Shares of ESCO Retail Residential Sales in New York 30
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STATE OF NEW YORK SUPREME COURT COUNTY OF ALBANY RETAIL ENERGY SUPPLY ASSOCIATION, INTERSTATE GAS SUPPLY, INC. d/b/a IGS Energy, ACCENT ENERGY MIDWEST GAS LLC d/b/a IGS Energy, and ACCENT ENERGY MIDWEST II LLC d/b/a IGS Energy, Plaintiffs-Petitioners, -against- Index No. 870-16 PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, AUDREY ZIBELMAN, PATRICIA L. ACAMPORA, GREGG SAYRE, and DIANE X. BURMAN, in their official capacities as Commissioners of the Public Service Commission of the State of · New York, and KATHLEEN H. BURGESS, in her official capacity as Secretary of the Public Service Commission of the State ofNew York, en- g: Defendants-Respondents. "-< I \.0 CITY OF WASHINGTON ) :JI:> DISTRICT OF COLUMBIA ) ss.: \0.. ·'~·~i...,. I I, JOHN R. MORRIS, being duly sworn, depose and state as follows: "' Introduction 1. My name is John R. Morris. I am a Principal at Economists Incorporated, an economic consulting firm located at 2121 K Street, NW, Washington, DC 20037. I have a bachelor's degree in economics from Georgetown University, and I have a master's degree and a Ph.D. in economics from the University bf Washington. I have been studying energy industries since joining the Federal Trade Commission in 1985. Since joining Economists Incorporated in 1992, I have consulted on many mergers involving electric and gas companies, examined competitive issues relating to utility rates, provided market power studies for applications for ~ market-rate authority, and studied market power issues in state restructuring proceedings. I have published articles on competition and energy matters, and I have spoken on numerous occasions concerning competition in natural gas, electric power, and other industries. I have previously been accepted as an expert witness on energy matters before the Federal Energy Regulatory Commission (“FERC”), the New York Public Service Commission (“Commission”), other state commissions, and in federal court. A complete listing of my experience, publications, and testimony is contained in my resume, presented in Attachment JRM-1. 2. Counsel for NRG Energy, Inc. (“NRG”) asked that I prepare an affidavit to assess the competitiveness of Energy Service Companies (“ESCOs”) selling electric energy to mass market customers. 3. To provide this assessment, I have relied upon my 30 years of experience examining competition in energy markets, prior Commission decisions on marketing to retail customers in New York, postings on the internet by the Commission and ESCOs related to mass market retail energy offers in New York, data from the U.S. Energy Information Administration (“EIA”) on retail sales in New York, and data on ownership and affiliations of ESCOs in New York. 4. I have found that mass market retail sales of electric energy in New York are highly competitive. Over 40 independent entities sell electric energy at retail, suggesting robust competition among sellers. Moreover, market shares of sellers can change significantly over time. This indicates that mass market retail customers routinely switch suppliers according to their interests. Moreover, the market exhibits no barriers to entry, and entrants collectively account for a competitively significant share in each year. 5. I have reviewed the allegations against ESCOs. A workably competitive market does not mean that every supplier satisfies the needs of its customers 100 percent of the time. It does mean, however, that buyers are able to switch to alternative suppliers when buyers decide that a supplier’s offering is inadequate—whatever the reason. The turnover of customers in retail energy markets that I have observed indicates that buyers can and do seek better supply options. Generic rules that limit the ability of ethical companies to market energy to retail customers simply cannot make those customers better off in the long-run. Indeed, the essence of market power is the ability to restrict buyers from taking service from other competitors. Actions by the Commission that limit options for buyers restrict competition and do not promote competition. An Objective Measure of Competitiveness 6. Although no single metric captures all facets of competition, market concentration, as measured by the Herfindahl-Hirschman Index, has been used by antitrust practitioners and regulators in energy industries for many years as a gauge of the likely competitiveness of a market. The Herfindahl-Hirschman Index, also called the HHI, equals the sum of the squared market shares. For example, a market with four firms with market shares of 40, 30, 20, and 10 percent would have an HHI of 3,000, which equals the sum of 1,600, 900, 400, 100—the squares of the market shares. As another example, a market with 10 firms with market shares of 10 percent each would have an HHI of 1,000. In other words, the more market participants exist and the more comparable their market shares, the lower the HHI will be. 7. Under U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, markets with an HHI less than 1,500 are considered unconcentrated. These markets are considered so inherently competitive that mergers “in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.” This can be found in Section 5.3 of the 2010 version of the Horizontal Merger Guidelines. 8. When examining whether oil pipelines should be deregulated in 1982, the U.S. Department of Justice concluded that markets with an HHI below 2,500 were sufficiently competitive that they could be deregulated with little likelihood of prices being set at supra- competitive levels. This can be found in U.S. Department of Justice, Oil Pipeline Deregulation (May 1986). 9. Therefore, to determine whether energy retailing to mass market customers in New York is workably competitive, one can examine sales data to determine whether market concentration, as measured by the HHI, is sufficiently low to conclude that the market is workably competitive. 10. To calculate the HHI for electric energy retailers to mass market customers in New York, I utilize data for sales to residential customers in New York. EIA posts results from Form EIA-861, which lists sales by retail provider by state. The most recent data available are for the calendar year 2014. From these data, I calculated the HHI based on sales revenues of all the ESCOs in New York selling electric energy to residential customers. From the raw data provided by EIA, I aggregated the sales for those companies known to be part of a larger corporate family. For example, I aggregated the sales data from Green Mountain Power and Energy Plus Holdings because both of these companies are affiliates of NRG. 11. The results of the HHI calculation are provided in Attachment JRM-2. As shown in the attachment, 19 ESCOs sold electric energy at retail in 2014 and had a share of ESCO sales of 1 percent or greater. The largest seller in 2014, Ambit Energy Holdings, had a share of 20 percent. The next largest seller, Direct Energy, had a share of only 14 percent. All other ESCOs have shares of 10 percent or less. ESCOs with shares of less than 1 percent collectively accounted for 7.5 percent of ESCO sales. The HHI is only 916, well within traditional screening thresholds for determining a competitive market. 12. It is not possible to do a similar HHI calculation for only small commercial customers because the EIA sales data do not separate out sales to small commercial customers from sales to large commercial customer. 13. I nevertheless conclude that sales to small commercial customers in New York are also workably competitive. This conclusion is based upon the publicly available data showing many suppliers to commercial customers, the low concentration of ESCOs supplying residential customers, and my experience examining competition in retail energy markets. 14. Accordingly, I conclude that sales to mass market energy customers in New York are workably competitive. Additional Indications of Robust Competition 15. I have also examined whether these shares are stable or unstable. Unstable market shares indicate that buyers often switch among competitors. Consumer switching provides evidence that buyers seek out deals that they believe are best for their particular situation and preferences. In other words, unstable market shares provides another indicator that the market is workably competitive. Based upon my experience in examining retail energy competition in other states, substantial switching among suppliers is common in competitive markets. 16. Attachment JRM-3 is a chart showing changes in market shares from 2010 through 2014. The chart in Attachment JRM-3 shows that shares can change substantially. For example, Direct Energy (including the companies it has acquired) had a share over 25 percent in 2010, and fell to 14 percent by 2014. Hudson Energy services and IDT Energy shares have also fallen over the period. In contrast, Ambit Energy’s share has increased from under 10 percent to 20 percent over the period. Therefore, in just four years the landscape of the ESCO market has substantially changed, which is a good sign of healthy competition. 17. In my experience, ease of entry is a major driver of competitive markets. Here, small scale entry is both feasible and common. For example, Kiwi Energy’s share increased from 0 percent in 2012 to over 4 percent in 2014. Such growth by a small firm over a short period is indicative of easy entry. Markets with easy entry are inherently competitive. Commission Concerns 18. I understand that the Commission has expressed concerns that mass market ESCOs “offer little more than higher prices.” 19. Based on my understanding of the data relied upon by the Commission staff, the conclusion that was reached by Commission staff is in my opinion an oversimplification because it fails to account for certain important information about ESCO services and products.