Report: Maryland’s deregulated energy market ‘dysfunctional,’ harming low-income households

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Photo by Steve Snodgrass, via Flickr

Maryland’s deregulated energy market, in which third-party electricity and gas suppliers compete with the big utilities, isn’t delivering on promises from 1999 to lower utility rates. In fact, it’s led the roughly one-in-five Maryland households that have switched to third-party suppliers to overpay by a combined $255 million from 2014 to 2017, while allowing companies to take advantage of low-income customers with marketing tactics, according to a new Abell Foundation report. Co-authors Laurel Peltier (a.k.a. GreenLaurel here at Baltimore Fishbowl) and electrical and nuclear engineer Arjun Makhijani concluded the state’s market has become “dysfunctional,” relative to the state’s original goal of helping customer save money.

They deduced that by comparing billing data from the roughly 60 third-party suppliers with rates from the state’s five major electrical utilities (Baltimore’s is BGE, of course) and two natural gas suppliers–and by interviewing dozens of low-income bill payers who’d switched to third-party companies, most of them convinced to do so by marketing reps promising them gift cards and other small-time incentives.

A quick explainer: Third-party suppliers and major utilities offer the same energy, save for a select few firms that specialize in offering 100 percent renewable power to the environmentally conscious. But under a 1999 law passed by the Maryland legislature, major utilities like BGE and Pepco were required to sell their power plants, and third-party companies were permitted to purchase the generated power and sell it at their own rates to households. The idea was that the competition would drive down prices and help the consumer.

The results, according to the Abell report: It was working as of 2010, when customers collectively saved $20 million.

But that same year, a new regulation took effect allowing the big utilities to purchase customers’ debt owed to the third-party suppliers. The utilities could then go out and issue shutoff notices as a means of collecting unpaid bills; meanwhile, the suppliers could raise their rates in hopes of collecting more revenue, and inherit no risk of customers being unable to pay, since they could sell off the debt anyway.

They could also now target customers with bad credit, including in low-income areas.

“There’s no backstop. Some suppliers can charge as much as they can and get paid,” said Peltier this morning.

They also could continue to benefit from offering short-term fixed contracts for a few months, and then getting to change their rates from month to month with little oversight from regulators. Thereafter, from 2011 to 2013, the Abell report found, customers “came out about even” comparing third-party and standard utility rates. But from 2014 to 2017, they overpaid by $255 million, including $59 million alone last year.

At the micro level, Peltier and Makhijani also analyzed data from 40 Baltimoreans who were receiving assistance with their utility bills at the nonprofit Govans Ecumenical Development Corporation, in a program known as GEDCO CARES.

Most of them were elderly, black, “very low-income” and lacked internet access, the report said. A number of them were receiving public assistance help them pay their utility bills. All had switched from BGE to third-party companies after talking with direct sales reps in their neighborhood—you may have seen them going door-to-door where you live, asking to see your power bill, or doing the same from booths at events.

The analysis of that group’s bills found the average amount paid for electricity was 51 percent higher than the standard rate offered by BGE. For gas service, it was 78 percent.

“You sit down and talk with woman after woman who is 70 or 80, and they make very little money—we’re talking like $15,000 a year—and they believed the reps that they would save money,” Peltier said. “And you look at their bill and you realize that just over and over and over they may have overpaid $25 that month, $200 this month… This is not a small financial issue.”

And by looking at nine interviewees’ bills, the co-authors sought to learn how much federal, state or local assistance they were receiving for their utility bills, ranging from several hundred to a few thousand dollars per household, was being eaten up by overpayments. It came out to about 34 percent, roughly a third of every assistance dollar going toward third-party suppliers’ higher rates.

“The implications aren’t small,” Peltier said. She alluded to the domino effect of falling behind on one’s electricity and gas bill when already receiving public assistance, noting, “Their housing vouchers can be dependent on having a utility bill fully paid off.”

The report offers other findings, including a similar conclusion that a separate Maryland Office of People’s Counsel report drew last month—that third-party suppliers’ variable rates change with little notice, causing customers to overpay over the course of their contract; that supplier’s marketing often targets low-income ZIP codes or places near public agencies where people go to receive government assistance; and that the Maryland Public Service Commission hasn’t actively sought to regulate those variable rates or the aforementioned marketing tactics, even after raising its own concerns.

Third-party energy suppliers have defended the system as it is, touting the benefits of incentives they offer to new customers like smart thermostats and rebates.

“Measuring the success of the retail market only by looking at price fails to adequately capture the true value of choice, convenience and innovation,” the Retail Energy Supply Association trade group testified to the Maryland Public Service Commission this past summer.

In a statement sent to Baltimore Fishbowl Wednesday morning, RESA said the Abell report “takes into account only a fraction of the number of shopping customers in the market. It is, therefore, not an accurate representation of the market as a whole.”

The trade group also pointed to federal data that it says indicate residential electric bills “have essentially remained static” in Maryland for more than 10 years while rising in states with regulated prices. And it added that the report does not account for differences in the types of products offered by third-party suppliers and standard utilities, “as well as the basic idea of why customers choose one product over another.”

Peltier and Makhijani recommended that the Public Service Commission begin examining the state’s deregulated energy market more closely, including by collecting billing data by ZIP code annually to “reveal the scope of overpayments if they continue to exist, or customer savings,” and by investigating marketing tactics used to draw in low-income customers.

They also said the PSC should stop allowing companies to market to customers individually, including by going door-to-door, with an exception for 100 percent renewable companies; that it end the practices of allowing variable rate contracts and termination fees for customers seeking to switch back to major utilities; and that it require energy companies to clearly display how much a customer saved or overpaid compared to a standard utility on a monthly bill, among other recommendations.

Peltier said for now, with little guidance from the PSC, “households are on their own” to learn about their utility bills and see if they may be overpaying.

Page 7 of the Abell report offers something of a guide with an example of a bill from a third-party supplier, showing a comparison of costs. Customers can also connect with organizations like GEDCO CARES to see if they may be overpaying, or use this guide that Peltier has prepared to better understand their bill (also available in Spanish).

This story has been updated with comment from the Retail Energy Supply Association.

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Ethan McLeod

Senior Editor at Baltimore Fishbowl
Ethan has been editing and reporting for Baltimore Fishbowl since fall of 2016. His previous stops include Fox 45, CQ Researcher and Connection Newspapers in Virginia. His freelance writing has been featured in CityLab, Slate, Baltimore City Paper, DCist and elsewhere.
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