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PSC Considers Revising Rules for Customer Deposits and Prepayments Held by Competitive Energy Companies

Background        

In 1996 the New York Public Service Commission (PSC) adopted a policy allowing competitive providers of natural gas service to provide residential service without complying with the Home Energy Fair Practices Act (HEFPA).   HEFPA is the landmark ``Bill of Rights" for residential utility consumers adopted by the state legislature in 1981.  See History of HEFPA. 

Instead of HEFPA, the Commission issued alternative standards for competitive gas companies (labeled ``gas marketers").  These standards basically allow the marketer or ``Energy Services Company" to halt its services on 15 days notice for any reason.  The Commission also decided not to exercise its statutory complaint jurisdiction over consumer disputes with providers of residential natural gas service, and instead allowed ESCOs or marketers to substitute their own contract requirements for court action or arbitration initiated by an aggrieved consumer. The Commission does not license or issue a certificate as it routinely does for other utilities or for competitive telephone companies, who are required to abide by the standard telephone consumer protection rules. Instead, Department of Public Service Staff issues informal letters of approval for new market entrants.  See, NYPSC, Becoming a Natural Gas Marketer in New York State:  What Are the Requirements and Steps? 

The Commission explained that any customer who wants to keep HEFPA rights and remedies may do so by not switching to a competitive supplier:

The Commission indicated that a customer terminated or dissatisfied by a competitive utility service provider would be sufficiently protected by a return to HEFPA-compliant service from the distribution company.  The Commission stated: 

    ``The portion of the service resulting from the new relationships among the marketers, LDCs and the customers will be based on contractual agreements, tariff provisions and good customer principles."  Cases 93-G-0932, Proceeding on Motion of the Commission to Address Issues Associated with the Restructuring of the Emerging Competitive Natural Gas Market., et al., Order Concerning Compliance Filings, at 24, (Issued March 28, 1996). 

    ``[S]hould a marketer discontinue supply, the customer will continue to receive gas service from the LDC.  The LDC then will be required to provide full HEFPA protection prior to termination.  This is important to protect against potentially harmful situations."  Id. at 25 (emphasis added). 

PULP consistently opposed the two-tier standard of consumer protection that requires a customer to sacrifice statutory consumer protections when receiving competitive utility service. See ``Retail Choice: A Race to the Bottom," 

 ``State Forgot Consumer Protection in Deregulating Gas,"

``Consumers In Dark With Electricity Deregulation"

The Iroquois Energy Management Incident

In the Fall of 2000, a competitive gas company in Western New York, Iroquois Energy Management, terminated all its 19,000 residential customers who had switched to them, declared bankruptcy, and retained $1.8 million in prepayments that had been collected from the customers.

Iroquois' bankruptcy papers revealed that nearly $1.8 million of its less than $3 million in assets was money received from its residential customers who had been required to post deposits or prepayments in advance of their natural gas service.

    Iroquois' bankruptcy filing on Tuesday indicates that the company owes more than $5 for every $1 that it has in assets. The company has $2.89 million in assets and $16.3 million in liabilities, $7.3 million of which is unsecured.

    In addition to the nearly $1.8 million owed to its former residential customers, Iroquois owes its commercial customers $9,600 in deposits.

    "When Iroquois exited the residential market, it indicated it could return the prepayments," said Edward Collins, a spokesman for the state Public Service Commission. "The commission's goal continues to be the return of customer prepayments, and staff is working to achieve that goal."

    National Fuel Gas Co. is Iroquois' biggest creditor, with $4 million in claims outstanding against Iroquois. Part of that claim -- $2.33 million that is owed to National Fuel's utility business -- is backed by a surety bond, said Julie Coppola Cox, a spokeswoman for Buffalo-based National Fuel.  

Customers of Bankrupt Hamburg, N.Y.-Based Energy Firm Must Wait for Refunds, Buffalo News, (Nov. 2, 2000).  The customers returned to service from NFG, without refunds of what they had paid for the next season's gas service.  Unfortunately, their unsecured claims ranked lower than the claims of NFG and other secured creditors, and they have not received refunds of their prepayments or deposits.  These residential customers then faced a northwestern New York winter without the security of their prepaid natural gas service or deposit to rely on, and with little hope, despite the efforts of DPS Staff, that any of the $1.8 million held by the competitive gas company when it went bankrupt would be recovered for consumers.

The Department of Public Service Staff Proposal

The State Assembly scheduled hearings on the lack of consumer protection for ESCO customers in Buffalo for May 11, 2001. 

On May 9, 2001 the PSC issued a notice requesting comment on a DPS Staff proposal to revise consumer protections for ESCO customers.  The PSC notice cited ``recent market experience," apparently a reference to the defaulting competitive gas company. Staff proposes that the PSC ``may" require ESCOs to post security to cover consumer credit balances and suggests a number of possible requirements, ranging from a security bond to ``other" documentation.  It would also allow ESCOs to demand deposits equal to the amount needed to cover two months service.  See ``Proposed Rules to Protect Customer Prepayments,"

The Staff proposal puts an outer limit on consumer deposits, and represents a retreat from the original Commission decision not to regulate ESCO service beyond the rudimentary rules set in 1996.  The two-month deposit rule, however, is still at variance with HEFPA, which only allows deposits when a customer has a bad track record in paying for gas service from the company.  If Iroquois Energy Management had collected a two-month deposit from its 19,000 residential customers, even more consumer money could have been lost or tied up in its bankruptcy proceedings.  It is unclear how Staff's proposal would apply to level payment plan balances, which at times might exceed two months service, and other consumer credit balances.

The Staff proposal allows competitive gas companies to compete by avoiding credit risk, rather than by providing at least as good (or hopefully better) service more efficiently and at a better price. 

The two month ESCO security deposit rule is also a superficially ``neutral" requirement that facilitates economic redlining to avoid serving low income consumers and areas.

The Staff proposal is vague on the degree of financial security, if any, that would be required to be posted by the competitive provider.  The PSC previously considered ESCO creditworthiness standards on several prior occasions, and at length, in its orders regarding unbundling and creation of ``Uniform Business Practices."  See PULP's Comments on Uniform Business The outcome of those proceedings was the current standard under which the PSC allows ESCOs not to post security bonds if they have a certain minimum credit rating. That standard was in effect when Iroquois defaulted, and it did not adequately protect either the distribution company (NFG) or consumers.  The Staff proposal still makes posting of actual security a discretionary matter and would allow ``other documentation" -- perhaps a credit rating - in lieu of actual posting of a security bond. 

The Staff proposal includes a number of possible security devices, but it is not clear whether they would be exempt from the estate of a bankrupt gas company, which is necessary to avoid the problems of the customers of Iroquois Energy management who lost their money.

Thus, even if the Staff proposal were adopted, the current rules might be continued with little or no modification, do not assure that consumer credit balances will be protected in bankruptcy, while ESCOs would be given a new charter and tacit Commission approval to demand two-month deposits, thereby permitting redlining and competition to avoid credit risk, rather than competition to provide equivalent or better service at a better price.

PULP's Executive Director testified regarding the need for HEFPA enforcement and further protection of consumer credit balances in the hands of ESCOs. Under HEFPA, a gas company could not have terminated customers unless the customer had defaulted in making payments. In contrast, other jurisdictions where competitive utility service providers have gone bankrupt, they entered bankruptcy without terminating their residential customers and then fulfilled or transferred their obligations to customers under the supervision of the bankruptcy courts and the state public service commissions.  

PULP's Comments On Protection of ESCO Customer Credit Balances - were filed June 11, 2001