Utilities venture off power grid into home warranty business
Analysts say they are using monopolies to try to boost revenue
CenterPoint Energy has entered the home warranty market, selling a suite of products that cover the cost of gas line, water heater and sewer line repairs, a move that analysts say takes advantage of the Houston utility’s regulated monopoly as it competes with other companies selling similar products.
CenterPoint, which distributes electricity and natural gas, is sending letters on its familiar blue and black letterhead to its 1.4 million gas customers, promoting nine separate warranty plans through a partnership with the British company HomeServe. Consumers can buy each plan individually or all nine plans for $84 a month.
Across the country, utilities such as CenterPoint are leveraging customer lists and taking advantage of long-standing ties to residents to find new ways to sell more products. Analysts say utilities are essentially using their monopoly power to break into competitive markets and boost earnings of their non-regulated businesses.
“They have a built-in distribution facility. They have a built-in way to talk to customers. Certainly they are taking advantage of it,” said Ed Hirs, energy economist at the University of Houston. “It’s not necessarily bad but it’s something that deserves a little scrutiny.”
CenterPoint disputes that it is taking unfair advantage of its monopoly position and says it is merely offering the warranty programs as a convenience to its customers. The Texas law that deregulated power markets in 2002
maintained regulated utilities to distribute electricity, while establishing competitive markets for power generation and retail electricity sales.
The utility is moving into a market that retail electricity providers already target as they try to supplement the tight profit margins from selling power and try to deepen relationships with customers to make it less likely they will switch to competitors. The retail companies offer services such as home security, power surge protection and plumbing repair plans.
CenterPoint’s entry into competitive markets through non-regulated subsidiaries has been challenged by the retailers before. In 2012, CenterPoint set up a retail electricity shopping site, My True Cost, that offers electricity plan offers from a variety of vendors, which pay fees to the CenterPoint subsidiary for signing up customers.
Some 15 retail electric providers, including Reliant Energy, Green Mountain Energy and Direct Energy, sought an order to shut down the retail shopping site, which featured CenterPoint’s corporate logo, arguing that the utility was entering a competitive market, in violation of the state’s deregulation law. The Public Utility Commission denied the request, and since then, My True Cost has grown from 10 retailers to 16 retailers.
Direct Energy and NRG Energy, the parent company of Reliant and Green Mountain, each offer an array of home protection plans of their own. Neither would comment on CenterPoint’s new warranty program.
How it works
CenterPoint, which has nearly 2.5 million electric utility customers in the Houston area, has both regulated and non-regulated business. The bulk of its earnings come from its regulated activities — distributing electricity and natural gas. The Public Utility Commission sets the rates and returns for its electricity operations and the Railroad Commission for its gas distribution.
But the non-regulated end of the business is becoming increasingly important with 42 percent of CenterPoint’s revenues last year coming from the nonutility side of the business, up from 28 percent in 2016, according to financial records. The non-utility business lines, in addition to home repair warranties, included construction and repair services for pipeline systems, primarily natural gas.
CenterPoint launched its home-related warranties last year with a gas line repair policy, promising to repair lines extending from the outlet side of a meter to indoor and outdoor appliances. The warranty covers corrosion from normal wear and tear and aims to protect consumers from expensive repairs and replacement, which can cost hundreds of dollars, according to letters to customers headlined “Important Information Regarding Gas Lines.”
The warranty — which is not insurance and therefore not regulated by the Texas Department of Insurance — will pay up to $8,000 in repairs after a 30day waiting period. Customers pay $5.49 a month, which is added to monthly CenterPoint bills.
But the warranty doesn’t cover damage caused by fires, explosions, earthquakes, droughts and floods. Nor does it cover repair or replacement of appliances or fireplaces that may have been damaged from leaky gas lines, according to the contract.
Home warranties typically are narrowly written to include a variety of exclusions, said Ryan Marquez, a professor specializing in consumer law at the University of Houston. If homeowners can’t prove they did everything required in the polices, such as keeping maintenance records, the warranty can be voided.
CenterPoint said its warranty program paid out $1.9 million in claims in the first year, with the average claim running about $1,800. CenterPoint officials won’t say how many plans the company has sold or how much it is earning from selling the plans.
But a 2013 contract between HomeServe and the water department of Charlestown, S.C., shows how utilities make money by just lending their name to HomeServe’s warranties. HomeServe agreed to pay a $120,000 fee and 12 percent of the sales on water repair warranties it sold through the water department.
In exchange, according to the agreement , the water department would endorse the warranties in newsletters, and HomeServe could use the city’s logo to send letters to water customers as much as 12 times a year.
Today, HomeServe has partnerships with 150 utilities and 550 municipalities in the United States, according to HomeServe. The company reported revenue for fiscal year 2019, which ended March 31, equal to $1.3 billion with profits of $136.5 million.
After rolling out the gas line plan last year, CenterPoint has expanded its warranty offerings through HomeServe to include eight others. They include water heater repair for $9.99 a month, heating system repair for $13.99 a month and sewer line repair for $9.99 a month. A cooling system tune-up costs $8.99 per month and another $16.99 a month to cover repairs.
Gregg Knight, CenterPoint’s chief customer officer, said the partnership with HomeServe is a good fit because, as market research shows, customers trust utilities such as CenterPoint. The company, he added, is providing a convenient way for its customers to cover repair costs.
“We filled a void in the community,” he said.
Wrong impression
Some states, however, are cracking down on arrangements between thirdparty warranty providers and utilities. Utah regulators said in October that Dominion Energy, a natural gas utility in the state that also partnered with HomeServe, was not acting in the public interest and was using its competitive advantage as a monopoly to share customer information with non-regulated affiliates and third-party solicitors.
More than 10,000 Dominion customers in Utah signed up with HomeServe as a result of the solicitation, which regulators found was misleading, in part because it used the utility’s logo.
Dominion apologized in a letter to customers for creating any misunderstanding with the offers. It agreed to make it clear that HomeServe is a partner of Dominion’s unregulated business Dominion Products and Services and not the regulated portion, Dominion Energy Utah.
HomeServe voluntarily stopped offering its warranties through Dominion, but expects to resume, said HomeServe spokesman Myles Meehan. Going forward, HomeServe will not use customer names and addresses supplied by the utility unless customers give permission to the utility in advance, he said.
HomeServe has come under fire in other states, too, settling cases for deceptive advertising, failing to disclose exclusions and creating false impressions the service plans were offered by local utilities or government agencies. Four years ago in Maryland, Attorney General Brian E. Frosh negotiated a $115,000 settlement with HomeServe after determining that consumers were tricked into signing up for coverage they might not have needed because the ads looked like they came from a local government agency.
HomeServe said no penalty was assessed, denies any wrongdoing in the settlement and entered into it to put the matter to rest. Since the issues arose, HomeServe said it has changed its marketing materials nationwide to address the points that sparked attorney general concerns.
Meehan said the six settlements, in which the company did not admit to any wrongdoing, stretch back nearly a decade and ushered in a new era of transparency, including more information about HomeServe and its relationship with the local utility.
CenterPoint said it is aware of the past complaints against HomeServe and has imposed performance markers, including requirements to respond to claims within a certain time frame and score high on post-service quality ratings.