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.

Why Am I Being Billed An Early Termination Fee?

There are a few reasons why you might have received a bill in the mail for an early termination fee from a retail energy supplier. First, if you switched to a different supplier while you were in contract, then you will get an early termination penalty.

Another reason you might receive an early termination fee, or ETF, is because you were a victim of energy fraud. When an energy supplier or broker switches your utility account without your knowledge, it will trigger a contract breach with your existing supplier. This energy scam is also known as slamming. If you catch the scam early enough, you can fight the unauthorized switch, remain on your existing energy supply contract, and avoid all termination fees.

Can I Leave My Energy Contract Early Without Paying A Cancelation Fee?

That depends. Some residential and small commercial energy contracts do not have early termination fees. If you enrolled in this type of contract, then you should be able to break or leave your contract early without paying. Most commercial contracts, including all large commercial energy contracts, contain early termination clauses with steep penalties if you try to break the contract. Learn more about how these energy cancelation fees are calculated below.

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 energy fraud, and common energy scams), 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. Here are some tips when you receive an ETF from your energy provider:

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1. Get An Explanation

Contact your supplier or energy broker right away and find out why you received the notice. If you did not intend to break your contract, there is a small window for re-enrolling the contract to avoid any cancelation penalties. Sometimes, a good energy broker can catch a dropped utility account when it happens and can get you re-enrolled without triggering an early termination fee. You should receive a drop notification from your broker so you can re-enroll. 

2. Ask For A Detailed Calculation

Ask the energy supplier to provide a detailed calculation of the early termination fee that coincides with the contract language. If the contract states that the supplier can charge you the difference between your rate and the wholesale market price, then request that they provide that data. 

3. Negotiate

Sometimes energy suppliers are willing to negotiate with customers regarding early termination penalties. Unfortunately, many customers break their contracts with suppliers, avoid making any payments, and their accounts go into collections. If you broke your contract by mistake and cannot get reinstated, the energy supplier might be willing to work with you on the ETF. 

How To Avoid Energy Contract ETFs

The best way to not have to pay an early termination fee is to avoid it altogether! Adhering to the terms of your energy contract is the number one way to not get charged a penalty. Here are some other tips for understanding early termination energy contract language, and for avoiding ETFs:

Remove Your Account Information From Public Utility Lists

Most electric and natural gas utility companies publish something called an Eligible Customer List, or ECL. This is a public list of all customer names, services addresses, utility account numbers, and other details about customer accounts. And, in order to access this list, an energy company must hold an energy broker license or supplier license.

Sometimes, unfortunately, this information gets into the wrong hands and allows for the slamming, or unauthorized enrollment, of utility accounts. The best way to avoid your account being slammed is to request that your information be removed from the list. You can do this by contacting your utility company and asking them to make your account information private. 

Blend And Extend 

If you signed an energy agreement at a time when market prices were high and you wish you could just cancel your contract, a blend and extend option might be your best bet. Some energy suppliers will offer contract extensions for lower prices. Here is how a blend and extend offer might work:

  • You signed a contract for 3 years at 10.5 cents per kWh
  • 18 months into the contract, energy rates are much lower, around 8 cents per kWh
  • You still have 18 months remaining on your 10.5 cent contract
  • The supplier offers to re-write your existing contract at 9 cents per kWh providing you extend it for another 12 months

Blend and extend options are great ways to take advantage of lower energy prices in the middle of a fixed-rate contract that is hard to break. This allows customers to avoid early termination fees and negotiate better terms with the energy supplier. A win-win!

Need Help With An Early Termination Fee?

If you are a commercial customer that recently received an early termination notice from your energy supplier, we can help you! Early termination fees can be quite large and costly for businesses that are trying to save money on their utility costs. At Diversegy, we have relationships with the nation’s leading energy suppliers and might be able to help you navigate a contract breach. Contact us today to speak with one of our energy experts.

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