Direct Energy is well-known for its flat-rate natural gas plans. By guaranteeing rates for a period of time, they are in effect acting as an insurance company. Any time you buy insurance, you need to find out if the other party is financially sound enough to follow through on its promises.
According to the Direct Energy web site, they offer a two-year flat rate natural gas plan in my area at a rate that is about 30% higher than the variable rate that I’m paying right now. This added 30% amounts to a premium for 2 years of insurance against rate hikes.
But what happens if natural gas supplies are interrupted and rates spike up? Will Direct Energy be able to fulfill its promises if variable rates double? I have no idea, but anyone considering entering into a flat rate plan should find out. If Direct Energy isn’t able to maintain promised rates, customers could end up paying the flat-rate premium and then paying the high variable rates too.
Any time we enter into agreements with another party who is promising to deliver something in the future, we must consider the financial health of the other party. AIG employees entered into a bonus agreement with AIG, but it turns out that the company would certainly have gone bankrupt were it not for government intervention. If AIG wasn’t too important to be allowed to fail, the bonus agreements would have been worthless, not because they weren’t legal, but because AIG wouldn’t have been able to pay.
When I left a former employer, I chose to take the commuted value of my pension rather than leave it in the company plan. I didn’t do this because I did the accounting and determined that the commuted value was worth more than the future promised payments. I did this because I doubted the company’s ability to fund the pension plan until I turn 65, and I doubted that the government would step in to protect the full amount of my pension.
It may be that Direct Energy is financially sound enough to honour their fixed rate plans even if natural gas prices spike. But, why would anyone pay the premium for a fixed-rate contract without first investigating the financial backing of the rate promise?