Thursday, September 28, 2006

Think Twice Before Switching Utilities

In 1996, the New York PSC adopted a utility "restructuring" paradigm prominently championed by Enron. Under that model, customers could deal with two utilities for electricity and possibly two more utilities for natural gas. The traditional utility, in that model, would stop selling electricity and gas, which would then be sold only by lightly regulated new "energy services companies" or "ESCOs." Enron wanted to be a major player in these new wholesale and retail markets.

This method of deregulation, described in "Disconnected Policymakers," created a synthetic competition. New wireless electric and pipeless natural gas utility middlemen would buy electricity and natural gas in wholesale markets and sell in deregulated retail markets, and the rates, terms and conditions of their service would no longer policed closely by federal or state regulators. This system was being considered in many states until the Enron bankruptcy debacle. Notwithstanding claims of utility deregulation proponents, serious studies have found no discernible consumer benefit in the states that "restructured" their utilities, several states that went down the road of utility deregulation reversed course, and others are reconsidering their decision.

Few residential customers in New York switched to ESCO service. Yet, over the past decade, the New York PSC has required many millions of dollars of ratepayer and taxpayer funds to be spent to promote migration to ESCO service. There is no analysis, however, showing that customers save money or receive different or superior service with ESCOs. Instead, the emphasis has been upon expensive PSC and utility advertising campaigns (paid for by utility ratepayers) and promotional gimmicks, such as small discounts for a limited period. These campaigns typically extoll the virtues of "choice" but are short on information on price and service.

In 2002, the legislature overruled the PSC by enacting the Energy Consumer Protection Act which requires ESCOs to follow HEFPA, the Home Energy Fair Practices Act. Even so, the PSC may be upholding unfair provisions in ESCO contracts. Small business customers have no HEFPA protection and they lose the protection of the non-residential customer protection rules when they switch to ESCOs. When customers discover that prices are far higher than the old utility, they may find that their ESCO contract contains very expensive early termination provisions.

In 2006, the PSC geared up its efforts to require all utilities to implement an "ESCO referral" program in which participating customers are assigned randomly to ESCOs. They will receive a small discount on the commodity part of their bill for two billing periods, and then be shifted to ESCO rates unless they take action to return to full utility service from the traditional utility. Typically ESCO rates, terms and conditions of service for the time after the introductory period are not disclosed at the time the customer decides to participate in the program. PULP objected to many aspects of this program in the ESCO marketing guidelines case. The PSC rejected PULP's arguments in its order approving the guidelines for ESCO referral and in its September 26, 2006 order denying PULP's petition for clarification and rehearing.

Utilities are continuing ESCO service marketing promotion, including elaborate "energy fairs" and advertising campaigns whose cost is charged to utility customers. Door to door sales abuses, high pressure and misleading sales practices have been reported. AARP has cautioned utility consumers to be wary of the program. PULP's website page on ESCO issues also has information about ESCO service and questions and answers for energy shoppers considering ESCO service.

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