Home-Heating Costs Enter Era of Volatility

The brisk winds and early snows that buffeted northern states in the past week sent a sharp reminder: The season of storm windows, weatherstripping, and heating bills has begun.

The price of natural gas and heating oil is going up this winter, experts say. And although they predict fuel prices will trend down in future winters, big gyrations may become the norm.

Thanks to increasing competition among utilities, energy prices could become as unpredictable as the weather. "You're trading a utility price of power for an unregulated price," says Bill Hughes of Charles River Associates, a Boston economic research firm. "There can be a lot more volatility."

Fortunately, consumers have a few years to adjust. And, when the time comes, they'll have new ways to insulate themselves from price swings and get lower prices, Mr. Hughes adds.

Homeowners who use oil heat have already seen the effects of roller-coaster prices.

This summer, analysts expected prices to fall because Iraq would reenter the oil market. Instead, Iraq was not allowed to sell oil, and home-heating oil prices rocketed upward. For a time, it looked as though America might run out of the stuff if the winter turned severe. Then, thanks to record production, the oil industry began replenishing heating-oil stocks and prices have begun to drop. The net result: Americans with oil heat will spend about 10 percent more to heat their homes this winter, the federal Energy Information Administration (EIA) forecasts, assuming normal weather.

But the ups and downs of the oil market directly affect only 10.6 percent of homes, mostly in the northeastern United States. Half of Americans rely on natural gas for heat and another 26 percent use electricity. For years, regulators have insulated homeowners from price swings in these fuels. Slowly, that is changing.

For example, 14 utilities in 10 states are initiating programs to give their customers a choice of who will provide their natural gas, as are statewide programs in California, New York, and individual companies in Georgia, Maine, Massachusetts, Montana, and Ohio. By 2000, more than one in five Americans will be able to choose their natural gas provider, predicts the American Gas Association in Arlington, Va. Similar experiments are under way in electricity, which is relied on more in the South than in colder climes.

In theory, increased competition should mean lower, albeit more volatile, residential heating costs. In practice, such benefits are a few years away, analysts say, and they may not bring heating costs down that much because many utilities currently subsidize consumers by charging industrial customers more.

This winter, the EIA expects average natural gas prices to rise by 4.8 percent compared with a year ago. It forecasts average electric rates will actually fall, but by so little that homeowners will barely notice. And the decline will be related to weather and general economic conditions, not competition, says John Castagna, media relations director at the Edison Electric Institute in Washington.

The coming competition will give consumers new ways to save money on home-heating, experts say. They will be able to choose a new supplier. And, they will be able to insulate themselves from unexpectedly severe winters by locking in their energy prices through the increasingly popular flat-rate programs, now offered by several utilities as well as independent companies. It's a little like choosing a mortgage, says Mr. Hughes of Charles River. Some homeowners pick a fixed rate, others decide to live with the ups and downs of an adjustable mortgage.

At least 20 percent of residential customers in the Northeast already use fixed-price plans, says John Lichtblau, chairman of the Petroleum Industry Research Foundation, an energy-research group based in New York. "I have a feeling it will increase significantly after this winter."

Of course, the best way to save money on winter fuel is to use less of it.

The EIA suggests homeowners conduct periodic conservation inspections. Once their homes are well-insulated, people should consider using the least expensive fuel in their area. (Generally, natural gas is the cheapest, but this varies greatly by locality.) Finally, consider replacing an old heating system with a highly efficient one. The new system could start saving consumers money a lot sooner than the utility competition that's about to unfold.