What Are Early Termination Fees?

Early termination fees are penalties charged by retail energy suppliers when customers break a contract. If you reference this article on how energy futures trade, you will understand that when a supplier enters into a fixed-rate agreement with a customer, they pre-purchase, or agree to purchase, the energy for that contract upfront. So, in order to protect themselves from the future price of the market if they are forced to liquidate their position, retail energy suppliers often institute early termination penalties on customers who break a fixed-rate contract. This fee is structured to help the supplier recover its costs in case they are forced to sell the pre-purchased energy back to the market for a loss.

How Are Early Termination Penalties Calculated?

Although all retail supplier contracts are different, most suppliers have a liquidated damages clause in their agreements. This type of clause allows the supplier to charge the customer for the full amount of the remaining energy left on the agreement should they decide to cancel. Liquidated damages clauses are typically calculated by the following means:

(Contract $/kWh) – (Current Market $/kWh) x (Remaining kWh on Contract)

Since these clauses are often calculated by using mark-to-market accounting methods, the customer is left with a large bill. In fact, because of these early termination clauses in retail energy supply contracts, it is almost never worth leaving a contract early.

Fixed Early Termination Fee (ETF)

Some suppliers offer fixed ETF’s for small commercial and residential customers. Many times, these customers are too small to pursue in court for the full ETF, so the supplier simply charges a flat amount. These early penalties can range from $10/month remaining on the contract to a flat rate of $500, and anywhere in between. Many suppliers elect to not impose an ETF on residential contracts.

How Are Early Termination Fees Billed?

In most states, the supplier must send a separate bill to the customer, even if the supplier was billing the customer on utility consolidated billing. Other states, like Delaware, allow suppliers to add the early termination penalty directly to the utility bill. Customers are often shocked when they see an extraordinarily high utility bill containing an early termination fee. Either way, the customer is on the hook for honoring the fixed-rate contract with the supplier, and ETFs are a sure-fire way to ensure that they do so.

What To Do When You Receive An ETF

If you receive an early termination penalty from your supplier, do not panic. The first step is to determine if and when you broke your fixed-rate contract. Maybe your energy broker forgot to notify you of an account drop and the supplier automatically sent you a bill. Maybe you were slammed by another supplier (see more here on slamming), and you did not have the intention to cancel your contract early. Either way, it is important to understand why you were billed a penalty.

Next, contact your supplier and try to come to a resolution. If you are working with a retail energy broker, they should be able to facilitate this for you. In fact, good energy brokers are on top of early termination penalties and can often get you reinstated into your old agreement for no fee. If you blatantly decided to break your fixed contract early, then the liability is on you, and you might have to pay the penalty to the old supplier.

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