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New York Utilities Seek PSC Collaborative On Financial Security From ESCOs For "UBP Financial Security" (Obligations To Utilities)

April 16, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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The joint New York utilities have urged the New York PSC to establish a new collaborative to review the Uniform Business Practices’ financial security requirements for ESCOs

The joint utilities' recommendation came in comments on an ongoing PSC review of ESCO financial assurance in terms of eligibility (on which the utilities also made comments, noted further below). The review of the ESCO eligibility financial assurance, which would be in addition to existing security requirements for ESCOs to serve customers at the individual utilities, has focused on ESCOs meeting their contractual (price) obligations to customers, such as any guaranteed savings due to the customer in the case of an ESCO failure.

However, the utilities noted that ESCOs have obligations to utilities and said that the current security requirements in the Uniform Business Practices do not adequately protect the utilities

"In recent years, it has become clear that the existing financial security that the Joint Utilities are permitted to collect from ESCOs under the Uniform Business Practices is not adequate to protect the utilities and customers from financial risk. Therefore, the Joint Utilities urge the Commission to establish a collaborative involving Staff, the Joint Utilities, ESCOs, Direct Customers and other interested parties to review the Uniform Business Practices’ financial security requirements. The financial security inadequacy is particularly significant in regard to Natural Gas Imbalance Risks. The Uniform Business Practices should be amended to provide for adequate financial security based on the outcome of the discussion and Staff’s findings that result therefrom," the joint utilities said

Turning to the ESCO eligibility financial assurance, the joint utilities continue to maintain an aversion to surety bonds, "given their enhanced risk as compared to other types of financial security," the utilities said

"Of particular concern is that sureties are often insurance companies, who historically have been reluctant to pay claims. At the stakeholder meeting, Central Hudson and National Grid recounted recent experiences where sureties refused to pay claims that they were contractually bound to pay," the joint utilities said

"In addition, sureties go bankrupt, which allows the bankruptcy court to discharge their obligation to pay," the joint utilities said

"For these reasons, cash and an irrevocable letter of credit are the preferred forms of financial security," the joint utilities said

"A parental guarantee is also acceptable where the guarantor has an investment grade credit rating or its equivalent," the joint utilities said, though the utilities stressed that, "A parental guarantee also is inferior to cash or an irrevocable letter of credit because the security holder must collect the security. Although the parent normally complies, some risk remains."

An investment grade credit rating means BBB- and above for Standard and Poors and above Baa3 for Moodys, the joint utilities said

"If an entity does not have a publicly available investment grade credit rating, it may submit audited financial statements to the security holder for the security holder to determine whether the parent’s financial strength provides an acceptable level of assurance. Allowing the security holder to determine whether an entity has an acceptable level of financial strength by reviewing audited financial statements introduces more subjectivity and risk into the process and is to be avoided," the joint utilities said

The joint utilities said that proposals to use ESCO receivables under POR as security should not be adopted

"During the stakeholder meeting, stakeholders discussed whether the existing purchase of receivable ('POR') programs could be modified to require utilities to use portions of money owed to ESCOs to provide credits to customers where the ESCO fails to meet its price requirements. This suggestion poses a number of concerns and should not be adopted. Increasing the POR discount to include a component related to guaranteed savings poses a myriad of accounting issues, and the possibility of conflicts over security interests in receivables. Further, there is no mechanism to segregate amounts that would be used for security and regular POR discount revenue. Increasing the existing POR discount would increase utility revenue associated with the POR program, thereby increasing tax liability, upsetting the utility’s rate structure and balance sheet, and producing other accounting complexities. Administering the security through the POR mechanism would also shift the price guarantee burden to the utility by making it responsible for reimbursing customers for amounts owed by ESCOs. For these reasons, the Joint Utilities do not believe the POR is an appropriate means to raise or manage funds to secure ESCO price guarantee obligations," the joint utilities said

In terms of the level of eligibility financial assurance, the joint utilities said, "The financial security provided by ESCOs should be sufficient to cover any forfeiture that the Commission may order. Under no circumstance should any utility(s) pay any amount that ESCOs owe to customers. The Commission should establish the amount of each ESCO’s financial security such that the Commission is satisfied that it has sufficient funds upon which it may draw to protect customers."

The joint utilities include Consolidated Edison Company of New York, Inc. ('Con Edison'), Orange and Rockland Utilities, Inc. ('O&R'), Central Hudson Gas & Electric Corporation ('Central Hudson'), The Brooklyn Union Gas Company d/b/a National Grid NY ('KEDNY'), KeySpan Gas East Corporation d/b/a National Grid ('KEDLI'), and Niagara Mohawk Power Corporation d/b/a National Grid (together with KEDLI and KEDNY, 'National Grid'), National Fuel Gas Distribution Corporation, New York State Electric & Gas Corporation ('NYSEG') and Rochester Gas and Electric Corporation ('RG&E')

Case 15-M-0127 et al.

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