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Car Dealers, Happy Meals And Retail Energy: Day One Of New York DPS Staff Policy Panel Cross

December 06,2017

• DPS Staff: "Hybrid", Non-Muni Aggregation Potentially Might Be Workable

• DPS Staff: Needs To Be Some Price Regulation In ESCO Mass Market

• DPS Staff: PSC Can't Abdicate Charge To Ensure Just And Reasonable Rates

Day one of cross examination of a New York Department of Public Service panel of witnesses on policy (policy panel) devoted significant time to a discussion of the consideration of the value (if any) provided by certain ESCO products, how to determine such value, and, if customers value such products, whether such products should be available to customers.

Much of the cross focused on the offering of fixed rates or other value-added products from ESCOs, what value they provide to customers, and how such value is presented to customers, including any premium which may be included in the product and whether such premium is separately disclosed to customers.

As previously reported by, in pre-filed testimony, the Staff policy panel had recommended that the retail mass market be "shut down" except for a product where an ESCO provides guaranteed savings versus utility default service, where an ESCO provides a product under which 100% of the electricity is generated from renewable resources, or where the sale occurs through municipal aggregation or an ESCO organized as a not-for-profit corporation or as a municipal entity

Counsel for the National Energy Marketers Association engaged the panel in a discussion of whether customers, when presented with "full" information about an ESCO product, should be allowed to make a selection of a product they value.

Bruce Alch, Chief of the Retail Access and Business Advocacy Section in the Office of Consumer Services at the New York State Department of Public Service, testifying as part of and for the panel, pushed back on what constitutes "full" information.

Alch testified that if ESCOs are not listing as a line-item or otherwise separately disclosing the premium associated with any value-added service (such as a fixed rate), then customers do not have complete information with which to make an informed decision, and therefore the market is not transparent

Alch drew a comparison to shopping for an automobile. Alch testified that when shopping for a car, the price for various value-added items (optional equipment) are transparently listed in addition to a base price

While Alch's larger point on the disclosure of premiums may or may not have some merit, the car shopping experience does not appear to offer the best support for the argument, and, indeed, actually bolsters ESCOs' arguments that products in other retail markets are routinely presented to customers as a bundle, with no line-item disclosures for value-added services, while still allowing a meaningful and transparent comparison

Specifically, while there is no dispute that there can be various line-item options in automobile purchases, many cars also come with "standard" equipment, included in the base price and for which no separate or underlying price is disclosed, that competing models do not offer as "standard". In others words, standard equipment varies from model to model; some models offer value-added products as part of the "standard" price

For example, a 2014 Toyota Corolla included as standard equipment disc brakes only for the front wheels, with drum brakes, generally seen as inferior in performance (and less costly), in the rear. However, the comparable competing model from Mazda, the Mazda3, included 4-wheel disc brakes as standard equipment. Essentially, the Mazda3 came with a bundled, value-added feature in its base price. A customer cross-shopping these vehicles, while they could certainly compare the nature of each product and total price, would not have been able to determine the exact value, or premium, that Mazda assigned to, or charged for, 4-wheel discs, as the Mazda was offered as an all-in price (with respect to that specific feature). The customer would not have been presented with specific disclosures regarding whether any pricing difference between the Toyota and the Mazda base price was due to the disc-vs-drum brakes, or due to other reasons (e.g. relative build quality, etc.), and the customer would have had to make their shopping comparison without any such line-item disclosure for Mazda's 4-wheel disc brakes

More broadly, essentially every Subaru model (except the niche sports car BRZ) comes with all-wheel drive as standard equipment. Comparable competitor models may have all-wheel drive as an option, and not included in the base price. Subaru's base price for standard equipment certainly doesn't list separately any premium for the all-wheel drive, it's part of a bundled, all-in product and price.

Yet while consumers have, and continue, to routinely encounter such situations when purchasing automobiles (ranging from in days past when power windows/locks were standard on some cars but not others, to today where it is autonomous features which may now be bundled as standard on some cars but not others), Alch held the car buying experience as more transparent, and distinct, from when a customer shops for an ESCO's value-added offerings. We fail to see a difference, and, in fact, see the situations as very similar. Automakers routinely bundle value-added equipment as "standard", without disclosing the premium included in the base price that results from the inclusion of various value-added equipment as standard. Despite this fact, Alch held out car shopping as a more transparent process than ESCO shopping with respect to value-added services.

The cross examination later turned to consideration of a McDonald's Happy Meal, which had been raised previously, by a witness testifying on behalf of ESCO parties, as an example of a value-add bundle

However, Alch first said that the price of the individual components of the Happy Meal are listed as separate items on the McDonald's menu, allowing customers to determine whether the bundled price of the Happy Meal is superior to buying the products individually.

What about the toy, counsel for NEM asked?

Alch initially responded that the presence of the toy would not "sway" the purchasing decision for a Happy Meal -- which elicited laughter, presumably skeptical laughter (from parents), from the gallery

However, after further questioning, Alch testified that the toy may have value to customers, and that its discrete price (or premium) is not separately disclosed to customers

However, turning from these general markets more specifically to the New York retail market, Alch stressed that the utility industry, including retail sales to customers, is regulated, unlike these other industries used as examples

The PSC, Alch said, can't abdicate its statutory charge to ensure just and reasonable rates

Given the discussion above concerning the consumer experience with value-added products in other markets, counsel for NEM pressed the panel on whether the panel would adopt as its recommendation to the PSC that ESCOs shall be allowed to offer fixed rates, provided that full transparency was provided, such as a disclosure to the customer of the most recent default service rate

While such a comparison would be, "a start," Alch said that the panel is not deviating from any of its recommendations with respect to shutting down the retail mass market except for the exceptions described above. Alch said that various proposals for greater transparency, raised by ESCOs or offered on questioning during cross, merely deal with the edges of the problem, and do not address the issue of whether rates are just and reasonable.

However, Alch, when asked on cross about testimony from The O.E. Group heard earlier in the day, said that a "hybrid" aggregation approach potentially might be workable.

In its pre-filed testimony, The O.E. Group proposed a mechanism under which brokers could act on behalf of "groups" of mass market customers that would allow such groups to obtain pricing similar to that of large customers, and switch such customers to various ESCOs. See a discussion of the O.E. Group's testimony here

While Alch did not specifically endorse any specific mechanism proposed by The O.E. Group, Alch said an aggregation "hybrid", distinct from the municipal aggregation model, might potentially be workable.

Given the Staff panel's focus on transparency, counsel for NEM questioned the panel on utility default service rates, asking the panel if the panel thought such utility default service rates were transparent

"It's all in the tariff," Alch responded though, upon further cross, Alch said that, to the general customer, the utility tariff may not be "fully" transparent.

Asked if the panel found non-transparent rates acceptable, Alch replied that if the rate is just and reasonable, and the lowest cost possible, then the lack of transparency is not concerning, as Alch said that the utility default service rates are just and reasonable.

During cross, Alch reiterated the panel's pre-filed testimony that data indicates that for the 36-months ending December 31, 2016, New York State residential utility customers who chose to take commodity services from an ESCO collectively paid almost $1.2 billion more than they would have if they instead took commodity supply from their utility.

That's a negative outcome, Alch said. "There needs to be some price regulation," Alch concluded

Alch testified that the primary principle for the PSC in opening the retail market to choice was to obtain better prices for customers


--by Paul Ring

New York  

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