September 15, 2017
Market Intervention Would Produce Adverse Outcomes for Consumers, Energy Innovation
The New York Public Service Commission’s efforts to prohibit certain energy service company (ESCO) sales are unsupported by fundamental economics and will harm consumers, resulting in unintended consequences that likely will thwart the state’s programs intended to transform New York’s energy marketplace and promote cleaner, customer-empowering technologies.
That’s the high-level message in testimony from two industry experts submitted to the PSC today by the Retail Energy Supply Association in an ongoing proceeding in which prohibition of ESCO sales has been proposed as an outcome. The two experts, who together have more than half a century of experience in competitive energy markets, urged the commission to use its existing authority to police the marketplace and to not engage in wide-reaching prohibitions and price regulation.
“To the extent that there is evidence of marketing abuses by ESCOs, the Commission is right to take action,” said Frank Lacey, an independent consultant testifying on RESA’s behalf. “RESA supports rigorous oversight of ESCO behavior and swift enforcement action against any ESCO engaged in unlawful or deceptive practices. However, I do not believe it is appropriate to economically regulate an entire industry as a policy substitute for enforcement and oversight,” he said.
Jeff D. Makholm, Senior Vice President/Managing Director at National Economic Research Associates (NERA) said “it is not unreasonable for the Commission to re-examine the current status of retail energy markets for mass-market customers in New York so as to target and remedy any deceptive marketing practices by certain individual ESCOs.” But it would be “unreasonable for the Commission to judge the broad efficacy of mass-market ESCO services by simplistic and misleading average revenue comparisons between manifestly different services provided by ESCOs and the utilities,” Makholm testified.
“I criticize strongly the implication, evident in the Notice for this proceeding and various actions of the PSC that preceded it, that the ‘default’ energy service average revenues . . . passed through by the state’s regulated electric and gas utilities, provides a ready quantitative benchmark by which to measure the competitiveness or the value to consumers of the retail energy services that ESCOs provide,” Makholm said.
“In any competitive marketplace, there will be some customers paying more than others,” Lacey said. “Companies position products differently and prices can be directly related to that positioning. This is commonly referred to as product differentiation and it exists in nearly every, if not every product market.”
If such a “test” were applied to almost any other industry, one would similarly conclude that the marketplace in that industry had “failed,” Lacey noted. In any market, whether for telecommunications, groceries or home mortgages, customers readily choose more expensively priced products and services, demonstrating that consumers perceive value in attributes other than price, Lacey said.
In particular, many homeowners readily pay more for a fixed-price mortgage, even though variable-priced mortgages offer savings in the near term, Lacey noted. “The primary benefit of a fixed-rate mortgage is stability and cost certainty just as a fixed ESCO rate offers similar benefits. What this Commission is contemplating is akin to having the Federal Reserve or Treasury Department require that all fixed-rate mortgages to be priced at or below variable-rate mortgages.”
If the objective is to ensure energy consumers pay the lowest available price, Lacey suggested, then the PSC should require utilities provide default service at the lowest available ESCO price. But “any requirement to place all customers on the lowest available ESCO rate would meet significant practical challenges. It is just as problematic and inappropriate to place such pricing restrictions on ESCOs.”
“I cannot emphasize strongly enough the utter impossibility of drawing useful conclusions on the efficacy of ESCO mass-market service in New York’s electricity or gas markets by comparing any average . . . ESCO revenues with default service revenues – over any time period,” Makholm said, noting that preserving and expanding competitive retail access for mass market customers in New York will help the state achieve other energy policy objectives such as New York’s Reforming the Energy Vision initiative, known as REV, and the advancement of clean energy goals.
In addition to serving as a disincentive for companies to participate in New York’s envisioned REV marketplace, removing ESCOs from the mass market and imposing price controls would “destabilize and harm” the New York power market, Makholm said.
“New York’s ESCO market generally exhibits the characteristics I would expect to see in a reasonably competitive market: many buyers and sellers, low barriers to entry, reasonably transparent information, and a high level of possible mobility for customers,” Makholm said. “[R]egulating ESCOs out of New York’s mass-market would eliminate an entire group of intermediaries and extend monopoly energy services . . . which should not be seen as anything other than a retrograde movement . . .”
Lacey suggested enhancements and reforms of the existing market that would better serve consumers and the state’s economy. “The New York market, while it may have been innovative 20 years ago when first walking the path to restructuring, has done very little to improve its market since then,” he said, citing the need for actions to address metering infrastructure, utility protocols for data access and customer billing issues.
“Customer engagement and the creation of customer value are directly aligned with electricity market design,” Lacey said. “If the market is structured correctly, all parties win –the utilities, the ESCOs and the State, and most importantly, the customers.”
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