Thursday, July 10, 2008

Heating Oil Price Protection Plan Shenanigans

I think there is something funny going on with some home heating oil price protection plans.

I am not generally a huge supporter of class action law suits, but if there are any enterprising lawyers out there, this one might be worthwhile. I am concerned about the impact of higher heating oil prices on lower income households in the Northeast and would be very upset if anybody was behaving in an opportunistic way to make that situation worse.

Let us be clear that I am not accusing any company of inappropriate behavior, but let me sketch what I have noticed. I will not name any companies at this point. Interestingly, I described the potential for this problem earlier this spring to my colleague at Tuck, and I said I would wait to see what happened. Sure enough, it happened.

Here is my personal situation. Last summer, I contracted to buy around 800 gallons of heating oil at a fixed price. I spread the payments across 11 months, paying a fixed and constant amount each month. The fixed price I contracted for was around $3.20 per gallon.

Now this winter, although very snowy, was not all that cold. Thus, by March and April, I had not yet used up all 800 gallons that I had contracted for.

That made me wonder what would happen if I did not use all 800 gallons.

A check that came in the mail today answered my question: the 140-odd gallons left on my contract as of May 30 were worth, at my contracted price of $3.20, about $450. My heating oil company sent me that refund check today.

Now I would have preferred to get the 140 gallons, which at current heating oil prices ($4.85 per gallon!) would be worth about $680. And, on the other side of the transaction, my delivery company clearly prefers to pay me the cash value of my contract.

I suppose that if I read the fine print, somewhere in the contract I signed last year, it would say that the company could pay in cash (using old prices of course) for any unused gallons.

It is not the settlement in cash that concerns me. It is a more subtle opportunity for opportunistic behavior.

I had noticed back in mid spring that my tank was low and that I had not received any deliveries for some time. Therein lies the possible problem. The heating oil company clearly knew that heating oil prices in the open market were way above last year's fixed prices. Therefore, every gallon they could avoid delivering would mean roughly $1.65 (4.85-$3.20=$1.65) of profit (or avoided expense, however you want to view it). In fact, at one point during this year, I had to call my company because they had not delivered for some time and I was on empty.

So what if the heating oil companies were purposely letting customers' tanks run low, thereby minimizing the amount of oil they would have to buy at open market prices and deliver at the old, lower fixed price? That would smack of opportunism, would it not? (Don't be fooled into thinking that the companies would not care, since they might have bought enough oil to cover expected deliveries early in the year at lower prices as well. They well might have locked in prices, but that doesn't mean that they still don't want to part with oil that is worth $1.65 more per gallon than they are going to get for it!)

If I were a lawyer, I would be interested in seeing if delivery policies were changed in the springtime. Maybe some low income households should get an even bigger check than they might already have received. Or at least, the delivery company could deliver the fuel that was contracted for so that low income households don't start the fall with an empty tank. That is what I have right now -- an empty tank and a check for $450 instead of a tank with 140 gallons of fuel oil worth $680. Not exactly peanuts.

23 comments:

Anonymous said...

Interesting issue and problem.

First in terms of the refund, I think it makes sense that they refunded you based on the price originally contracted. Any other price gives too many opportunities for disagreement in an environment where prices are changing significantly. If prices had gone down, you would have been really unhappy paying $3.20 per gallon and receiving less than that.

The second issue on delivering oil is much more possible. I doubt that any senior management would sanction that. However, I do think within operations given the prices, they are trying to stretch the oil they got at the lowest price and avoid paying high prices to deliver oil. They were probably low on their oil and looking to minimize how much they deliver. The cost of delivering more than a customer really needs would be very costly to them as I am sure they did not hedge fully their sales. So even if they did not do anything illegal, they were trying to deliver to every customer just in time inventory and not a gallon more. Had the price been lower, you would not have faced this issue.


AK

Anonymous said...

If the price had gone down and the oil company had refunded your money based on the lower price - you would have been crying like a baby!

Anonymous said...

However, most customers have to purchase a price protection insurance plan (about .30 gallon of the contracted gallons) which covers the oil company anyway. Win - Win for the oil company.

By the way, this same thing happened to me, except I was on autmatic delivery and after the price doubled, oil was delivered and I owed $800, due in 14 days.

Anonymous said...

If you hadn't locked your price, you could have noticed your tank was low in the spring, and purchased a top-off since you would just be a cash customer. Granted you are more exposed to market prices, but most oil companies that you lock in with will put you on automatic delivery and not top off your tank so you get the maximum gallons for your "left-over" money with them.

Anonymous said...

Follow this winters heating oil prices at http://www.integrityenergy.com/heating-oil-prices.html

Ken Lowe-Oil said...

I'm concerned about my impact on the environment. I heat my home with heating oil but am worried about what this is doing to the environment. I live in a rural area of lincolnshire so there's not much alternative to heating my home with oil except wood and LPG... but I don't know if this is even more harmful.

I have just found a heating oil website who offer Group Buying Days, this seems like a great way to help the environment because you can order with others which helps to keep tankers off the roads more, reducing CO2 emissions.

I would like to see more information on the internet about the effects of heating oil on the environment. On most climate change sites I go on there are articles on gas and electric heating but little on the effects of heating oil.

Does anyone have any figures about heating oil and ways to minimize my impact on the environment?

Anonymous said...

I have never had an issue with the heating oil fixed pricing plan with my provider, Irving Energy. I think they have a lot of great resources on the subject.

http://www.irvingenergy.com/heating-oil-propane-price-protection-program-2011/

Jerry said...

I have never had an issue with the heating oil fixed pricing plan with my provider, Irving Energy. I think they have a lot of great resources on the subject.

www.irvingenergy.com

www.camobel.es said...

Quite worthwhile piece of writing, lots of thanks for the article.

Anonymous said...

NeighborOil is sponsoring a contest to give away $850 worth of home heating oil this winter! Just film a short video clip describing your worst experience with a heating oil company. Send the video with your contact information to video@neighborpoints.com in order to be eligible. Follow NeighborOil on Facebook and Twitter to stay updated. Winners will be announced on December 15th!

Mac said...

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Can you explain whats the meaning of Shenanigans? its a little complicated for me.

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lizabaker said...

Consumers like me are just thankful that price protection program is being regulated. I guess that's what Petro North Haven are also for.

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