New York DPS Staff Proposes Baseline Amount For New ESCO Financial Assurance Requirement; Amount Would Grow With ESCO Revenues

Staff Says An Additional (Higher) Financial Requirement For Door-to-Door Marketing Is, "Appropriate"

Staff Recommends Forms of Acceptable Financial Instruments

May 29, 2020

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Staff of the New York Department of Public Service have issued a whitepaper with recommendations concerning new ESCO financial assurance requirements

The purpose of the new financial assurance, part of the PSC's retail market reset order, is to ensure that any customers that are harmed by ESCOs are made whole, to the extent possible, in cases of harm such as a failure on behalf of the ESCO to honor the terms of the customer agreement, violations of the UBP, or violation of other Commission orders, rules, and regulations.

Staff proposes to utilize annual revenues as the metric that directly impacts the amount of an ESCO’s financial assurance obligation, with a baseline amount of required financial assurance of $500,000, with the potential for higher requirements based on an ESCO's revenues. Specifically, Staff proposes that ESCOs be required to obtain a financial assurance requirement that is equal to $500,000 or 10% of the ESCO’s annual revenues, whichever is higher

"In determining the base amount of a financial assurance requirement, Staff sought to select a monetary amount that would be sufficient to cover the potential financial harm to customer served by an average to below average size ESCO. Staff believes that tailoring the base financial assurance amount to smaller ESCOs is appropriate so as not to create an excessive financial burden on smaller companies. Doing so also preserves the option to scale the amount of financial assurance up for larger companies," Staff said

"Staff proposes that the base amount of a financial assurance requirement be set at $500,000. This amount is comparable to the higher levels of what is already required in other jurisdictions. Staff finds this appropriate in light of the stated purpose of the financial assurance requirement in New York as compared to other states," Staff said

"[T]his amount should be increased for larger ESCOs who pose the risk of accruing larger amounts of required customer refunds. Thus, Staff proposes that ESCOs be required to obtain a financial assurance requirement that is equal to $500,000 or 10% of the ESCO’s annual revenues, whichever is higher," Staff said

"Under this structure, Staff estimates that more than half of the market will secure a financial assurance for $500,000, with the remainder providing a company specific amount based on their revenues," Staff said

Staff noted that to implement a financial assurance amount based on revenue, the Commission will need to adopt an additional eligibility filing requirement directing ESCOs to file their revenues annually.

Staff said that the amount of the financial assurance would need to be reviewed, and potentially adjusted every three years during the ESCO’s triennial review, or more frequently if a significant change to the ESCO’s annual revenues occurs.

Staff said that an additional financial assurance requirement, in addition to the requirement listed above, is "appropriate" for ESCOs utilizing door-to-door marketing, but said that additional stakeholder input is needed, given that Staff has now proposed a baseline for all ESCOs.

Staff said, "Staff also considered additional financial assurance requirements for ESCOs the [sic] engage in certain activities in the market. Vistra proposes an additional financial assurance requirement of $750,000 for any ESCO utilizing door-to-door marketing. Staff recognizes that a significant portion of customer complaints, include [sic] slamming complaints, result from door-to-door marketing. In situations where a customer has been found to have been slammed by an ESCO, the appropriate remedy is usually to refund the customer any ESCO charges in excess of what the customer would have paid the local distribution utility for the period that the customer was enrolled with the ESCO. Given the demonstrated increased risk associated with this marketing channel, Staff proposes that an additional financial assurance requirement is appropriate for ESCOs utilizing door-to-door marketing. However, Staff seeks input from interested stakeholders as to the amount of such requirement."

Another issue considered by Staff was the potential disparate treatment of electric and gas commodity in the context of ESCO financial assurance requirements. "Given the seasonality of gas usage, it is possible that an ESCO offering gas service could incur significant overcharges during the winter heating season. This imposes an additional risk that the ESCO may not be able to provide any necessary refunds to customers."

"Thus, Staff seeks additional input regarding the potential to require an additional financial assurance requirement for ESCOs offering gas commodity to customers," Staff said

In terms of the acceptable financial assurance mechanisms, Staff’s preferred form of financial assurance is an irrevocable letter of credit.

"Under this scenario, the ESCO would be required to obtain an irrevocable letter of credit with a New York financial institution for the benefit of the ESCO’s customers. The ESCO would be required to provide proof of the available credit to the Commission as part of its eligibility requirements. Only after a Commission Order directing refunds to customers utilizing the letter of credit would payments be made to customers utilizing the distribution utility bill. As recommended by the Joint Utilities, it would be the Commission’s responsibility to direct the transfer of forfeited security to the applicable utility(s) and determine how the utility(s) should reasonably apportion credits to customers," Staff said

"Staff offers that, in the event that the Commission must be named the beneficiary of the letter of credit, legislation may be required to allow the Commission to serve in this role," Staff said

Discussing irrevocable letters of credit further, Staff said, "This option is the most attractive in Staff’s opinion due to the certainty of receiving payment of funds."

"However, issues surrounding the use of irrevocable letters of credit include identification of the appropriate entity to hold the letter of credit, and development of specific circumstances and “triggering events” that would allow for the remittance of payment in the event the need arises. Staff proposes that any irrevocable letter of credit be obtained through a New York financial institution with an investment grade credit rating, and that certified proof of the available letter of credit be provided to the Commission by the ESCO in order to satisfy any financial assurance requirement," Staff said

Staff does not favor the use of surety bonds

"Staff does not consider surety bonds as a viable option due to the difficulty of collecting on these bonds," Staff said

"Staff does not recommend surety bonds as a form of financial assurance to be utilized by ESCOs in satisfying a financial assurance requirement," Staff said

Concerning parental guarantees, Staff said, "The use of a parental guarantee is another option that was suggested by stakeholders as an example of what has been done in other states. This option is particularly useful to ESCOs that may not have the financial means to secure an alternative financial assurance instrument, or cannot demonstrate creditworthiness due to a lack of credit rating in order to meet the required form of indebtedness to operate. In this instance, a parent would be the financial backstop and guarantor of funds. One potential downside of a parental guarantee, particularly compared to an irrevocable letter of credit, is the additional risk that the parent would refuse to pay. Staff proposes that if a parental guarantee is accepted by the Commission as a suitable form of financial assurance, the parent company providing the guarantee must have an investment grade credit rating."

Concerning cash, Staff said, "Cash, held in an escrow account, is considered an attractive option because it may be accessed at any time and used at the discretion of the security holder based upon conditions agreed to by the parties as part of the escrow agreement. However, as PULP pointed out in its comments, in order for a government entity to hold any type of financial security, legislation would have to be passed permitting it to do so. Thus, while cash has attractive features, the logistics of how and by whom the cash is maintained creates an overarching problem."

Case 15-M-0127 et al.

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