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ARM: "Extremely Concerned" About Texas PUC Proposal To Grant Ability To Pay >$50 Deposits In Installments To All Residential Customers

Says Bad Debt From Proposal Could Approach $160 Million Annually


February 6, 2018

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

In comments to the Public Utility Commission of Texas, the Alliance for Retail Markets said that it is, "extremely concerned" about the proposal to give all residential customers and applicants the option to pay a security deposit greater than $50 in two equal installments.

As previously reported, a proposal for publication in a rulemaking concerning changes to customer protections as a result of the Lite-Up Texas low-income discount program ending, the PUC has proposed requiring that retail electric providers provide all residential customers with the ability to pay any required deposit that exceeds $50 in two installments. Under current rule, only customers eligible for the Lite-Up Texas discount are eligible to pay any deposit that exceeds $50 in two equal installments.

"[R]equiring a REP to offer all residential customers the option to split the payment of a deposit greater than $50 into two equal installments continues to impose 'too great a financial risk on REPs,'" ARM said

ARM noted that the Commission requested calculations of the specific costs REPs will incur under the proposal to provide all residential customers the option to pay deposits greater than $50 in two monthly equal installments.

"In response, ARM developed an estimate of the market-wide bad debt costs REPs would experience under the proposal. This estimate is based on the 70-day disconnection for non-payment timeline [discussed below], publicly available information, and a few basic assumptions," ARM said

"ARM estimates that the proposed policy would result in annual bad debt costs to the market that range from approximately $28.6 million to $158.8 million. This estimate does not include the costs of IT project expenditures, personnel training, documentation revisioning, and other implementation costs that REPs would incur under the proposal," ARM said

ARM's calculation is based on 3.3 million residential switches and Move-ins annually, and assumes that a typical residential customer uses 15,000 kWh annually, or 1,250 kWh per month on average. In its calculation, ARM used a simple average of all residential offers on Power to Choose (including a simple average of all three EFL usage price points), which results in a simple average offer price of $0.10/kWh (rounding to the nearest cent).

Next, these price and quantity assumptions were translated into an average monthly bill of $125 (1,250 kWh x $0.10/kWh) and an average deposit of $250 based on two months' estimated usage per 16 TAC § 25.478(e)(1)(A). ARM noted that while REPs are permitted under §25.478(e)(1)(A) to assess a deposit based on the higher of two months estimated usage or 1/5th of the customer's estimated annual billings, REPs today have adopted voluntary programs and policies to assist a customer in reducing the burden the customer might face from a deposit outlay. Therefore, ARM has used the lower of the rule's two deposit cap calculations (i.e., for this example, the two-month calculation, given that ARM makes no assumptions about load shaping or the time of year that enrollments occur) in making its estimate based on the assumption it is more likely representative of the current market.

"With these inputs and the operational disconnection for non-payment timeline inputs, ARM modeled two scenarios relevant to the proposal under consideration: (1) customers that do not pay the first deposit installment ('Scenario 1'); and (2) customers that pay the first deposit installment, but nothing thereafter ('Scenario 2'). In both instances, ARM assumes that REPs would begin to initiate service to customers prior to the receipt of the first deposit installment on Day 10 due to the aforementioned competitive pressures, though they would not be required to do so under the Commission's rules. ARM also assumes that all customers would take advantage of the split deposit option if assessed a deposit, based on time value of money principles," ARM said

Under both scenarios, ARM estimates that the exposure from non-payment equals $125 per non-paying customer. Under Scenario 1, this estimated amount applies because a non-paying customer is not expected to be disconnected until Day 30 (10 days until the first deposit installment is due, 5 days from past due to disconnection notice, 10 day disconnection notice window, and 5 days to prepare and process the disconnection for non-payment order), which is the assumed average monthly billing cycle corresponding to the calculated $125 average monthly bill. Under Scenario 2, this estimated amount similarly applies because the first expected disconnection day would be Day 60 (Day 40 plus 5 days from past due to disconnection notice, 10 day disconnection notice window, and 5 days to prepare and process the disconnection for non-payment order), and the first deposit installment is assumed to cover the first 30 days worth of retail service.

To translate the Scenario 1 and Scenario 2 per-customer exposure rates into a market-wide impact estimate, ARM made some assumptions about three parameters: (1) the market-wide deposit assessment rate; (2) the percentage of customers assessed a deposit that fail to pay the first installment; and (3) the percentage of customers assessed a deposit that pay the first installment but fail to pay anything more following the first paid installment.

"Because REP-specific data with respect to the assessment of deposits is competitively sensitive and not publicly available, ARM has instead opted to present a range of feasible market-wide deposit assessment rates based on specific ARM member feedback. This range is from 25% to 55%. Similarly, because REPs have not been previously required to offer split deposit options to all residential customers, there is no empirical data upon which a REP can uniformly rely upon for the installment nonpayment rates. Instead, based on ARM member feedback reflecting the best estimates of subject matter experts, ARM presents a range of Scenario 1 nonpayment rates from 15% to 50% and a range of Scenario 2 nonpayment rates from 15% to 40%. Using a range approach allows ARM to develop a spectrum of market impact estimates based on various combinations of these factors," ARM said

ARM provided one example calculation as follows: assuming a market-wide deposit assessment rate of 35%, a Scenario 1 nonpayment rate of 35%, and a Scenario 2 nonpayment rate of 15%, the annual market-wide impact would be $64.6 million:

Scenario 1: 3.3 million annual choice transactions x 35% deposit assessment rate x 35% Scenario 1 nonpayment rate = 404,250 unpaid deposit assessments; 404,250 unpaid deposit assessments x $125 per customer exposure = $50,531,250

Scenario 2: 3.3 million annual choice transactions x 35% deposit assessment rate x (100% - 35% Scenario 1 failure rate) x 15% Scenario 2 nonpayment rate = 112,613 underpaid deposit assessments; 112,613 underpaid deposit assessments x $125 per customer exposure = $14,076,563

Scenario 1 + Scenario 2 = $50,531,250 + $14,076,563 = $64,607,813

"Taking into account the full range of possible deposit assessment rates and deposit installment failure rates, ARM estimates that the annual market-wide impacts could range from roughly $28.6 million to $158.8 million," ARM said

In discussing the exposure REPs' face under the proposed rule, ARM discussed the earliest a REP could disconnect service to a new residential customer.

"Currently, a REP must provide approximately 70 days of service to a customer before it can disconnect the service for nonpayment. While some of that timeline is driven by a REP's operational and business decisions, the billing cycle, earliest due date, and disconnection notice components of the timeline are all driven by the Commission's customer protection rules and account for the significant portion of the timeline. Given the requirements of those rules, a REP cannot in practice expect to be able to disconnect a customer for non-payment in anything fewer than approximately 70 days," ARM said

ARM broke down the timeline as follows:

Billing cycle: 30 days
Obtain usage at end of cycle & issue bill: 4 days
Customer considered late in payment: 16 days
Issue disconnection notice: 5 days
10-day notice period: 10 days
Prepare and process disconnection: 5 days
Total exposure: 70 days

"[T]he Commission has recognized that a REP should be able to protect itself in the provision of retail service to a customer that is a credit risk. Under this precedent, the Commission has determined it is reasonable to allow a REP to collect, as a security deposit, an amount approximately equal to the charges it would expect a customer to incur during the initial 70-day period of service. In other words, the Commission has recognized that a REP is at risk for the provision of more than two months worth of unpaid electric service," ARM said

"Under the proposal to allow all residential customers and applicants to pay a security deposit greater than $50 in two equal installments, one-half of the security deposit would be due in ten days after written notice of the deposit requirement to the customer, while the second half would be due no sooner than 40 days [sic] While a REP could choose to delay initiating service to the residential customer until the deposit is received (either in full at Day 40 or in part at Day 10), the forces of competition may exert strong pressure on a REP to initiate service before any portion of the deposit is received as a matter of practice. For the sake of this discussion, assuming the REP initiates service immediately and the residential customer pays the first installment of the deposit, no further deposit payments are due from the customer until approximately Day 40 of receiving service, at the earliest. If the residential customer does not make the second deposit installment payment on Day 40, he/she is considered delinquent, and the REP would initiate steps toward the disconnection of service for non-payment. While the operational timeline for disconnection will slightly differ from REP to REP, depending on the REP's internal business practices, the first date for eligibility for disconnection for nonpayment would be at approximately Day 60. Under this scenario, by the time the customer is first eligible to be disconnected for nonpayment for failure to make the second deposit installment, he/she would have paid only one-half of the allowed security deposit, but consumed service for 60 days. As a result of splitting payment of the deposit into two equal installments, the REP has provided an additional 30 days of service for which it may never receive payment (assuming that the first paid deposit installment covered the first month's estimated billings)," ARM said

"Just as when the REP Coalition filed comments on this same issue in Project No. 41317, the majority of customer defaults today occur within the first few months of service, and most of those defaults occur in the first month alone. It is also true that payment rates on such defaults are among the lowest. Requiring a REP to offer every residential customer and applicant the option of paying a deposit greater than $50 in two equal installments is without precedent in the Texas electric industry. To ARM's knowledge, the Commission did not impose any similar requirement upon a vertically integrated electric utility in ERCOT prior to the restructuring of the electric market under SB 7. No such requirement currently exists in the provision of electric service in Texas by investor-owned electric utilities outside ERCOT, electric co-operatives, or municipally-owned utilities," ARM said

"If the Commission adopts the mandatory split deposit option proposal for all residential customers and applicants, the new requirement will undoubtedly impact the business dynamic of retail service to those customers. Some REPs may decide to delay initiating service to customers until a deposit in full is received. Most REPs would likely tighten their collection practices to address the additional risk posed by a split deposit mandate in order to maintain a viable cash flow," ARM said

"Today, REPs offer many customer accommodations during the billing and collection process. The billing timelines they employ often have built-in grace periods for customers. When a customer requests a reasonable accommodation, such as an extension on a due date based on extenuating personal circumstances, such a request is frequently granted. A REP may choose, as a courtesy, to grant a deferred payment plan to a customer when it is not required to do so under the Commission's rules. Similarly, some REPs elect to require less than the maximum Commission-allowed deposit amounts, employ lower security deposit thresholds, or even outright waive deposits (for example, several REPs voluntarily waived deposits for persons impacted by Hurricane Harvey). In ARM's view, these are business decisions best left to the competitive market. In the absence of the ability to promptly collect a security deposit that fully reflects the amount of risk to serve a customer, the ability of a REP to engage in these types of customer courtesies will dramatically diminish. Indeed, the REP may out of necessity begin to rely on a more stringent definition of what constitutes 'satisfactory' credit to waive a deposit pursuant to 16 TAC § 25.478(a)(3)-(4). All of these possible ripple effects will affect not only the residential customers or applicants from whom the REP is collecting a security deposit, but all customers served by the REP," ARM said

Project 47343

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