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CECI's Position on "Lock-in" Pricing What is meant by a contract for home heating oil at a "lock-in" price? What period of time is covered in a "lock-in" contract? What other provisions are included in a "lock-in" contract? What is a cap? Who offers a cap and lock-in pricing? How do dealers manage financial risks when they offer lock-in contracts? What are the consequences if something goes wrong? What is meant by a contract for home heating oil at a "lock-in" price? You pay a fixed price for the heating oil you buy for the period of time specified in your contract with your oil dealer. What period of time is covered in a "lock-in" contract? Usually you are allowed to lock-in for an entire heating season, but this is not always the case. Some dealers offer new customers lock-in pricing for only a few months as a teaser. You must read your contract carefully. Do not sign a lock-in contract until you know exactly what you are being asked to agree to. Once you fully understand the lock-in contract you may find that it does not suit your needs. What other provisions are included in a "lock-in" contract? You will likely be charged an enrollment fee, and you will be expected to buy all your fuel for the period of the contract from the dealer with whom you have signed the contract. Dealers depend upon making more money when the price of fuel is below the lock-in price in order to accept the losses they incur when their retail price of oil exceeds the lock-in price. Dealers understand that you may try to buy oil from another dealer when oil is cheaper than your lock-in price, and may have provisions to drop you if they find that you are not following the provisions of the contract. You should also be aware that oil dealers have a great deal of flexibility in setting up special arrangements with new customers. Merely asking for more favorable conditions from a dealer may be all that is needed to save additional money. Dealers may offer to lower their service contract price, or offer a low cost, multiple year service contract. Dealers know that they may only get one chance to capture your business. They may offer an attractive pricing plan over the phone. Ask for a copy of the contract or agreement that they are offering, then be sure to check the fine print. What is a cap? A cap is a contract offered by oil companies where there is a ceiling established on the price for a period of time. If the market price drops lower than the cap price during the year, the oil customer will pay the lower price. Who offers a cap and lock-in pricing? Many dealers offer lock-in contracts because they know that their ability to attract customers seeking pricing stability can depend upon it. Oil dealers know that they can lose a lot of money if they do not price lock-in contracts properly. In a worst case scenario, an oil dealer can be forced out of business in the middle of the heating season, leaving his customers to fend for themselves. Very few dealers in our area are offering a cap contract. How do dealers manage financial risks when they offer lock-in contracts? When oil dealers offer lock-ins or caps, they have to make a decision about how they will financially manage price fluctuations throughout the heating season to protect themselves. They may choose to protect themselves by buying oil futures (a commodity investment for a given amount of oil where both the price and a delivery date in the future are fixed), they may take on the risk themselves by foregoing profits during periods of high prices, or they may choose some intermediate level of financial protection. Oil futures cost money; the lock-in enrollment fee and the oil price is set high enough to pay the cost of any futures that the dealer may be purchasing. In other words, your dealer is likely entering the futures market with money you pay them as you fulfill your part of the lock-in contract. What are the consequences if something goes wrong? In Westchester, not only have several small dealers been in financial difficulty due to lock-in arrangements, but a few major companies are in or on the verge of bankruptcy. A few years ago, in Rhode Island, companies had to void lock-in agreements with their customers in order to remain in business. When oil dealers get into financial difficulty, they may start to skimp on services, especially in fulfilling their obligation to maintain your burner under a service contract. Dealers do not feel properly compensated when they must charge you a price below the market price, even when they have agreed, in a contract, to such an arrangement. CECI asks you to think about the impact you may be having on a hard working dealer who may be struggling, in the dead of winter, to repair burners and to keep you supplied with oil, and who may not have fully protected himself from financial losses. |
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