NY's Private Utility Companies Are Facing Extinction
Illustration by Dan Page
New York's Public Service Commission is considering banning private energy retailers from the state's residential market and plans to hold an evidentiary hearing on the matter, the latest in a series of dramatic shake-ups in the state's utilities industry that followed a months-long Voice investigation earlier this year.
The commission and the industry went to war in March, after our story detailed a litany of abuses by energy service companies, commonly known as ESCOs. Many had business models based largely on hoodwinking customers with red-herring contracts and high-pressure sales tactics. The Voice also found evidence that, on the whole, the companies were costing customers more than traditional utilities, despite the fact that ESCOs were formed during the nationwide deregulation craze of the 1990s to drive down consumer prices through competition. That galling reality was starkest for low-income customers and those with limited English proficiency, those most vulnerable to the companies' schemes — people like Stella So, a South Korean-born grandmother from Queens, who was tricked into a contract that ended up costing her hundreds of dollars she could ill afford. As a result of the story, the commission announced sweeping new regulations designed to reign in ESCO rates — which are higher than those charged by traditional regulated utilities, often by as much as 18 percent — and made it easier to discipline the companies when they step out of line.
Nine months later, almost none of those reforms have gone into effect. ESCO trade groups have tied them up in court, arguing that that they would devastate their industry. But an evidentiary hearing could go much further than anything the PSC has done so far. For the first time, the PSC plans to examine whether ESCOs "should be completely prohibited from serving their current products to mass-market customers." In other words, whether New York's entire energy-privatization experiment has failed everyday consumers.
It's a stunning reversal for the agency. Over the nearly twenty years that ESCOs had operated in New York prior to the publication of our story, the PSC had meaningfully disciplined just two active companies. In fact, even as their own reports overflowed with accounts of abuse, the PSC actively steered customers away from traditional utilities like Con Ed and into ESCO service. Only months ago, spokesperson Jim Denn said that the "commission continues to encourage consumer-oriented market competition, stimulate innovation, and promote economic investment."
For Richard Berkley, president of the Public Utility Law Project, a nonprofit which advocates for low-income consumers, the PSC's change of heart is long overdue. "The PSC came up with a formulation in 1996 that there could be value to customers," Berkley says. "And I think that just hasn't been proven."
New York is one of 22 states that have deregulated utilities since the mid-1990s. (Enron, the energy giant that collapsed in 2001 amid a massive fraud investigation, led the charge in the legislatures.) Since the early 2000s, hundreds of ESCOs have competed for the business of the state's residential customers, and today about 20 percent of households buy power through private providers, often at serious markups. According to an ongoing lawsuit against the PSC, New Yorkers paid $820 million more, over the 30 months that ended in June 2016, than they would have with a traditional utility.
The failure of the industry to do what it promised was predicted. "There were lots of people that had serious concerns about what would happen here," says Barbara Alexander, a consumer protection consultant who specializes in the energy industry. (Alexander emphasized that she was speaking in her own, independent capacity, not on behalf of any client.) The problem comes down to the structure of the market, Alexander explains. ESCOs make their money by buying energy from the wholesale market, and selling it to their customers at a profit. Utilities do the same.
But both entities buy the same commodity from the very same wholesale markets. And since traditional utilities are required by law to sell at rock-bottom prices, the only way an ESCO could possibly provide cheaper energy is to buy energy at times of less demand, for example, and arbitrage the savings, or to offer complicated variable rate plans, so consumers could throttle usage at expensive hours. Any cost savings would be cents on the dollar, which only serves large industrial customers, for whom a half-percent discount might add up to tens of thousands in savings. Recouping such tiny fractions for residential users simply isn't enough incentive.
And ESCOs have other costs that negate even small savings. "They add, to the wholesale price, their raw costs, all of their profits, their marketing, their overhead, and everything else that goes along with being a retail business," Alexander says. "There's no way it can [cost] consistently less."
Those eager for a repudiation from the PSC will have to wait until spring 2017, when the hearing will begin. But Berkley, for one, says they're heading in the right direction.
"We think the PSC and the governor are doing the right thing by continuing to keep the pressure on ESCOs." Berkley says. "There is no reason why they should be allowed to continue these appalling overcharges."
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