Fixed-Payment Utility Plans Can Have Nasty Endings - TheStreet

No one likes to get hit with high utility bills in the middle of winter. If you heat your house with electricity, paying hundreds of dollars more in January than you do in July is pretty much the norm -- and the same goes for other utilities. This year, increased energy costs could make your midwinter heating bills significantly higher.

For many consumers, the solution is to work out a budget plan with your utility providers so you can even out the highs and lows of the annual billing cycle. In essence, you pay more in summer so you can pay less in winter.

With a fixed-payment plan or budget plan, you make equal monthly payments to your utility provider based on your previous year's usage. But if you end up using more power, oil or propane than last year -- or even worse, if the price of whatever you are buying jumps significantly -- your monthly payment will stay the same, even though it may no longer cover what you owe. When your contract ends, you'll owe a hefty "balloon" payment to make up the difference.

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That's why the folks at

Consumer Action

, a national nonprofit consumer education and advocacy organization, are wary of some of the budget plans that are out there.

"The problems with fixed-payment plans is that they don't actually protect the consumer from a rise in prices," says Linda Sherry, director of national priorities for Consumer Action. "That leaves consumers exposed to huge bills at the end of their contract."

How big of a balloon are we talking about? It depends -- but it could be pretty big.

Take heating oil, for example. Say you typically use 1,300 gallons of oil a year. If it's a colder winter than normal, you may use an extra 300 gallons to heat your home. The weather, along with other market forces, could drive the price per gallon up to $5.75 -- 75 cents above your budget plan's estimate of $5. That means at the end of the season you could owe a balloon payment of up to $2,700. You paid a total of $6,500 over the course of the year, but you used $9,200 worth of oil (1,600 x $5.75).

While oil has been getting all the headlines because of the massive spike in prices, consumers relying on electricity and propane to heat their homes are just as exposed to increases in usage due to a colder than expected winters.

You don't have any control over the weather or prices, but you can at least make sure your budget plan is based on the best possible information. Sherry recommends asking your utility provider for your usage statistics for the last two years so you can make an accurate estimate of how much energy you'll need.

If you're wary of the balloon payments that may come along with a budget payment plan, check out pre-pay and fixed-price plans. In both cases you are able to

lock in your heating oil price

for the entire winter, thereby protecting yourself from future price increases.

In the end, if you decide to go with a fixed-payment plan, Sherry suggests setting aside some extra money in order to be prepared when that final balloon payment comes due. In many cases, she says, your utility will offer a discount if you are able to pay the remainder off right away.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.