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New York State Agency: Current Market Structure Favor Utilities Over ESCOs

NYS Agency: Utility Permitted To Under-allocate Costs To Commodity

Banning ESCOs From Mass Market "Premature" Given Lack of Full Unbundling

September 19, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

New York's current market structure favors utilities over ESCOs and direct customers, and any prohibition on mass market sales by ESCOs is premature until such inequities are fixed, the New York State Office of General Services (OGS) said in testimony in the New York PSC's evidentiary review of the retail energy mass markets

OGS serves as an energy service company supplying electricity to various political subdivisions of the State and other State agencies

OGS testified that, "The electric market is dominated by the utilities. The utilities control customer data and have historically had a monopoly on the entire customer experience within their service territory. Market issues are expensive and time consuming to attempt to address. At the same time, market participation itself requires significant expense. For example, Direct Customers and ESCOs are subject to NYISO credit requirements and are required to make weekly payments to the NYISO within two days of the receipt of bills. Direct Customers and ESCOs are also required to have collateral to back their NYISO purchases. In addition, ESCOs and Direct Customers are required to have North American Energy Standards Board ('NAESB') digital certificates to participate in the NYISO markets. Serving many smaller customers also requires electronic data interchange ('EDI') compliance, which allows the use of the consolidated billing option that is needed for entities lacking an advanced billing system. Administratively, ESCOs and Direct Customers need to have the knowledge and technical expertise to forecast, bid, schedule, and reconcile all of their energy and capacity needs for all accounts. Doing this correctly requires an understanding of how to convert metered data to the data that is submitted by the utility to the NYISO. In some cases, there are four factors of adjustment between actual meter readings and the data reported to the NYISO. This could require anything from a simple spreadsheet reconciliation to a full smart database. In addition to all the expenses outlined above, ESCOs can have significant customer acquisitions costs – costs that the Utilities do not incur as the default provider."

"After accounting for all the above costs, Direct Customers and ESCOs must still compete against a utility, which is not allowed to make a profit on its commodity sales. That makes true competition impossible," OGS said

OGS testified that other market design issues exacerbate this inequity

"Because utilities do not receive a Return on Investment ('ROI') on commodity, they are motivated to include as many costs as possible under the delivery portion of a customer’s bill. In fact, utilities are incented to allocate all possible commodity and employee/technology costs to a customer’s delivery bill, since that is where the utility receives an ROI. As a result, no accurate comparison is possible between utility and ESCO commodity costs," OGS testified

"Utilities also have other mechanisms that allow them to report below-market commodity costs. For example, a utility can use 'Load Modifiers,' which are generators within their territory that do not participate in the NYISO markets but have contracts with the utility. The output of these generators is netted out of the load that the utility reports to the NYISO. By doing this, the utility can avoid contributing to NYISO Ancillary Services costs. When a utility avoids Ancillary Services, all other market participants must pay more for Ancillary Services because the total Ancillary Services costs remain static. Utilities also have other contracts for energy and capacity supply that are reconciled through other delivery charges. These mechanisms allow utilities to under-allocate costs to commodity, making accurate comparisons impossible," OGS said

"Only a true full unbundling of retail rates would allow an accurate comparison between utility and ESCO rates. Once such a review is possible, the Commission should examine the extent to which customers benefit from retail choice. Until then, however, prohibiting ESCOs from serving mass market customers is premature," OGS said

"That is not to say that OGS disputes that ESCO malfeasance occurs, or that the Commission should not take immediate steps to eliminate it. OGS has witnessed many customer abuses by ESCOs first-hand. OGS has a significant amount of State accounts. In some instances, before the accounts were taken over by OGS, ESCOs were charging State facilities abusive rates that were significantly higher than utility or market rates. OGS has also received deceptive calls from ESCOs and has reported those calls to the Commission. OGS does not condone or defend such behavior, but believes that remedying specific abuses is possible without a general prohibition on service to an entire market segment," OGS said

"OGS hopes that the Commission can reign in the bad apples that are abusing the market, while simultaneously improving the functioning of the market to the benefit of consumers. As evidenced by current enrollment numbers, many customers want an alternative provider to their utility. The retail market must make that possible. For example, OGS currently charges State agencies market rates. Despite this fact, there are times that the OGS price is higher than some utility prices. The Commission should create a process where it assumes a direct oversight role in the commodity process to help ensure that costs are allocated properly between delivery and commodity, and that the interests of end users are adequately safeguarded," OGS said

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