, Waltham, Watertown, Weston, and Winchester, has used the system for more than two decades and says it works: It has tied or beaten the market every year until now.
Last year, those communities locked in a rate less than $2, and watched gleefully as prices rose to more than $4 a gallon. But this year, the sharp decline in prices means a city like Newton, which estimated it would use 905,000 gallons of oil this heating season, may have to spend an extra $1.7 million, based on the current average price.
It's been the same story for consumers like Ken Glasser of Billerica, who negotiates a rate for about 60 of his relatives, friends, and colleagues across the Commonwealth each year. He locked in at $2.55 a gallon last year but is paying $3.98 this year. He paid at least $178 more than the market rate for his first delivery of 110 gallons of oil last week.
"Last year, I was the hero," Glasser said. "We were saving money like crazy. This year, after an initial increase, prices started going down, and kept going down, and going down. We crashed and burned."
Glasser said he fielded calls from numerous people in the group, including his mother and sister, asking how they could get out of their contracts. This year was the first time in the decade since Glasser began negotiating group prices that he was asked to sign a contract. It included a fixed termination fee that ranged from $399 to $599.
Some dealers don't offer a fixed termination fee. If consumers want out of a contract, they have to pay the difference between the market rate and their fixed rate for the gallons of fuel they have not consumed. Other contracts, like those of the municipalities, do not have an out clause, said David Geanakakis, Brookline's chief procurement officer.
Despite complaints from angry customers, fuel oil dealers are also locked into contracts, and are not profiteering.
After they enter into agreements with their consumers for a fixed rate for a specific volume of oil, the dealers go to the commodities market and essentially pre-purchase oil from large wholesale suppliers like ExxonMobil and Gulf Oil, which have storage facilities in the state. The wholesalers give dealers strict credit terms, often demanding payment within 30 days.
"A lot of people don't believe we've pre-purchased oil," said Sandra Farrell, owner of Northborough Oil Co., who has heard complaints from half of her 400 fixed-rate customers. "Last year, when prices were below the market rate and consumers were saving money, we were able to honor that pricing because we had that oil pre-purchased.
"They have to understand dealers are only doing what the consumers are telling them they want."
Several suppliers didn't return calls for comment.
Undaunted, many consumers are still searching for ways to wiggle out of their contracts.
"It's an issue the industry has never had before," said Chris Keyser, president of the New England Fuel Institute, a Watertown-based advocacy organization for fuel dealers. "We've never had customers calling and trying to get out of their contracts."
Some consumers pay for their oil up front, while most pay on delivery. If consumers default on their contracts, dealers could face a choice between financial losses or taking consumers to small claims court. Ferrante said the financial impact and number of defaults will only become clear at the end of the heating season in April.
The state attorney general's office has fielded a few complaints, but not enough to cause concern, said spokeswoman Emily LaGrassa, adding that the office can step in only if there are legal irregularities in a contract.
Glasser is considering paying the termination fee in his contract and renegotiating terms.
None of the communities in the consortium using fixed pricing plan to switch to a system based on market price, used by cities and towns such as Needham, Wellesley, and Boston.
But Jan-Charles Fine, a Weston resident who negotiates heating oil prices for about 80 families in the town, said it should be a year-to-year decision.
"Most people are creatures of habit. But you have to be a forecaster. You have to ask what conditions are emerging now that are going to impact the cost of oil," said Fine, who didn't use a fixed rate this year. "Part of this is skill, and part of this is art, and part of this is luck."
Eric Moskowitz of the Globe staff contributed to this report. Rachana Rathi can be reached at rrathi@globe.com. 