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New Report On Benefits Of Retail Choice Says Consumer Protections Undertaken To Date Should Be A, "Starting Point"; Favors "Aggressive" Steps For Consumer Protection

REAL Says Report "Finds Retail Energy Key To An Affordable Clean Energy Transition"

July 17, 2023

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Copyright 2010-23
Reporting by Paul Ring •

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The Retail Energy Advancement League (REAL) publicized a new report, prepared by a consulting firm and authored by Paul Hibbard, former chairman of the Massachusetts Department of Public Utilities, which finds that, among other things, "harnessing the productive innovation and creativity of retail supply -- which is already evident in the products that suppliers have brought to market -- will be a powerful tool in the toolbelt states will need if they are to successfully achieve aggressive decarbonization goals while managing the challenges of an industry undergoing rapid change in both supply and demand."

"While this is a relatively new challenge, the retail market has already demonstrated its ability to react in concert with public policy goals. Across the U.S. suppliers have developed and sold product offerings that accelerate low/zero carbon options; enable price responsive demand; help manage new loads with vehicle electrification; help smooth load growth that will come with building electrification; and help manage reliability challenges associated with the increasing variability of supply and demand. These are challenges states will face at an increasing pace in the coming years, and retail supply can be a vital piece of the decarbonization puzzle," the report states

REAL summarized the report as finding that, "consumers in states with restructured energy markets are better off than states still holding onto the monopoly utility model. States that allow competition are also better positioned to support the transition to clean energy, consumer adoption of electric vehicles, and reduce carbon emissions without relying on ratepayer or taxpayer dollars."

"Report findings demonstrate that retail energy choice has substantially increased the options available to consumers for the purchase of electricity, played a critical role in the development of clean energy resources, created and marketed a wide range of products that are designed to meet consumers' energy cost management and non-price preferences, and creates the conditions to lower all energy costs in the state market over time," REAL said

The report notes that, "retail supplier marketing methods have raised a number of concerns amount states and consumer advocates."

"While retail supply is not the only industry or consumer product where some participants engage in questionable or harmful sales and marketing activities, particular attention should be focused on their prevalence with respect to the cost and delivery of a product as vitally important as electricity for customers’ health and welfare. There are at least three reasons why deceptive, misleading and harmful sales and marketing practices in retail electricity supply warrants heighted [sic] attention, strict licensing requirements and compliance oversight, and consequential penalty systems. First, electricity is a basic need, and energy costs are a non-discretionary expense, one that represents a disproportionately high portion of the income of low and moderate income consumers. Second, until retail choice is as ubiquitous as cell phone use and cell phone plans, electricity billing in general and retail electricity choice in particular is confusing, and highly vulnerable to the development and use of manipulative marketing information and practices. Third, there is much to lose from consumer and societal perspectives if the misleading, deceptive, and harmful practices of some retail suppliers are allowed to poison the water for all, resulting in the severe curtailing or elimination of retail choice," the report states

"If retail supply is to continue and play an important role in the energy transition, the consumer protection steps taken to date by states should be viewed as just a starting point. State regulators and consumer advocates, utilities, and the retail supplier community should work together and take aggressive steps to ensure that consumer protection and appropriate customer service become a defining feature of retail supply, not its Achilles heel, while letting retail supply thrive," the report states

While the report does not offer specific recommendations on consumer protections, the report chronicles actions taken to date as including the following: "States have taken notice and have enacted multiple strategies to protect consumers and make sure that any deceptive, misleading or harmful marketing and sales strategies are minimized or eliminated, and to provide regulators tools to take action against bad actors. For example, some states have prohibited service to ratepayers on energy assistance programs or required regular reports on numbers of such customers served by competitive suppliers. In 2016, the New York Public Service Commission issued an order prohibiting service to low-income customers by competitive suppliers. States can also implement a 'do not switch' option for consumers to block their accounts from unauthorized switching from basic service."

"Optionality for customers can strongly support consumer protection. If a customer finds that a service or product falls short of expectations, they can select an alternative supplier. However, some states have logged diverse and multiple complaints regarding the marketing approaches and strategies of some retail supply companies. This is one of the most controversial and challenging elements of retail choice to date. While retail supply is not the only industry or consumer product where some participants engage in questionable or harmful sales and marketing activities, particular attention should be focused on this issue since electricity is a basic need. Successful retail suppliers recognize that providing quality service and continuously improving product offerings is a fundamental requirement to gain the trust of customers and thereby gain market share. But state rules and regulations must evolve to better protect consumers against deceptive advertising and inappropriate marketing practices, and put in place robust requirements for licensed suppliers and consequential penalties for bad actors," the report states

The report cautions against ending retail choice

"Retail choice was initiated with supplier licensing rules and regulatory oversight that were in hindsight too light in many states, opening the door to bad actors, deceptive practices, and bad outcomes. But it would be imprudent to eliminate retail choice at this time because of these experiences. Instead, this can and must be improved both (a) to prevent harm to consumers and establish customer service expectations and obligations that align with the importance of a market that delivers an essential good, and (b) to allow retail choice to continue to evolve. Many states have already reacted with revisions to strengthen consumer protection, marketing/advertising, and customer service requirements on retail suppliers, and these changes appear to work. These moves are appropriate, replicable in other states, and fully aligned with the consumer protection roles of state public utility commissions. In short, the bad experiences some states have had with the actions and predatory practices of some retail suppliers can be effectively ironed out of the framework for retail choice with relatively straightforward changes to the regulatory construct.," the report states

"Doing away with retail choice as a response to challenges is akin to throwing out the baby with the bath water; there are too many current and potential consumer and societal benefits to flow from healthy retail choice markets for this to be the outcome of isolated practices in a nascent market. U.S. experiences have shown that proper assessment of the impact of retail competition requires a holistic review of at least the following metrics: (1) competition, (2) energy market evolution and state climate goals (3) consumer control, engagement and preferences, (4) long-run consumer costs, (5) education and transparency, and (6) customer service and consumer protection," the report states

The report finds retail choice bringing benefits in the areas of (1) competition, (2) energy market evolution and state climate goals, (3) consumer control, engagement and preferences, (4) long-run consumer costs, (5) education and transparency, and (6) customer service and consumer protection.

Specifically, with respect to long-run consumer costs, the report states, "Competition for the provision of electricity creates the conditions to lower all customers’ costs over time. Evidence from a review of statewide data supports the idea that retail choice can and does deliver long-run cost-reduction benefits in the retail supply of electricity for all customers. Moreover, while a review of the literature focused on the price-only impacts of retail choice reveals a range of methodological challenges, it also supports the idea that all classes of consumers – commercial, industrial and residential – have benefitted from retail choice."

Citing prior analyses, the report notes that, in aggregate, retail choice customers fared better during winter storm Uri than muni and co-ops in Texas

"Retail choice played a critically important role in the Texas crisis from the perspective of retail consumers. While disastrous at the wholesale level, the majority of residential customers in the retail market in Texas were shielded from the impacts of price volatility in the wholesale market. Specifically, approximately 75 percent of retail residential customers in Texas had chosen and were under fixed price retail electricity supply contracts, which successfully shielded them from the extreme price volatility that resulted from the storm and subsequent events. Of the remaining 25 percent, roughly 24 percent were on variable rate plans and only less than 0.5 percent of residential customers were on wholesale index pricing plans. Thus the severe volatility in the wholesale market affected only a minority of residential retail electricity customers [sic][.] In the aftermath of the energy crisis, analyses determined that customers with access to retail choice incurred a lower average cost per residential customer compared to their non-retail choice counterparts. A residential customer with access to retail choice had an average electricity bill of $86 per month whereas a customer served by an muni or co-op had an average electricity bill of $373 per month."

"These outcomes illustrate how retail choice benefitted the majority of residential customers in Texas during and after the crisis by providing opportunities to select fixed-price, or price-stable, rate plans. The 2021 energy crisis may highlight significant risks associated with operation of power systems and wholesale electricity markets during times of severe weather or other episodic events, and raise important issues related to coordination of natural gas and electricity systems, and investment in energy infrastructure winterization. But the experience in Texas during the crisis is unrelated to the existence of robust retail competition in the state. To the contrary, it appears that the availability of diverse products and pricing plans due to retail choice if anything mitigated the impacts of the Winter Storm Uri electricity crisis on retail customers," the report said

Addressing other comparisons concerning prices under retail choice, the report said, "price analyses related to retail choice universally suffer from a range of flaws that reduce the value of their results in assessing whether and to what extent retail choice will provide long-run cost benefits to consumers. They tend to compare results across time periods that are too short, across electricity products that are diverse in pricing structure, contract term, and value-added options, and across incomparable time periods or geographies."

Other recommendations from the report include, but are not limited to, the following:

• "[S]tates, utilities, and retail suppliers need to double down on efforts to increase consumer education and establish familiarity with retail choice. Competition thrives with active, growing and informed consumer demand. Efforts to-date in most states to inform consumers about the availability and details associated with choosing one’s electricity supplier have not been adequate to the task. Texas provides a solid benchmark in this respect – choice was not optional from the get-go, and consumers are now familiar with electricity choice and fully comfortable with choosing (and re-choosing) suppliers"

• "[W]ith strong consumer protection rules in place, consider active steps to level the playing field between distribution utilities providing default service, community aggregators, and retail suppliers. The principle of competitive retail supply is that a vibrant competitive market of suppliers will drive prices down and maximize the benefits to consumers of electricity purchase decisions. But the flip side of this coin is that the market needs to be truly fair and level across suppliers. In many states, this simply is not the case as incumbent utilities have primary or exclusive access to customer data and billing administration, and these frustrate the purpose and conditions of competition. Some states have taken effective steps to level the playing field – by allowing supplier confidential access to customer data, and by allowing the customer-selected supplier the opportunity to be the point of contact with the customer through billing administration. States should work with stakeholders to develop acceptable and effective steps to level the competitive playing field."

"We stand ready to work with regulators on implementing the proposed reforms outlined in the report," said Chris Ercoli, President and CEO of REAL. "By prioritizing consumer education initiatives, creating a fair environment for competition, and ensuring fundamental consumer protections in place, restructured states can unlock the full potential of competitive retail energy markets and foster a more transparent, inclusive, and sustainable energy landscape."

See the report here


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