On May 20, 2016, a state Supreme Court judge in New York is tentatively set to hear arguments regarding a request for preliminary injunctive relief with regard to the “Order Resetting Retail Energy Markets And Establishing Further Process,” issued on February 23, 2016 (the “ESCO Order”) by the New York Public Service Commission (“NYPSC”). While the fate of the operative provisions of the Order is in the hands of the court, the ESCO Order and additional developments in related proceedings have created turmoil in the energy service companies (“ESCO”) market and have not benefitted ESCOs or customers. Furthermore, the NYPSC has taken completely inconsistent positions – in one proceeding it seeks to eviscerate part of the ESCO market and then in another proceeding (Reforming the Energy Vision or “REV”) it contemplates that ESCOs will play a pivotal role in providing innovative services to end-use customers in a more dynamic, diverse and smart distribution system.

Several ESCOs have committed violations of the rules governing ESCO conduct (the “Uniform Business Practices” or “UBP”) in their marketing and contract practices. However, the ESCO Order’s attempt to address those violations of the UBP is excessive. The NYPSC could have addressed these problems with several, well-publicized enforcement proceedings against the worst ESCO offenders and the enhanced investigation of others.

We will report back on the outcome of the preliminary injunction hearing and on continuing developments at the NYPSC in the ESCO proceeding (Case 15-M-0127).

The ESCO Order

In the ESCO Order, the NYPSC confirmed its authority to regulate ESCO participation in the retail market, noted that consumers had submitted numerous complaints regarding ESCO marketing and contracting practices, and concluded that it was necessary to restructure the ESCO market for residential and small commercial retail customers (i.e., mass market customers) to protect customers from high-pressure sales situations, deceptive marketing, slamming, and lack of expected savings.

Accordingly, the NYPSC directed that ESCOs “shall only enroll new mass market customers or renew existing mass market customers in gas or electric service if at least one of the following two conditions is met: (a) enrollment where the contract guarantees that the customer will pay no more than were the customer a full-service customer of the utility; and (b) enrollment based on a contract for an electricity product derived from at least 30% renewable sources.” Additionally, the NYPSC required ESCOs to receive affirmative consent from a mass market customer prior to renewing that customer from a fixed rate or guaranteed savings contract into a contract that provides renewable energy but does not guarantee savings. Finally, ESCOs that currently serve mass market customers, through month-to-month variable rate agreements, must enroll those customers in a compliant product at the end of the current billing cycle or return the customers to utility supply services.

Incredibly, the NYPSC ordered that ESCOs implement the ESCO Order within ten (10) calendar days from the issuance date of the ESCO Order.

The ESCO Industry Challenge of the ESCO Order

The ESCO industry challenged the Order on a number of bases, including that the Order was issued in an arbitrary manner and resulted in an unconstitutional taking in violation of due process. The ESCO industry successfully obtained a Temporary Restraining Order (“TRO”) on March 4, 2016 and a stay of the operative provisions of the Order (as discussed above) pending the hearing on the request for a preliminary injunction.

However, the prospect that the operative provisions of the Order may be re-instated has caused ESCOs and utilities to scramble to be ready for compliance. For example, ESCO and utility risk management groups are confronting a material change in risk profiling and hedging with the prospect that thousands of customers may be moved rapidly from the ESCO portfolio to the utility portfolio.

NYPSC Expectations for ESCO Implementation of the ESCO Order

With respect to the guaranteed savings requirement, the ESCO must guarantee that the customer will pay no more, on an annual basis, than the customer would have paid as a full service customer of the utility. The ESCO must ensure that this requirement is met by refunding at the end of each year any customers charged more than they would have paid as a full service customer of the utility for that year.

With regard to new offerings by ESCOs of the renewable product, the ESCO must guarantee that at least 30% of the energy provided to the customer will be generated by renewable resources, eligible under the NYPSC’s Environmental Disclosure Labeling Program (“EDP”) rules, to ensure that these products contribute to greater renewable energy achievement. Pursuant to the EDP, energy labels are based on the environmental attributes of the energy purchased by the load serving entity and are not affected by the separate purchase of Renewable Energy Certificates (“RECs”). Currently, to meet this requirement the ESCO must guarantee that at least 30% of the energy provided to the customer will be generated by deliverable renewable energy resources, including biomass, biogas, hydropower, solar energy, and wind energy, and will include renewable attributes.

Additional NYPSC Proceedings Regarding The ESCO Industry

In addition to the modifications to the ESCO market for mass market customers, the Commission established procedural rules to make it easier for the NYPSC to revoke the eligibility of the ESCO to conduct business. The NYPSC may now issue an Order to Show Cause requiring the ESCO to explain why the ESCO’s certification should not be revoked and demanding the ESCO present a case to maintain its eligibility without prior Staff notice to the ESCO, even if the ESCO has only a single violation of the UBP governing ESCO conduct in New York.

Similarly, in a related proceeding (Case Nos. 15-M-0127, 12-M-0476 and 98-M-1343), the NYPSC has invited interested parties to submit comments on a variety of issues pertaining to the functioning of the ESCO market, including: (a) whether and under what circumstances ESCOs should be required to post performance bonds or other forms of demonstrated financial capability; and (b) what penalties may apply to ESCO’s that violate the UBP, other NYPSC orders, or provisions of the New York Public Service Law.