In an order issued February 23 (the Order),1 the New York Public Service Commission (PSC) took the surprising step of effectively and prospectively shutting down the competitive retail electricity market in the state for the majority of residential and small commercial (mass market) customers. The Order would limit energy service companies (ESCOs) to serving mass market customers under contracts that either (i) guarantee customer cost savings in comparison to utility rates or (ii) guarantee that the energy delivered to mass market customers consists of at least 30 percent renewable energy. This limit would apply not only to new customers but also to contract renewals, and it purports to become effective on March 4, 10 calendar days from issuance of the Order. This Order would immediately and directly affect more than 100 competitive retail suppliers operating in the state and more than one million mass market customers.
The Order is the latest in a series of state regulatory actions triggered by consumer complaints. When retail electricity markets began opening up to competition nearly two decades ago, participation was largely limited to large industrial customers. As mass market participation increased in recent years, and particularly in the wake of price spikes in the Northeast during the winter months a couple of years ago, many customers receiving competitive supply realized they were paying rates higher than the utility rate and began to complain. State regulatory commissions and, in some cases, legislatures reacted to those complaints by launching investigations, penalizing some suppliers, issuing new regulations and amending laws. Competitive retail suppliers have been working to comply with new state requirements, which can include increased customer notice requirements, limits on variable rate contracts and additional regulatory filing requirements. New York's response, however, is a unique one.
New York's Action
This action by the New York PSC stems from efforts to revisit ESCO eligibility criteria and modify the consumer protections applicable to the ESCOs, known as the Uniform Business Practices (UBPs), to address ongoing concerns about the ability of the competitive retail markets to provide sufficient competition or innovation to mass market consumers. Following a Technical Conference last spring, the PSC Staff issued a proposal (Staff Proposal) on July 28, 2015. This Staff Proposal called for the retail electric supply industry to develop clear and common standards for core issues of importance to consumers, including the ESCOs' ability to provide high-quality and responsive customer service; manage risk associated with offering fixed-price products; use common, easy-to-understand contracts and/or contract language; use appropriate marketing practices; and demonstrate they are performing well, as part of a review to be conducted every two years. However, the Staff Proposal did not go nearly as far as the Order in terms of eliminating the majority of the mass market in the state. The PSC issued a Notice of Proposed Rulemaking on August 12, 2015, and held a Technical Conference in response to the Staff Proposal on August 20, 2015. The PSC accepted comments on the Notice of Proposed Rulemaking through September 28, 2015.
In issuing the Order, the PSC went well beyond the Staff Proposal and indicated that it was doing so in response to comments received by parties in order to "ensure sufficient protection of the public interest and that the prices that customers pay for those services are just and reasonable." Citing the fact that the New York Department of Public Service in 2015 received more than 5,000 initial complaints and more than 1,000 escalated complaints, the PSC concludes in the Order that "[a]n immediate transition away from a retail market focused on a commodity resale, to a market in which competitive energy service providers provide guaranteed savings to consumers or further clean energy goals, is warranted."
As noted above, the primary change instituted by the Order is the elimination of competitive retail supply service for mass market customers other than in two very limited circumstances. The only products permitted going forward for new and renewed mass market customers will be contracts that guarantee savings versus utility rates on an annual basis and contracts that provide for at least 30 percent renewable energy, made up of biomass, biogas, hydropower, solar energy and wind energy. Mass market customers served under variable rate contracts will be required to be enrolled in a compliant program (guaranteed savings or renewable) by the end of the current billing cycle, or the customer must be returned to utility service. It is interesting to note that ESCO service offered as part of a Community Choice Aggregation is exempt from these limitations.
The Order also provides for enhancement of PSC enforcement of its rule regarding violations of the UBPs, consumer complaints and violations of sales or marketing regulations. With respect to violations of the UBPs, the PSC announced that in addition to eliminating the notice and cure period process currently in place when an ESCO violates the UBPs, it will issue an Order to Show Cause to demand an ESCO present a case to maintain its eligibility for any single violation of the UBPs. For consumer complaints, the UBPs will be revised to explicitly detail PSC's authority to impose consequences on ESCOs where there is a material pattern of consumer complaints on matters under an ESCO's control, such as marketing practices, even when those complaints do not reveal any violation of the UBPs. Regarding violations of other rules, the Order modifies the UBPs to explicitly state that the PSC may impose consequences on ESCOs that violate any state, federal, or local law, rule, or regulation, and further impose a "do not knock" rule, which applies to ESCOs that proceed with door-to-door marketing to a customer who has posted a nonsolicitation sign.
Finally, the Order provides that the PSC will consider what long-term conditions should be imposed on ESCO eligibility in the 60-day period following its issuance. This consideration will include the conditions under which ESCOs may enroll mass market customers on a going-forward basis, whether the existing three-day rescission right should be extended or modified, whether ESCOs should be required to post performance bonds, and what penalties may apply to ESCOs that violate the UBPs. The PSC will issue a notice soliciting comments on these issues and potentially others.
The PSC in the Order appears to have anticipated some of the multitude of arguments it will face from retail suppliers in the wake of this extreme action. For example, the Order asserts that authorizations to provide retail supply in the state are not "licenses" under New York law but rather are "tariffs" governing ESCO access to utility distribution systems, and accordingly the PSC's actions do not constitute a taking in violation of due process. In addition, the PSC explains that the Order only requires changes to ESCO contracting processes prospectively and therefore is not interfering with existing contracts. Notwithstanding these justifications and arguments, there is a high likelihood of a strong reaction by retail suppliers to the shutting down of such a significant market. If the Order remains as issued and goes into effect, it remains to be seen what its broader-reaching implications may be.----
Day Pitney Alert
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