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January 11, 2016

Electric suppliers see customer drop-off

PHOTO | HBJ File Electric suppliers saw rapid customer growth from 2006 to 2012, but their market share has been declining for the past three years.

Connecticut has developed one of the more robust competitive electricity retail markets in the country, but electricity suppliers have taken some lumps in the past few years, losing market share amid consumer complaints and tougher government oversight.

Third-party suppliers — state-licensed companies that buy wholesale electricity and resell it to residential and commercial customers — lost nearly 26 percent of their customers (188,000) between 2012 and Nov. 2015, state data shows.

The bulk of the losses have taken place in the residential market, where suppliers now claim one-third of the customer base, down from a 2012 peak of 45 percent.

Three consecutive years of decline in the young and sometimes controversial industry, which signed up just 3 percent of utility customers a decade ago, has occurred against a backdrop of tightening regulations, including a 2015 ban on variable-rate contracts, state fines and other penalties for supplier misconduct, and stricter rules for disclosing contract terms and notifying customers of pending rate increases.

The crackdown by the state legislature and the Public Utilities Regulatory Authority (PURA), lobbied for by the Office of Consumer Counsel (OCC) and Attorney General, has been a response to complaints by customers, who have raised red flags about deceptive marketing practices, aggressive door-to-door sales tactics, and “slamming” — a term for signing up customers without their consent.

But also prominent were accusations that suppliers had not disclosed vital contract information about their variable rates. It's an allegation suppliers have disputed, arguing that some customers simply did not pay attention to the wording of their contracts or mailed notices.

That matter came to a head in early 2014, during unusually frigid weather caused by a polar vortex that affected a large swath of the country and drove natural gas prices to a five-year high.

Because much of Connecticut's electricity is generated by natural gas-fired plants, it triggered price increases in suppliers' variable-rate electricity contracts, which in turn prompted a flood of customer complaints to PURA.

Consumer Counsel Elin Swanson Katz and Attorney General George Jepsen released information at the time saying “thousands” of supplier customers were paying more than 17 cents per kilowatt hour, which was well above the approximately 9 cents charged by the two utilities, Eversource and United Illuminating. A smaller but unspecified number of supplier customers were paying nearly 25 cents, they said.

PURA received 2,161 complaints about suppliers that year, more than the previous four years combined, prompting the legislature to pass a some reforms that summer. That was followed by a first-of-its-kind law adopted last year banning variable rates for residential contracts, which took effect Oct. 1.

PURA spokesman Michael Coyle said the agency has added staff this year specifically aimed at supplier-related enforcement, outreach and education.

Meantime, suppliers blame their shrinking customer base on the exceptionally cold 2014 winter, which helped erase nearly one-fifth of its residential accounts in a single year.

Two industry officials, who between them represent many Connecticut suppliers, said the situation was beyond suppliers' control and virtually impossible to hedge against. But it created enough public outrage that lawmakers took notice.

“There was fallout from a lot of negative press associated with the polar vortex,” said Marc Hanks, senior manager of government affairs and regulatory services for Direct Energy Services, one of the state's largest suppliers. “The past few years have been a rough, bumpy ride.”

Hanks stressed that he was speaking not for his employer, but as New England chair of the Retail Energy Supply Association (RESA), which represents some of the state's biggest suppliers.

Craig Goodman, president of the National Energy Marketers Association, said he thinks suppliers' customer losses could be worse, given the state's new regulations and “intensely negative media coverage” that winter.

“The industry has rebounded remarkably, given numerous regulatory demands placed upon it,” Goodman said. “Connecticut customer penetration is among of the highest in the country, despite the histrionics and an anomalous weather event no one could regulate, anticipate or hedge.”

Hanks said suppliers aren't against all of the state's new regulations, arguing the industry supports consumer protections.

Consumer advocate maintains heat

To boost consumer awareness, Swanson Katz's office has started publishing monthly reports on its website comparing supplier rates to those offered by the utilities. The latest such report, issued this month, says between 77 percent and 84 percent of residential supplier customers paid more than the utilities' standard offer rates in October, resulting in an aggregate difference of $7.9 million. From January to November last year, the aggregate difference was $49.8 million, according to OCC, which crunches supplier-submitted data from PURA to produce the reports.

Victoria P. Hackett, an OCC staff attorney, said fewer customers choosing to switch to an electric supplier could indicate customers are wary after suffering from price spikes after the initial “teaser” term of their contract expires. In response, she said, many customers are opting for the value and stability that standard service can offer.

“More customers are now aware that they do not have to switch, and are less vulnerable to the high pressure, aggressive sales practices of some electric suppliers because there has been more press coverage and community education exposing such practices,” she said.

OCC has also challenged suppliers for blaming winter weather two years ago, arguing to PURA that price-increase complaints began before the polar vortex. The office has alleged that some suppliers seemed happy to raise rates when wholesale prices went up in the past, but were less inclined to lower them when wholesale prices fell. Several lawsuits filed in Connecticut against various suppliers have alleged the same.

While Hanks offered praise to OCC for its work to protect and inform consumers, he said he finds their monthly reports unfair to the industry.

“Some are opposed to retail electric competition altogether and won't be satisfied until the market essentially goes away,” he said.

Hanks said he would rather customers research supplier offerings and draw their own conclusions about whether suppliers' offers are right for them. He also argued that the OCC-calculated rates don't provide an apples-to-apples comparison with standard rates, which can change every six months, while supplier customers may be able to lock in a low introductory rate for longer.

He said many suppliers also have value-added products, such as smart thermostats, built into their rates. And he noted some suppliers, unlike utilities, offer green contracts, which source a certain amount of power from renewable energy and can cost more as a result.

CT market seen as strong

Despite the customer fall off since 2012, the number of licensed suppliers in the state has grown over the same time period. There are 75 suppliers doing business in Eversource's territory and 53 in United Illuminating's backyard.

Hanks said he does not believe the variable-rate ban will result in suppliers vacating the state.

Connecticut is also viewed favorably by Texas-based consulting firm DEFG, which since 2007 has issued an energy industry-funded report analyzing policies promoting competition in the U.S. and Canada.

The most recent ABACCUS report, in July, ranked Connecticut's residential market as the fourth best in the U.S., though the scoring did not account for the variable-rate ban.

“I'm sure companies are going to figure out how to enter Connecticut and make some money selling the commodity,” said Nat Treadway, managing partner at DEFG.

The report also noted that six other states saw customer declines in 2014.

Treadway said suppliers in many states are stuck in a deregulated market in which there is supposed to be competition, but they find themselves subject to onerous regulations and having to compete with government-influenced standard offer rates.

Treadway advocates for getting rid of those rates entirely, like Texas has done, and leaving the generation market solely to competitive players.

But he admits that seems unlikely to happen in many states.

What will 2016 bring?

The state legislature may not be done with new electricity supply market regulations.

When lawmakers passed the variable-rate ban, they instructed PURA to analyze the rate structure of the competitive residential market.

PURA issued its report to the legislature on Dec. 31, recapping much of the industry's recent turmoil and regulatory history, and concluding with a choice for the future:

“If the legislature seeks a low-risk market with only flat, long-term rates, then continuing the ban on variable rates is the best path forward,” the report read. “If the legislature seeks a market with dynamic pricing options, continued innovations, and the maximum possible savings to customers, then some form of month-to-month rates should be considered.”

Read more

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