March 6 (Bloomberg) -- The 70 percent freefall in natural- gas prices since July hasn’t helped Louis Huguelet, a widower who shares his five-bedroom house in Oak Forest, Illinois, with two daughters, a son-in-law, and two grandchildren.

That’s because 17 months ago, fearful of soaring heating bills, the 62-year-old crane operator locked in his gas price for five years with U.S. Energy Savings Corp., a retail marketer. As a result, Huguelet’s January gas bill was about $50 higher than it would have been under the regulated rate charged by local utility Nicor Gas, based on a comparison of bills.

Half of U.S. residential gas customers, some 35 million households, are in states that allow them to shop for the best gas price. Trying to lock in a cheap gas price is usually a losing bet, consumer advocates said.

“We don’t know anywhere in the country where it is working for consumers,” said David Kolata, executive director of the Citizens Utility Board of Illinois, which estimates that 91 percent of all gas-purchasing plans offered in the state lost money for consumers. “You have people paying far more than they should for an essential commodity.”

Allowing consumers to price-shop for their gas is the result of a decade-long effort to open the retail market to competition, according to the Energy Department in Washington.

Enrollment in such programs rose 11 percent to 4.6 million in 2007, the department said. The number of New York households placing bets on gas surged 14 percent in the 12 months through November as prices were rising, according to state data.

Savings Were Rare

Huguelet’s experience is typical, consumer groups say. A historic rate comparison shows Huguelet saved money only in May, June and July, as gas prices rose. In the other 14 months he’s been under contract, he has paid more than the regulated rate. In January, he paid $195 for his gas. His sister, a Nicor customer who lives nearby, paid about 26 percent less.

“Between the showers, the extra laundry and gas for the hot water tank, it adds up,” Huguelet said in a telephone interview.

Consumers didn’t pocket big savings even when the Gulf of Mexico was slammed by back-to-back hurricanes in 2005 and gas futures surged to a record $15.78 per million British Thermal units, Kolata said.

“You didn’t save all that much, and there weren’t as many plans that saved as much money as you might think,” Kolata said.

‘Price Stability’

Based on research by the utility board and more than 450 customer complaints, Illinois Attorney General Lisa Madigan last year sued U.S. Energy Savings, Huguelet’s supplier, saying its door-to-door sales force falsely promised customer savings and didn’t tell buyers the price was higher than what utilities charged in the past.

“There is no evidence to support the representations that customers will save money,” Madigan’s office said in the lawsuit filed in Cook County Circuit Court last year. “There is substantial evidence from the Citizens Utility Board that shows consumers have not saved any money.”

U.S. Energy Savings sold fixed-price five-year contracts at $13 per million British thermal units when the highest price charged by Chicago-area utilities after Hurricane Katrina was $11.70, according to the complaint.

“We go out of our way to make it clear to customers that they’re not getting savings, they’re getting price stability,” Francis Pullaro, a spokesman for U.S. Energy, said in a telephone interview. The company is a unit of Toronto-based Energy Savings Income Fund.

The company’s contracts with consumers state, “This agreement offers price stability and does not guarantee financial savings.”

Like Heating Oil

The long-term contracts offered to gas customers are similar to those that have been used by heating-oil customers for years, Pullaro said.

Energy Savings Income Fund reported Feb. 6 it is in settlement negotiations with Illinois, after settling a similar complaint by the New York Attorney general.

The company said it added 94,000 customers from a year earlier in the fiscal quarter ended Dec. 31. Net income rose 34 percent, excluding the lost value of contracts adjusted for year-end market prices.

Today, with gas futures trading below $4.50 per million British thermal units, customers may have more reason to stay away from long-term contracts. The lowest fixed price available to Youngstown, Ohio, customers is $8.65, according to a state Web site. Dominion Resources Inc.’s Dominion East Ohio gas utility in that territory is charging $6.81 for those willing to be exposed to the risk of rising prices.

Fixed-Price Contracts

“Forward wholesale prices are higher than short-term prices, so a fixed-price contract is sometimes much higher,” said Jeff Mayer, chief executive officer of Stamford, Connecticut-based gas marketer MXEnergy Holdings.

A marketer wanting to lock in its price for gas to be delivered in March 2010 would pay $5.81 a million British thermal units on the New York Mercantile Exchange. The price for March 2011 is $6.66.

“Utilities base most of their supply on short-term contracts,” said Pullaro of U.S. Energy Savings. “We can’t beat that, but when prices spike, their price may be well above us.”

Customers wanting to exit gas contracts face excessive termination fees, said Kolata of Citizens Utility Board of Illinois. The charges are necessary so marketers can pay off their contracted purchases when a customer leaves, said Pullaro of U.S. Energy Savings.

The company has begun offering to renegotiate customer contracts, offering lower prices in exchange for an extended term, he said.

Pros Get It Wrong

Marketers that hedge can be required to post collateral to back contracts, and many of the pros have learned the same lesson as Huguelet: Betting on gas prices is a tricky business.

MXEnergy last year took over the Georgia customers of Catalyst Energy LLC, a marketer that sought bankruptcy protection in October after prices fell and credit tightened. Chicago-based Integrys Energy Group Inc. announced Feb. 26 it would sell or shed its marketing unit to reduce capital needed to back contracts.

Hedge fund Amaranth Advisors LLC collapsed from a $6.6 billion loss in 2006 from wrong-way bets on gas. MotherRock LP, a $400 million fund founded by former New York Mercantile Exchange Inc. president Robert “Bo” Collins, also folded that year after bets on the commodity soured.

“Ultimately, you are asking people to bet on natural gas prices,” Kolata said. “People who are so-called experts have lost a lot of money doing that.”

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: March 6, 2009 00:01 EST