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Maryland's Dysfunctional Residential Third-Party Energy Supply Market

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Maryland's Dysfunctional Residential Third-Party Energy Supply Market Maryland’s Dysfunctional Residential Third-Party Energy Supply Market: An Assessment of Costs and Policies By Laurel Peltier and Arjun Makhijani, Ph.D. December 2018 The Abell Foundation www.abell.org Suite 2300 Phone: 410-547-1300 111 S. Calvert Street @abellfoundation Baltimore, MD 21202-6174 Cover photo: Shutterstock TABLE OF CONTENTS Executive Summary ........................................................................................................... 1 Introduction ........................................................................................................................ 3 Third-Party Supply Data .................................................................................................... 5 Third-Party Supplier View ................................................................................................. 8 Growth of Maryland’s Third-Party Energy Supplier Market ............................................ 8 Maryland's Electricity Choice Pricing Outcomes ............................................................ 9 The Burdens and Harms Due to Unaffordable Utility Bills ........................................... 16 Data From Other States .................................................................................................... 19 Current Status at the Maryland PSC ................................................................................ 20 Recommendations ............................................................................................................. 21 Conclusions ........................................................................................................................ 23 Acknowledgements ........................................................................................................... 25 References .......................................................................................................................... 26 Abell Foundation www.abell.org @abellfoundation P: 410-547-1300 December 2018 1 Maryland’s Dysfunctional Residential Third-Party Energy Supply Market: An Assessment Of Costs And Policies by Laurel Peltier and Arjun Makhijani, Ph.D. Executive Summary1 For a variety of reasons, the marketplace for nonregulated suppliers was slow to grow Maryland’s Electric Customer Choice and until 2010. The impact, however, during that Competition Act of 1999 opened the door year was positive: Residential consumers who to electric retail competition and allowed purchased from non-utility (“third-party”) a variety of third-party supply companies suppliers saved in total about $20 million, as to sell electricity supply and other services compared to regulated utility supply prices. to Maryland’s consumers. The regulated Between 2011 and 2013, consumers who utilities continue to provide distribution switched to third-party suppliers came out service to all customers, and they supply about even on the whole. service to those customers who do not want to purchase it from competitive But from 2014 to 2017, Maryland households suppliers. The idea was that a deregulated have been paying tens of millions of dollars energy market would provide consumers more per year in aggregate to third-party with choices, spark competition, and electricity suppliers—about $255 million “provide economic benefits to all customer more in all than if they had stayed with their classes.”2 This report examines whether utility’s supply offer. This adverse outcome retail competition has benefited residential for consumers, despite a large number of consumers, especially low-income suppliers, indicates that Maryland’s third- households. Gas retail competition also is party supply residential market has become available, subject to the same licensing and dysfunctional3; in its current state, it is no longer consumer protection rules that apply to fulfilling the purpose of the law—to benefit all electric retail competition. consumer classes. 3 We use the word “dysfunctional” in the sense that price-based 1 References for statements in this summary can be found competition, with transparency in the market, should in theory in the body of the report. produce lower prices on average, but that is not the case for 2 Maryland Electric Restructuring Act 1999, 20. Maryland's residential customers. Table ES-1: Maryland residential electricity third-party supply summary 2014-2017 Total overpayment Year # On third-party supply % Supplier rate over SOS compared to SOS 2014 477,000 15% $77 million 2015 441,000 14% $69 million 2016 418,000 11% $50 million 2017 400,400 16% $59 million Total $255 million 2 In this report, we examine the impact of higher purchase the suppliers’ receivables at a very rates on low-income households, with a focus small discount, effectively shifting the risk on Baltimore City. There are 383,000 low-income of nonpayment of bills to the utilities—and households in Maryland that are eligible for the ratepayers—rather than the companies government assistance to help reduce energy that charge the high prices. Yet no state bills; 20 percent live in Baltimore City alone. agency actually collects and analyzes the Statewide, in 2016, assisted households had an impact of third-party supply rates for average income of about $14,700 and average Maryland consumers, even though federal energy bills of about $2,180—15 percent of electricity supplier reporting is available. More income. Many more families live under serious remarkably, no government agency assesses financial stress. the impact of higher rates on energy burdens, though the harms to low-income families For better insight, we collected data and caused by unaffordable utility bills are known interviewed clients at a Baltimore City agency to be severe. that provides a variety of services to low-income Baltimoreans, including energy assistance. Most The outcomes of these policies for low-income of the people we interviewed were elderly African- consumers are clear: American women. We found the following: • Certain consumers face higher utility • When compared to Baltimore Gas and bills than the regulated utilities’ SOS for Electric Company’s (BGE) Standard Offer electricity and gas supply. Service (SOS) rates, the 40 low-income account holders we interviewed paid a • They are at greater risk of nonpayment 51 percent premium for electricity and a of utility bills and utility service 78 percent premium for natural gas. termination notices. • The 40 low-income account holders • There is a decreased effectiveness of we interviewed have all applied for, limited energy assistance dollars in and most have received, financial aid reducing high energy costs. through Maryland’s Office of Home • Third-party suppliers are incentivized Energy Programs (OHEP) to help pay their to charge high rates because they no energy bills. We estimated that over half longer bear the risk of nonpayment—a of the low-income clients who visited phenomenon known in economics as the Baltimore City agency for energy “moral hazard.” assistance in May and June were on third-party supply, more than double the • The already-severe economic stresses statewide average. faced by low-income families are intensified by high energy bills, thereby • For a sample of nine energy-assistance magnifying the damage to low-income clients, we analyzed monthly bill-level data, families (e.g., ill health, homelessness, which revealed that 34 percent of energy- loss of productivity). Maryland also assistance money was negated by higher incurs substantial costs in the form of prices of third-party suppliers. added emergency room visits, shelter Since 2009, Public Service Commission (PSC) for the homeless, and other economic regulations have allowed regulated utilities to and social losses. Abell Foundation www.abell.org @abellfoundation P: 410-547-1300 December 2018 3 The report offers the following recommendations: 6. For consumers who choose third-party 1. The PSC should be required to annually supply, utility bills should prominently collect and report actual bill-level display that the customer saved Y data for consumers by zip code. dollars or paid X dollars extra for that These data would reveal the scope month by being on third-party supply. of overpayments if they continue to exist, or estimate customer savings, 7. Some marketing practices to low- if any, and would verify whether they income households in Baltimore appear disproportionately affect low-income to be similar to those condemned households as our data and analyses by the PSC in 2014. We strongly from other states suggest. recommend that the PSC initiate a broad and thorough investigation into 2. Residential customers who want third- marketing practices affecting low- party supply should only be served income households and also more by some form of aggregated supply actively enforce current regulations. that would ensure lower costs. We are not recommending the end of Unlike many issues facing the state, improving third-party supply for the residential consumer outcomes quickly and effectively sector but are advocating for the end seems a realistic goal. Maryland has many good of marketing to and contracting with models to study and consider, and we offer a households for third-party supply list of common-sense reforms to dramatically on an individual basis with a very improve a marketplace that is currently restricted exception of 100 percent not functioning to the benefit of Maryland renewable energy procurement. households, especially low-income residents. There are tested approaches
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