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Consumer complaints about pricing could derail natural gas and electricity market

When regulators opened the state’s energy market to competition, they hoped to create a robust marketplace where consumers would have ample choices that would cut their heating and electric bills.

It hasn’t worked out that way.

Instead, consumers often pay more if they buy their electricity or natural gas from an independent supplier, and thousands of those customers have complained about deceptive practices by the energy marketers.

In a move that would directly affect roughly one in every five Western New York households – nearly 96,000 in all – those same regulators are proposing radical changes to the state’s energy marketplace, requiring marketers to guarantee that their customers will pay less than their local utilities charge.

So radical, in fact, that they could drive the independent energy suppliers out of the residential market.

The reason is simple: Utilities are required by state law to sell natural gas and electricity to their customers at cost. The marketers, to stay in business, need to sell energy to their customers at a profit.

If the new rules take effect – and they’re on hold temporarily – it could force energy marketers to drop tens of thousands of customers and return them to their local utilities. The marketers warn that could deprive consumers of popular products, like fixed-price contracts that help smooth out the ups and downs that can rock energy markets.

“I think you’ll see a lot of marketers just drop out of the game,” said Bruce Heine, senior vice president at National Fuel Resources, the unregulated energy marketing arm of National Fuel Gas Co.

In the interim, marketers are holding talks with state regulators to try to craft a compromise that will give them more flexibility in the pricing and the products they can offer, while still helping consumers find the savings that have been so elusive since deregulation took effect in the late 1990s. They’re hoping to hammer out proposals by early summer.

“The PSC created this marketplace, and the whole idea was that people would have the opportunity to shop for a better rate,” said William Ferris, AARP’s legislative director for New York.

“This marketplace has not produced the desired effect: Lower prices through competition,” Ferris said. “This marketplace just was not working for consumers in New York.”

An AARP found that consumers buying their energy from a marketer paid an average of 14 percent more than they would have paid their local utility in 2014.

A bolt from the blue

An order that the commission issued in late February took most marketers by surprise.

The PSC gave marketers 10 days to overhaul their pricing and products to meet a new requirement that marketers charge customers less than their local utility. It was a radical change from the way most energy marketers priced their services.

Most marketers currently offer consumers a choice of either a fixed price or a variable rate that fluctuates with changes in natural gas or electricity commodity costs. Few offer long-term contracts with guarantees of cheaper prices than the local utility.

The PSC rules changed that. Under the new standard, energy marketers would only be able to enroll new customers or renew existing contracts if they offer guarantees that those consumers won’t pay any more than they would if they were a customer of their local utility, like National Fuel or National Grid.

The only way marketers can charge more than the utility is for consumers who sign up for an offering for electricity where at least 30 percent comes from renewable sources – an option for marketers selling electricity but not for those selling natural gas.

But the PSC’s initial rules raise questions about whether National Fuel Resources and other marketers can still serve residential customers in the long run and still make a profit.

“It’s very difficult to compete with the utility and have any kind of margin,” Heine said. “We may phase out of it over the long term if it’s not profitable.”

Working on a deal

The PSC’s staff is expected to make recommendations in the coming weeks on benchmark prices for additional product offerings, including fixed-price options and choices that include additional energy-related services, such as heating and cooling system maintenance, energy efficiency upgrades or the installation of smart thermostats. The commission’s staff is expected to make its recommendations by June or July.

Those potential changes could significantly weaken the PSC’s original proposal, giving marketers more flexibility to offer fixed-rate products, without necessarily having to charge less than the local utility.

The Public Utility Law Project, an Albany advocacy group that represents low-income consumers, opposes the inclusion of any value-added services, including non-energy incentives such as travel rewards programs. It said those extra services can offer a way for marketers to charge higher prices.

Two-part utility bills

Part of the issue is they way New York’s utilities are regulated, with a two-part rate structure that forces utilities to sell their natural gas and electricity to consumers at cost, while deriving their profit from the regulated rates they charge to deliver that energy to their customers’ homes and apartments.

As a result, both the marketers and the PSC’s staff agree that it is virtually impossible for a marketer to sell energy to consumers for less than the utility, which doesn’t have marketing costs to sign up customers and doesn’t have to make a profit from its energy sales. The state’s rules do give marketers some cost advantages, exempting their customers from sales taxes that utility customers must pay.

No matter where a customer gets their energy, all consumers still pay the utility delivery charges that make up the second part of the overall rate structure.

Savings are elusive

A 2012 analysis of two years worth of National Grid bill data found that roughly six of every seven customers who bought their electricity through an energy services company paid almost $21 a month more than they would if they had continued to buy their power from the utility. Roughly 10 of every 11 National Grid consumers who switched to an energy services company for their natural gas service paid an average of almost $11 a month more.

One of the other reasons behind the commission’s push to remake the state’s competitive energy market is the rising number of complaints about unscrupulous marketers. The PSC received more than 5,000 complaints about energy marketers last year, many related to deceptive marketing tactics that fell heavily on senior citizens and immigrants, Ferris said. About 20 percent of the complaints were from consumers who felt they were paying too much, the National Energy Marketers Association said.

Utility concerns

Even National Fuel’s utility business has raised concerns about the proposal, especially if it leads to tens of thousands of natural gas customers being switched back to the utility. If National Fuel doesn’t know how many customers it will have for the upcoming winter, it will make it harder for the utility to know how much natural gas it has to secure during the summer in order to be certain that its supplies are adequate for an unusually cold heating season.

“We do not have a clear understanding of the order’s potential impacts and have almost no time to prepare for potential consequences that may result,” said Karen Merkel, a National Fuel spokeswoman.

With the uncertainty lingering, consumers who buy their energy from a marketer are in flux.

“We’re telling people to just stay put” while the regulations are hashed out, AARP’s Ferris said. “We don’t want people to sign back up with an energy services company or go with an ESCO until this is figured out.”