ESCO Advertises 9.75% Tax Savings on Delivery Service

We commented previously on the odd tax break given to ESCO customers which reduces the cost of delivery service still provided by the utility, enabling the ESCO actually to charge more for the part of the service it provides, i.e., the "commodity" portion of gas or electric service, and still show total bill "savings" to the customer. See ESCO Tax Subsidies: A Hidden $128 Million Cost of the New York PSC's "Retail Access" Scheme

We recently received a glossy flyer in the mail from "Energy Plus", an ESCO, claiming that residential customers who buy electricity commodity will get up to 9.75% savings -- on the utility-provided delivery service taxes:

Monthly sales tax savings
Save up to 9.75% on the delivery portion of your bill every month since you will no longer have to pay sales tax when you select EnergyPlus as your supplier.

These savings are because of a law that exempts sales tax on the delivery service part of the ESCO customer's total bill. According to a publication of the state tax department, sales taxes vary locally, but in no location are the total state and local sales taxes more than the 8.75% rate for Erie County.

According page 149 of the latest New York State Division of the Budget (DOB) Annual Tax Expenditure Report, the foregone public tax revenue due to this loophole

• was $6 million/year in 2002
  
• was $128 million/year in 2008,
  
• is projected to reach $154 million in 2009, and
  
• is still rising at a rate of more than $20 million/year.

There is no valid reason to subsidize an industry built upon arbitrage of tax breaks for financial middlemen who do not produce electricity. This permits companies who resell the same services at higher cost to win customers by splitting the savings from the unjustified tax break. This tax break rather than superior value may account for the widespread switchover of large industrial and commercial customers to ESCO commodity service.

It is difficult to imagine why DOB regularly proposes to axe worthy programs, in the name of balancing the budget, but doesn't propose elimination or phaseout of the increasingly expensive corporate welfare tax break favoring ESCOs and their customers, which might hit more than $150 million next year. For example, the Governor proposed a slow phasein of welfare grant increases, which had not been adjusted for 18 years, whose annualized cost, when phased in fully, will be $109 million a year. While some of the ESCO sales tax break is for local sales tax, ending the ESCO tax break could have helped New York's poorest families cope.

Energy Plus customers will get US Airways "dividend miles" for each dollar they pay for their electricity. Perhaps one function of the "plus" is to add a perk - frequent flyer miles - making it even more difficult to make an "apples to apples" comparison of what is being really charged for fundamentally identical ESCO utility service. See PSC Makes ESCO Service Comparisons Difficult; and PULP's Con Edison Bill Estimator.

There is no representation in the flyer of the rates actually being charged by Energy Plus for the unbundled commodity portion of electric service. The flyer claims that "we buy electricity every day at the best possible price and use that price to set our rate." Other than the vague puffery about the "best price possible," and that we "use that price to set our rate" which might be something other than the best price possible, the only clear representation of any savings is the tax break on the portion of the bill for utility-provided delivery service - there is no real representation that total bills will be any less than the charges of the traditional utility for full bundled service.

An article about at least one Energy Plus customer's experience indicates that savings may be illusory. See ESCOs Cost More -- A Familiar Experience. There is no evidence that shopping for other ESCO suppliers of residential utility service pays off over time, and those who switch often find themselves paying more than if they had not switched. See Think Twice Before Switching Utilities.

PULP's recommendation to customers wanting to reduce their electric bills: conserve.

For more on ESCO service, see PULP's webpage on ESCO issues.