Direct Energy Proposes $1 Million Financial Assurance Requirement For New York ESCOs, $3 Million If Involved In Door-to-Door, Outbound Telemarketing

Direct Energy has proposed that New York ESCOs be subject to a financial assurance requirement of up to $3 million.

Commenting on one of the questions posed by the New York PSC in its evaluation of the retail market after its full stop order, Direct Energy said that, "Direct Energy believes that the most urgent issue facing the market is the need to give New Yorkers a clear signal that ESCOs who operate in New York can be trusted, and that those ESCOs have the financial wherewithal both to keep the promises they make to their customers and to make things right if they ever fall short."

"A financial assurance requirement for all ESCOs should go a long way toward restoring consumer trust in the market in the near term, before moving on to address the other issues in the Request for Comments," Direct Energy said.

Currently, there is no PSC-required financial assurance requirement for ESCOs related solely to certification, though ESCOs must meet NYISO credit requirements, as well as certain utility credit requirements depending on billing method (ESCOs using utility consolidated billing and granting the utility a right to such receivables can avoid such standards).

"In Direct Energy’s view, an appropriate financial assurance requirement would have two tiers: $1 million for ESCOs serving mass market customers who certify that they are not engaged in door-to-door or outbound telemarketing sales to mass market customers, and $3 million for ESCOs serving mass market customers who do plan to use those sales channels," Direct Energy said.

The proposed financial assurance requirement would attach severally to each ESCO operating in the New York market, Direct Energy said. Thus, for example, a corporate entity with three ESCO subsidiaries, two of which are engaged in door-to-door sales, would arrange for two $3 million bonds or parental guarantees (one for each of the two ESCOs engaged in door-to-door sales) and one $1 million bond or parental guarantee.

Though reference is made to bonds or parental guarantees, Direct Energy did not propose specific instruments to meet the proposed financial assurance requirements, suggesting that the form of financial assurance permitted to meet the requirement should be one of the topics discussed at a first collaborative meeting established by the PSC regarding the full stop order, which will be held on March 15.

Speaking with EnergyChoiceMatters.com, Chris Kallaher, Sr. Director of Government & Regulatory Affairs for Direct Energy, said that the company has no objection to, "a lot of possible nuance," in the financial assurance requirement, both in the levels required, and in the instruments for meeting the standards.

Moreover, Kallaher said that the collaborative process addressing retail market changes can work out any proposals from other ESCOs for different requirements if ESCOs can demonstrate a particularly lower-risk business model that justifies another financial assurance tier.

"An enhanced financial assurance requirement for ESCOs using sales channels with a particularly high customer touch, especially door-to-door sales, which brings a sales agent in close physical proximity to a potential customer, is totally appropriate. While these channels can be very effective in educating customers about products and services an ESCO is offering, they also carry a higher risk of both inadvertent misunderstandings and intentional misconduct. ESCOs that want to take advantage of the closer customer interactions in those channels must also provide assurance against the risks that come with those interactions," Direct Energy said.

Direct Energy pointed to Texas and Pennsylvania as vibrant markets with financial assurance requirements which have not impeded competition or market entry.

Direct Energy further noted that Texas also has detailed, stringent technical and managerial requirements that retail suppliers must meet in order to gain authority to provide retail electricity service in the State. "The Commission could consider enhanced requirements in these areas for an ESCO to maintain its ability to do business in New York," Direct Energy said. Direct Energy initially only proposed the financial assurance requirements since the issue of financial assurance was a specific question asked in the PSC's request for comments.

Kallaher explained that, among other reasons, Direct Energy proposed the financial assurance requirement as an initial starting point to instilling consumer trust in ESCOs, because it is an issue that will likely find more consensus than other issues related to sales and marketing.

The financial assurance requirement will serve as indication to the market, that, if something does go wrong, ESCOs will have the wherewithal to make things right, such as by making customers whole, Kallaher said

Kallaher told ECM that the collaborative process is likely to find that there is, "fairly widespread agreement" on the need for financial assurance, and that parties can come together on the issue fairly quickly, with the PSC ultimately adjudicating the issue.

Starting on an issue with such "common ground" to work from will be more productive, Kallaher said, as Direct Energy envisions a serial process to address market changes -- prioritizing certain issues, and then moving on to others, so that solutions to the PSC's concerns about the market can be found as quickly and efficiently as possible.

"In our view, this means finding solutions to the most pressing problems first so that the ESCO community can win the trust of the consumers we serve and seek to serve and also to win the trust of other stakeholders who have raised concerns about the manner in which some ESCOs currently operate in New York. Once the most pressing issues are resolved in a way that allows the market to move forward, the Commission and other stakeholders can move on to the other issues of concern," Direct Energy said.

"Our focus on the need for a financial assurance requirement does not mean that we see the other issues in the Request for Comments as unimportant, or that we do not have views on those topics. Rather, it reflects our belief that the Commission should work with stakeholders to prioritize the issues before it and work through those issues in a serial fashion, and our belief that the financial assurance issue is the best issue to start with," Direct Energy said.