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By DAVID ROBINSON - The Buffalo News - 12/10/00
Ed Mogenhan, who's out more than $400 from Iroquois Energy Management's bankruptcy, has seen enough of the state's competitive natural gas market.
"This deregulation thing, I don't think it's going to go far," says Mogenhan, a Mayville resident who prepaid six months of his gas bill with Iroquois back in August and now stands to lose all that money now that the Hamburg natural gas marketer has essentially shut down.
"You're not protected at all," Mogenhan says.
That's the Achilles Heel of the state's natural gas deregulation plan that was exposed by the Iroquois bankruptcy.
Marketers like Iroquois can sign up customers by promising them savings if they hand over hundreds of dollars in up-front payments, but consumers have no way of knowing whether a marketer has the financial resources to deliver on its promises.
In short, New York's consumers are being asked to pick a gas supplier on blind faith that the marketer can deliver on its promises without giving its customers any evidence that it has the resources it needs to do it.
And as we learned with Iroquois, even one of the state's biggest energy services companies may not be able to deliver the goods.
"How can these consumers go out and interview people in the marketplace and know a good rate from a bad rate, and a good company from a bad company?" asks John Wilson, the president of PowerGasSmart.com, a Syracuse energy consulting company.
The Iroquois experience should send a message to state regulators that the rules of the deregulated market need to be tightened to limit the ability of energy marketers to collect prepayments from their customers.
"The risk to consumers is significant because there is no oversight of these competitive marketers," says Barbara R. Alexander, a consumer protection expert in Winthrop, Maine, and the former director of the Maine Public Utilities Commission's consumer assistance division.
Regulators could require marketers, like Iroquois, that want consumers to pay in advance to put up a bond or security deposit to protect the deposits of their customers. The rules already require marketers to post a bond that protects the local utility, such as National Fuel in the Iroquois case, in case they can't meet their gas delivery obligations.
Or they could simply bar marketers from collecting in advance from their customers - a protection that utility consumers already have under state law. Exceptions to that law allow utilities and marketers to offer popular programs, such as balanced billing plans, and also issue bills based on estimated meter readings. Some other customers with poor credit histories also can be required to make security deposits.
"The state Public Service Commission could protect customers by not letting these people collect money in advance," says Gerald A. Norlander, the executive director of the Public Utility Law Project in Albany. "This is an invitation to fraud, or to put the customer at the mercy of the bad business practices of the energy services company."
Pennsylvania, for instance, subjects marketers to the same billing, credit and collection rules that its utilities face. States that permit deposits typically limit customer deposits to a maximum of two months service and allow them only when the creditworthiness of the consumer is in question, Alexander says.
"There is a significantly reduced level of protection going on in the New York markets, compared with other states that are seen as having successfully opened their markets," says Alexander, who has been a consultant on consumer protection issues for utility regulators in several states.
But the PSC, which wants to encourage marketers to set up shop in New York as part of its push to establish vigorous competition for gas and electric service, has reacted cautiously to the Iroquois bankruptcy.
David Flanagan, a PSC spokesman, notes that marketers have to meet certain credit standards with the utility, as well as gas supply and service quality standards.
Those standards helped raise some red flags about Iroquois' problems. National Fuel officials wrote a letter notifying the PSC that Iroquois wasn't meeting those standards a week before the marketer turned its 19,400 residential customers back to the Buffalo-based utility.
But it isn't National Fuel's place to be a watchdog on the financial condition of one of its competitors, so the utility's warning letter was sent without any public announcement that could have alerted consumers getting ready to send advance payments to Iroquois, that something was amiss. That didn't become apparent to the public until Iroquois actually ditched its residential customers.
So, for now, it's up to consumers to not only evaluate the offers that an energy marketer might make, but also decide whether that company is financially sound.
That's a tall order, which is why several experts say the best thing consumers can do is avoid marketers that demand up-front payments. That way, if a marketer pulls an Iroquois and goes bankrupt, you'll only be left holding a bill for the gas you used the month before, not a worthless IOU for the gas you'll need tomorrow.
"I would never let my clients pay in advance for energy," Wilson says. "If it wasn't for that, there really wouldn't be a problem" with Iroquois' residential customers.
That's a lesson that former Iroquois customer Stephen Zenger says he's learned the hard way. "I can tell you one thing: I won't make this type of mistake again," the North Buffalo resident says. "I'm back with National Fuel and that's where I'll stay."
"No way I'll trust that any smaller business will be around long enough for me to get my money's worth," Zenger says. "I think this kind of thing is going to set deregulated energy purchases by consumers back to Square One."
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