AT RISK: NY reviews electric, gas free-choice program; consumers ended up paying more

Twenty years after New York allowed residential customers to begin shopping for electricity and natural gas, the groundbreaking program appears on the verge of being scrapped or broadly overhauled.

Rather than save consumers money, those who signed up under the state Public Service Commission’s program paid nearly $820 million more for electricity and gas than if they had stayed with their local company, according to a PSC analysis of the 30 months ended in June 2016.

Since the deregulation program began, the consumer loss could be in the billions, based on study estimates.

These stunning admissions come in reams of documents and testimony surfacing in months of hearings before a PSC administrative law judge.

The program — lauded in 1996 when New York was one of the first states to deregulate the utility industry — now is under review by the PSC. The commission already has halted marketing free choice to senior citizen and low-income customers.

"Allowing customers to select alternative energy providers should not come at the expense of exposing customers to higher energy prices when that is not what the customer has bargained for or had been led to believe will occur," New York's AARP and the Albany-based Public Utility Law Project said in a submission to New York regulators.

Electricity and natural gas marketers seized on the public’s confusion to sell overpriced supply. Deals offered by so-called “energy supply company’s” — ESCOs for short — were rife with abuses.

“Despite efforts to realign the retail market, customer abuses and overcharging persist,” the Public Service Commission said in initiating a study of the retail market . “If ESCOs were truly living up to the promise of their function as innovators, it is expected that there would be much greater variety and transparency.”

Indeed, the PSC acknowledged deregulation of the commodity markets in New York lacked the openness necessary to allow retail customers to make wise decisions on their energy choice.

High-pressure sales tactics and misrepresentations by door-to-door salespersons and telemarketers were common as competition rolled out. Promised savings never materialized as marketers used teaser rates to lure in customers, only to raise the price a few months into the contract.

Many opting for an independent supply ended up paying more than if they had remained with their full-service utility.

Independent supplier overcharges over the 30-month period ended June 2016 for New York State Electric & Gas Corp. customers were estimated at $86 million and $46 million at Rochester Gas & Electric , more than 15 percent higher than they would have paid by remaining with the resident utility.

"There is little evidence that retail choice has yielded any significant benefits," concluded a 2016 study of electric deregulation impacts nationwide prepared for the Electric Markets Research Foundation by Christensen Associates Energy Consulting of Madison, Wisconsin.

When New York in 1996 became one of the first states in the nation to deregulate the utility industry, the transmission of electricity and natural gas remained with traditional utilities such as New York State Electric & Gas Corp and Rochester Gas & Electric, both now subsidiaries of Iberdrola based in Spain.

New York's utilities were encouraged to sell their generation plants, which NYSEG did at the time, collecting $1.8 billion for the assets. And customers were freed to shop for their energy suppliers.

While industrial and commercial customers embraced the ability to shop for supply — many large consumers had the ability to use their large consumption levels to leverage better prices from suppliers — the typical homeowner remained on the sidelines.

"For a business, these benefits can be large enough to warrant spending staff time investigating electricity supplier options, and even large enough to justify having some staff dedicated to managing energy consumption decisions," the 86-page Christensen report said.

"For a residential consumer, by contrast, the gross benefits warrant only minimal consideration of options," the report added.

Confusion reigned. Residential customers were flummoxed by the concept of shopping for supply. They received little instruction from the PSC, which was expecting its innovative deregulation plan would revolutionize the utility industry and bring savings to customers who paid among the highest utility rates in the nation.

The state's Department of Public Service staff traveled across New York at deregulation's outset, trying to encourage consumers to experiment with the open market. Mostly, however, staff was greeted by a collective bewilderment as consumers tried desperately to grasp the concept of shopping for a commodity that had, for ages, been provided at fixed prices.

More: Shopping for electricity a daunting task

More: 'Smart meter' signals new era for utility customers

More: Watchdog Report: Adjustable pricing, tripled rates, next step in electric deregulation

More: Regulators approve rate hikes for RG&E, NYSEG customers

"Retail choice decisions require business savvy that many consumers lack," Christensen said.

That's not was New York regulators had in mind when they unveiled the program, trumpeting the benefits to both large and small consumers.

“The PSC envisioned that ESCOs would offer consumers lower energy prices than utilities in practice because ESCOs would find more efficient and innovative ways to purchase energy and pass a portion of the savings on to consumers,” said Jane Azia, of the New York Attorney General Bureau of Consumer Frauds and Protection, in December testimony before an administrative law judge.

Twenty years later, savings were few. Complaints were many.

A consumer's ability to shop for the best price was further hampered by the complete lack of a central site to compare offers over the an extended period, or how to determine the premium being paid for selecting a renewable energy option for electric.

“They didn’t make it easy to shop,” Danielle McMullen, client relationship manager for Energy Next, a Saratoga Springs energy consultant, said in a telephone interview.

Even today, just one in five residential customers across the state has opted for an independent supplier, according to figures compiled by the Public Service Commission, and the number willing to abandon the supply from the captive utility continues to decline.

That's because the prices offered by NYSEG and RG&E often beat the independent suppliers, based on statistics compiled by the federal Energy Information Agency.

“ESCOs simply are not providing consumers with the benefits that an open retail energy market was intended to promote,” said Gregg Collar, an analyst with the state’s Division of Consumer Protection, in a recent regulatory hearing.

Independent suppliers are not only overcharging, but some of the worst actors are engaging in outright fraud.

From 2014 through the end of 2016, Public Service Commission staff and the New York Attorney General fielded 14,000 complaints about ESCO marketing practices.

Azia testified at a recent PSC administrative court proceeding and gave several examples of issues with marketing practices.

For example, Energy Plus promoted a “risk-free” and “market-rate” deal on its Web site. In reality, customers paid as much as $440 more with the independent supplier over the course of a year than with the resident utility, according to testimony.

“Energy Plus also offered cash-back, enrollment bonuses and rewards for enrolling with Energy Plus, but the company failed to adequately disclose that customers would not receive the rewards until after they paid Energy Plus for two months or, in some cases, a full year,” Azia said.

Another firm, HIKO, engaged in “slamming,” the process of switching service without receiving proper authorization after sales representatives obtained customer account numbers through subterfuge, according to testimony.

“Consumers who attempted to cancel their contracts by calling HIKO’s customer service center were unable to reach anyone, nor were they able to leave messages because the mailbox was full. Customers’ cancellations were therefore delayed, and HIKO was able to bill the consumers for additional 2 months,” Azia testified.

Other independent suppliers engaged in similar practices over the years, consumer advocates said, souring both novice and sophisticated electric customers on the entire shopping process.

"Unfortunately, there are a lot of good reputable players in the market and there a lot of unscrupulous players in the market and they are making it harder for people to shop," McMullen said.

More than 100 independent suppliers now operate in New York State. Most follow the letter of law and avoid duping customers with bogus deals.

Nevertheless, ESCOs are closely monitoring the current administrative court proceedings to determine how regulators will solve the issues raised by consumer advocates.

“We recognize that just like in other markets consumers are unclear about the process,” said Frank Caliva, senior spokesman for a Washington D.C.-based ESCO industry group. “Energy choice is not only about lower rates. It’s about empowering consumer to get what they need. Maybe they value renewable energy. For some they want value added services — a Nest thermostat and energy audits — products that go beyond cost savings.”

Now, it is up to regulators to fix what educated observers call an unmitigated mess.

"The Commission continues to examine measures that must be taken to ensure...customers receive valuable services and pay just and reasonable rates for commodity and other services," PSC regulators said in a preview of their own study.

A wide range of solutions have been offered up from prohibiting ESCOs from marketing to residential customers to applying strict new rules governing the marketplace to prevent past abuses.

"I think it's really good t(the Public Service Commission) is willing to admit they made a mistake and they are trying to correct it," McMullen said.