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NY DPS Staff: ESCOs "Derelict" In Duty To Defend Reasonableness Of Charges Exceeding Default Service Rates

DPS Staff: $1.3 Billion In ESCO Overcharges Can't Be Explained By Value-Add Premiums, Polar Vortex

DPS Staff: Overcharges Result From "Greed", Lack of Transparency

DPS Staff Says Calls For Greater ESCO Collateral Requirements Appears To Be Part Of "Hidden Agenda" From Larger ESCOs To Weed Out Smaller ESCOs


April 2, 2018

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

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In a post-hearing brief, Staff of the New York Department of Public Service said that testimony in the New York PSC's review of the retail mass markets show that Staff's analysis that ESCOs have overcharged mass market customers by $1.3 billion has not been rebutted, and supports Staff's recommendations to end individual retail choice except for certain products noted below

"The Commission should determine that the prices charged to residential and small commercial customers in the electric and gas mass markets are substantially higher than those charged by the utilities. The ESCOs, NEMA and RESA seek to explain away this substantial difference by pointing to 'value-added' services that they offer. As Staff has proven, the tremendous difference in prices cannot be justified by light bulbs, thermostats, ridiculously high fixed-price offerings, 'green' energy that is no more green than the energy provided by the utilities at a lower cost, and other 'value-added' services and products. Mass-market customers are in fact the victims of a failed market structure that has emboldened the ESCOs into taking advantage of customers trust in statements made to them by unscrupulous representatives of the ESCOs and marketing tricks, designed to obfuscate commodity prices to exact unconscionable commodity prices that are not just and reasonable. Therefore, the Commission must take bold action to protect customers and ensure just and reasonable rates by either preventing the ESCOs’ from using the utilities’ systems to serve mass-market customers or fundamentally change the retail access requirements and rules in the manner proposed by Staff in this brief," Staff said

Staff's brief supported Staff's recommendations, previously set forth in testimony, to, among other things, end mass market ESCO sales except for the following: guaranteed savings products, 100% renewable products, and service under a municipal aggregation or not-for-profit ESCO.

"In summary, the Commission cannot correct the flaws in the mass markets solely through amendments to the UBP or modifications to its enforcement process because the UBP does not regulate the prices ESCOs charge for their products. Real change to the ESCO regulatory regime, as discussed in this brief, is required to protect residential and small commercial customers and ensure that their commodity rates are just and reasonable," Staff said

"In light of the pricing abuses ESCOs are committing against their customers, Staff recommends that the Commission direct that the utilities prohibit ESCOs from using their distribution systems to provide commodity service to mass market customers (both residential and small commercial, as defined in sections III.C.1.a.(i) and III.C.1.b.(i) of this brief), unless our recommendations are implemented by the Commission (Tr. 2032, ln 18 to Tr. 2037)," Staff said

"Staff’s first recommendation is that the commodity service product provided by the ESCO must either provide a guarantee that the mass market ESCO customer’s overall electric or gas bill will be lower, or no greater, than that charged by the utility for delivery and commodity, or that 100 percent of the ESCO product is generated from renewable resources that are delivered to and consumed in New York and otherwise in compliance with the Commission’s environmental disclosure program requirements. (Tr. 2033, lns. 1-14)," Staff said

"Second, the Commission should prohibit ESCOs from using the utility distribution systems to provide commodity service to aggregated mass market customers unless the customer aggregation is enabled through either a Community Choice Aggregation (CCA) model utilizing a professional energy buyer acting in a fiduciary manner that is independent of the ESCO (Tr. 2033, lns. 14-24), or the energy service provider is a not-for-profit (NFP) corporation or municipal entity (Tr. 2033-2034, lns. 24-3)," Staff said

"Third, in both instances, the Commission should monitor the performance of the CCA and NFP to ensure that they are providing competitive prices vis-á-vis the utility’s default service (Tr. 2034, lns. 3-6)," Staff said

"Fourth, mass market customer bills (whether individual or aggregated) must disclose a relative bill comparison in a manner acceptable to the Commission between the current bill charges and what the customer would have paid if the customer took both delivery and commodity service from the distribution utility (Tr. 2034, lns. 7-18)," Staff said

"Fifth, the Commission should direct that the utilities no longer provide Purchase of Receivables (POR) without recourse to ESCOs, but instead that POR only be offered to ESCOs with recourse, meaning that the ESCOs would not be made whole in the instance where funds for commodity service cannot be collected from the ESCO’s customers (Tr. 2034-2035, lns. 18-2; Tr. 2155, lns. 1-3; Tr. 2157-2158, lns. 10-2; Tr. 2159, lns. 1-3))," Staff said

"The sixth recommendation is that the Commission should require that ESCOs provide written reports on a calendar year basis, and that those filings contain the information necessary for the Commission to monitor the mass market and ensure that ESCOs are compliant with the Commission’s new requirements (Tr. 2035, lns. 2-10), including that ESCO customers must be provided with 100 percent green energy or realize savings on their commodity compared to the default utility’s offering," Staff said

"Regarding ESCO marketing practices, the seventh recommendation is that the Commission should prohibit ESCOs from using door-to-door, point of sale, telephonic sales, or similar marketing practices (Tr. 2035, lns. 11-14). Instead, the Commission should direct ESCOs to limit their marketing to direct mail, electronic communications, or similar forms of marketing where the potential ESCO customer would respond to such marketing and otherwise initiate direct contact with the ESCO (Tr. 2035, lns. 15-22)," Staff said

"The eighth recommendation is that the Commission should require that the ESCOs ensure the protection of customer data, confidentiality and cyber security by being in compliance with UBP Section 4 and consistent with the National Institute of Standards and Technology Cyber Security Framework (NTS&TCS) (Tr. 2035-2036, lns. 22-12; Tr. 2188, lns. 9-16) or the applicable cyber security requirements of the North American Electric Reliability Corporation (NERC) (Tr. 2698-2700, lns. 9-3), as proposed in the UBP, Section 12 (Exh. 724 (SP-11))," Staff said

"The ninth recommendation is that the Commission should modify the UBP to conform to Staff’s recommendations, which are shown on our redlined revisions to the UPB in Exh. 724 (SP-11). (Tr. 2036, lns. 12-14)," Staff said

"The tenth recommendation is that the Commission should provide for an orderly transition to implement our recommendations, and direct interested parties to file with the Secretary proposals concerning the scope of Track II, and that the Commission issue an Order determining the scope and issues to be addressed in Track II. (Tr. 2036, lns. 14-20)," Staff said

"The eleventh and final substantive recommendation is that the Commission should not delay or be distracted from implementing these recommendations by the prospect of potential value-added products that the ESCOs may offer to mass market customers until the transitional actions that we recommend have been implemented. The potential development of appropriate energy-related value-added products should occur later in a collaborative process in Track II, after the detrimental aspects of the current ESCO markets have been eliminated and customers can then make fully informed decisions regarding whether they want ESCO products based on full transparency of pricing for commodity products available to them, untainted by misleading or inappropriate marketing (Tr. 2036-2037, lns. 20-10)," Staff said

Staff said that, "According to the data provided by the utilities, the approximately two million New York State residential utility customers who took commodity service from an ESCO collectively paid almost $1.2 billion more than they would have paid if they purchased commodity from their distribution utility during the 36-months ending December 31, 2016."

"Additionally, small commercial customers paid $136 million more than they would have paid if they instead simply remained with their default utilities for commodity supply for the same 36-month period. Combining the residential and small commercial customer classes, mass market customers were “overcharged” by over $1.3 billion dollars over this time period. Finally, the data also shows that low-income customers (a subset of the residential customer mentioned above) who took commodity service from an ESCO collectively paid in excess of $146 million more than they would have paid if they took commodity supply from their utility," Staff said

Staff in its brief said that these excess costs could not be justified based on any premiums for value-added service, renewable content, and said that no party had rebutted Staff's findings regarding the overcharges. Staff criticized ESCOs for failing to provide specific evidence regarding claims of premiums for value-added services which could justify such overcharges.

"[P]arties ... fail to provide any reasonable alternative price comparison, and also fail to acknowledge that Staff in fact attempted to elicit the value of any alleged value-added products included on the ESCO side of the comparison, but that effort was stifled by the ESCO parties," Staff said

"Additionally, this argument also assumes that customers in New York are actually taking products from ESCOs that include energy-related value-added services. Direct Energy witness Hanger lists products and services that ESCOs “can” offer such as (1)fixed rates, (2) renewable energy, (3) smart thermostats, (4) gift cards, (5) airline miles, (6) information regarding energy consumption, and (7) 'more customer-friendly terms and conditions' (Tr. 255-256, lns. 21-13), but does not provide any hard evidence that ESCOs in New York are offering any or all of these products, nor that any New York customers actually take such products. Furthermore, there is no attempt to quantify the benefits associated with such products so as to potentially justify the over $1.3 billion in overcharges experienced by mass market customers who took ESCO service for the 36-month period ending June 2016," Staff said

Staff said that since its comparison included three years, the higher ESCO cost could not be attributed to transient events or the impact (or lack thereof) of reconciliations and prior period adjustments.

"It is important to remember that Staff aggregated the overpayments over a three-year period, and no out-of-period adjustments, polar vortexes, or other event could explain the over $1.3 billion in overcharges," Staff said

Staff also faulted various analyses presented in ESCOs' testimony as inapt, such as data which included savings solely attributed to large commercial customers.

Regarding ESCO testimony that default service costs are artificially low due to the lack of sufficient unbundling, Staff said, "The ESCOs’ proposals would raise delivery costs for customers, violate Commission regulations, and skew default delivery rates to make the ESCOs’ rates appear to be lower."

Staff said that the mass market, and its recommendations, should include small commercial customers. Staff said that small commercial customers should include those electric customer accounts that are not demand-metered, and those customers whose annual gas consumption is not greater than 750 dekatherms (dth), or equivalent, per year.

Furthermore, Staff said that the cutoff of 750 dth for a small commercial customer may be too low, and the Commission should investigate expanding the definition of small commercial gas customer beyond 750 dth of usage, "to ensure that it is providing appropriate protections to these customers, who are often as misinformed and vulnerable to the ESCOs’ marketing practices."

As stated above, Staff recommended that, "the Commission should prohibit the ESCOs from using the utilities’ distribution systems to provide any sort of variable-rate commodity-only products unless the ESCO guarantees that it will charge less, or no more, than the applicable utility’s default commodity service on an annual basis. (Tr. 2033, lns. 1-14)."

"The Commission should prohibit the distribution utilities from providing ESCOs access to their systems to provide fixed-price commodity products to mass market customers (Tr. 2132) unless the product can be structured so that they provide a guaranteed savings when measured against the default utility on an annual basis. (Tr. 2132, lns. 7-14)," Staff said

"[T]he Commission should determine that the only renewable energy products ESCOs may offer to mass market customers, excluding low-income customers, is a 100 percent renewable resource energy product provided over the calendar year and generated from renewable resources," Staff said

Staff said that, "ESCOs take advantage of the mass market customers’ lack of knowledge and understanding of, among other issues, the electric and gas commodity markets, commodity pricing, and contract terms (which often extend to three full pages), and in particular, the ESCOs’ use of teaser rates and 'market based rate' mechanisms that customers are charged after the teaser rate expires (Tr. 2106-2107, lns. 13-7 and Tr. 2107-2108, lns. 16-2). In fact, ESCOs appear to be unwilling to provide the necessary product pricing details as to how those 'market based rates' are derived to mass market customers in a manner that is transparent so as to enable an open and competitive marketplace where customers can participate fairly and with the necessary knowledge to make rational and fully informed decisions on whether it is in their best interest to take commodity service from their default utility, or from a particular ESCO among competing but equally opaque choices (Tr. 2081, lns. 11-20). Additionally, these problems would not occur if the ESCOs could not charge in excess of the utilities."

Regarding ESCO testimony that comparisons to default service costs is a flawed comparison due to value-added services offered by ESCOs, Staff said, "the cost incurred by the ESCOs in procuring these sorts of value-added products is at best de minimis and does not explain away the significantly higher commodity costs charged by so many ESCOs. (Tr. 2116, lns. 12-18). The $1.3 billion in charges over what these customers would have been charged had they taken default utility service cannot be explained away as the result of the costs incurred by the ESCOs to provide their customers with light bulbs and thermostats as 'energy-related value-added products' (Tr. 2214, lns. 1-5; December 2016 Notice, at 7-8). The massive $1.3 billion in overcharges is the result of higher, and more often than not, significantly higher, commodity costs imposed by the ESCOs on unsuspecting residential and other mass market customers. (Tr. 2116, lns. 11-18). These Overcharges are simply due to (1) the lack of transparency and greed in the market, which prevents customers from making rational economic choices based on facts rather than the promises of the ESCO representative, and (2) obvious efforts by the ESCOs to prevent, or at least limit, the transparency of the market. (Id.). These obvious efforts include the lack of a definition for 'market rate' in their contracts, resulting in the fattening of ESCOs’ retained earnings. (Id.)."

"Exhibit 704 (JSA-3 Confidential) reveals numerous instances where ESCOs have consistently charged residential customers in excess of levels charged by the utilities and some other ESCOs for the entire three-year period covered by the data provided in response to DPS-Utility 4 (Exh. 701 (JSA-1 Confidential)), without significantly losing market share. (Tr. 4170, lns. 3-21; Confidential Tr. 3730 lns. 20-23; Tr. 4188 lns. 7–11). All else equal, these sustained 20 percent plus mark-ups would clearly represent an exercise of market power. However, is all else really equal? Could these ESCOs be providing additional value beyond what is attributable to utility default service? There is no dispute that customers paid more than 20 percent higher prices to take commodity service from these ESCOs. The real question is whether the customer switching data on actual purchasing decisions by customers (Tr. 4189) is reflective of a reasonable valuation of those services. (Tr. 4190). In fact, over the three-year time period, 30 percent (226 out of 746) of the ESCOs were billing customers in excess of 20 percent more than what the utility would have billed them for commodity, yet these ESCOs were able to remain in the market all three years. (Tr. 4177, lns. 1-7)," Staff said

Staff said that, "[Direct Energy] Witness Kagan affirmatively states that ESCO rates can generate savings (Tr. 183, lns. 5-6) over utility rates, but at no point was he able to demonstrate, using historical data from actual New York customer purchases, that ESCOs do provide value. Given the resources at Direct’s disposal, and given the critical issues raised in this proceeding, it is surprising that Direct’s witnesses did not reconcile the charges as shown in Exh. 701 (JSA-1 Confidential) with the charges in Direct’s proprietary data set (which was not entered into the record) to show instances where the overcharge was attributed to a value-added service. It is readily apparent that the ESCO parties are derelict in their duty to defend the reasonableness of their high-priced sales to end-use customers by quantitatively showing that their products met either of these two conditions, nor have they made a showing regarding the Commission’s requirement of an effective or workably competitive market. They have not done so because they cannot make such a showing."

Staff dismissed the claim that imposing financial collateral requirements on ESCOs would resolve the current overcharging.

"The Commission should reject the idea that bonding and collateral posting will have the same effect as ensuring that the ESCOs are charging just and reasonable rates, as it will not. Presently, the UBP place no limit on what an ESCO can charge a customer, so the Commission cannot currently seek consequences under the UBP against a bad actor charging unjust and unreasonable rates. Thus, the posting of a bond or collateral will not have the effect they claim, and the proposal should be rejected by the Commission," Staff said

"Additionally, this appears to be part of a hidden agenda advanced by the larger ESCOs to weed out the smaller ESCOs," Staff said

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