Think Twice Before Switching to “ESCO” Utility Services

On March 10, 2016, AARP and the Utility Project cautioned utility consumers seeking to reduce their energy costs not to switch to ESCO service in light of the absence of any savings guarantee that is enforceable by the PSC. This recent move by the two consumer advocacy organizations comes after many years of advocacy against overcharging, and links back to a 2014 Order by the PSC described below.

After many millions had been spent in New York since 2006 to drive customers to try ESCOs, the PSC eliminated the requirement for utility “referral” programs in a 2014 Order which claimed ESCO migration was a success.  The same order found troubling aspects of ESCO service however, including widespread charges which exceed what the distribution utility would charge.  The Commission required price reporting and other reforms, many of which were stayed pending further proceedings.  See Case 12-M-0476, Proceeding on Motion of the Commission to Assess Certain Aspects of the Residential and Small Non-Residential Retail Energy Markets in NYS, Order Taking Actions to Improve the Residential and Small Non-residential Retail Access Markets (issued February 25, 2014).

Under the February 25, 2014 Order, ESCOS began to submit their prices to the PSC, but most of the ESCOs filed their rates with claims that the price data are”trade secrets” that cannot be disclosed under the Freedom of Information Law.  On February 1, 2016, the PSC Records Access Officer in RAO Determination 16-01 decided that the prices of ESCOs filed with the Commission are not “trade secrets”. The information has not been released, however, because ESCOs are appealing the decision to the Commission Secretary.  A decision of the Secretary adverse to the ESCOs would be directly appealable to court.

On February 23, 2016, the Commission issued an order reciting continued ESCO customer abuse and excessive charges, and required that as a condition of eligibility to access utility customers through utility tariffs, ESCO rates and charges may not exceed charges of distribution utilities (averaged over a year) unlesss the ESCO provides 30% green electric service or unspecified “value added” services.   See Order Resetting Retail Energy Markets And Establishing Further Process, (Issued February 23, 2016).

See also Jon Campbell, Why is Albany letting these energy companies scam thousands of New Yorkers, Village Voice, Feb. 2, 2016; Jon Campbell, After Voice Investigation, Major Reforms Announced In Retail Energy Industry, Village Voice, Feb. 23, 2016; Tim Knauss, NY regulators clamp down on energy marketers after too many customers get fleeced,  Syracuse Post Standard, Feb. 23, 2016; State cracks down on independent energy suppliers, Rochester Democrat & Chronicle, Feb. 23, 2016; New Consumer Protections for Energy Consumers, Hudson Valley News Network, Feb. 23, 2016; William Opalka, Rules Meant to Enable Markets, RTO Insider, Feb. 25, 2016.

ESCOs swiftly brought suit in Supreme Court, Albany County, seeking to annul the February 23 Order, alleging the PSC committed procedural and substantive violations of law.  The Court granted the ESCOs’ request for a Temporary Restraining Order on March 4, 2016, barring implementation of the February 23 PSC Order pending consideration of the ESCOs’ motion for a preliminary injunction, which was adjourned until mid April, 2016.  If the preliminary injunction is granted, the price protection and other reforms in the February 23 Order will not be implemented while the litigation proceeds. If permanent relief is granted to the ESCOs on the merits of their claims, the February 23 Order may be annulled,

Meanwhile, the PSC asked the Court to require ESCOs to post a bond to protect customers who may be overcharged while the February 23 Order is enjoined, in the event that after the litigation the Order is sustained. That request is pending.

Background

In 1996, the New York PSC adopted a utility “restructuring” agenda prominently championed by Enron and other proponents of utility deregulation. The contours of this program were detailed in the PSC’s “Vision” Order, Opinion 96-12, which “restructured” the New York electric industry, without enabling legislation, without adequately addressing universal service, customer protection, and affordability. Under the model adopted in Opinion 96-12, and follow-on orders, customers could deal with two utilities for electricity and possibly two more utilities for natural gas in areas where the electric company is different from the gas company. The PSC long term vision was that the traditional utility eventually would stop selling electricity and gas, and would just be a “pipes” or “wires” company.  Gas and electricity then, in the “end state”, would be sold by new “energy services companies” or “ESCOs” whose rates, terms and conditions of service would not be filed with and subject to approval of the Commission under the longstanding system of filed rate regulation established in Article 4 of the Public Service Law.

This method of deregulation, described in “Disconnected Policymakers,” created a synthetic competition. New wireless electric and pipeless natural gas utility middlemen, the ESCOs, would buy electricity and natural gas in wholesale markets (which were virtually deregulated by the Federal Energy Regulatory Commission (“FERC”), and sell it to New York retail customers. deregulated retail markets, and the rates, terms and conditions of their service would no longer policed closely by federal or state regulators. This system was being considered in many states until the Enron bankruptcy debacle. Since 2001, no state has followed New York and the 13 other  states that “restructured”.

Notwithstanding claims of utility deregulation proponents, a seriou.s study found that

the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers.

Borenstein, S, Bushnell, JB, The U.S. Electricity Industry after 20 Years of Restructuring, Annu. Rev. Econ. 7: Submitted. Doi: 10.1146/annureveconomics-080614-115630.

The “rent transfers” mentioned in the above article included ratepayer subsidies of ESCO service and distribution utility costs for implementing complex arrangements needed to facilitate sales of electricity and gas separated from its delivery and billing and collection for multiple providers.  Over the past two decades, the New York PSC required many millions of dollars of ratepayer and taxpayer funds to be spent to promote customer migration to ESCO service.  The rent transfers also include continuing subsidy of customers who switch to ESCOs at the expense of  taxpayers, through a questionable sales tax exemption.

There is no analysis, however, showing that customers save money over time, or receive different or superior service with ESCOs. Instead, the emphasis has been upon expensive PSC and utility advertising campaigns (paid for by utility ratepayers) and promotional gimmicks, such as small discounts for a limited period. These campaigns typically extol the virtues of “choice” but are short on information on price and service.  Most residential customers in New York have not switched to ESCO service, despite frequent high pressure telephone and door to door solicitations in some neighborhoods.

In 2002, the legislature overruled the PSC by enacting the Energy Consumer Protection Act, Chapter 686 of the Laws of 2002, which requires ESCOs to follow HEFPA, the Home Energy Fair Practices Act. Public Service Law 43 requires the Commission to decide customer complaints regarding their bills and nearly any matter regarding their service.  Even so, the PSC may be upholding unfair provisions in ESCO contracts and not reviewing excessive charges. When customers discover that prices are far higher than the old utility, they may find that their ESCO contract contains unanticipated early termination charges.  And, in the time it takes to switch back to the old utility, new charges at higher rates may continue to mount.

Small business customers have no HEFPA protection and they lose the protection of the non-residential customer protection rules when they switch to ESCOs.  The PSC refuses to hear and decide complaints of nonresidential customers regarding ESCO service:

the Commission’s regulations providing consumer protections to nonresidential energy utility corporation customers (16 NYCRR Part 13) were not amended to make them applicable to nonresidential ESCO customers.  Because of the inapplicability of PSL Article 4 (providing for price regulation of gas and electric utilities) to ESCOs, and the inapplicability of the Part 13 nonresidential consumer protection regulations to ESCO customers, the Commission does not have the statutory authority to resolve price- and billing-related contract disputes between nonresidential customers and ESCOs.

Commission Determination in PSC Case 08-G-0872, September 19, 2008, p. 7.

In 2006, the PSC geared up its efforts to require all utilities to implement an “ESCO referral” program in which participating customers are assigned randomly to ESCOs. They will receive a small discount on the commodity part of their bill for two billing periods, and then be shifted to ESCO rates unless they take action to return to full utility service from the traditional utility. Typically ESCO rates, terms and conditions of service for the time after the introductory period are not disclosed at the time the customer decides to participate in the program. PULP objected in comments and reply comments to many aspects of this program in the ESCO marketing guidelines case. The PSC rejected PULP’s arguments in its order approving the guidelines for ESCO referral and in its September 26, 2006 order denying PULP’s petition for clarification and rehearing.

 

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