Competition in the retail energy market on Long Island is dying a quiet death after the state this summer eliminated a sales tax break for energy service companies that compete against established utilities.
The change had a quick and near-complete impact on Long Island: about 3,300 commercial customers that made up the vast majority of the market have switched their service back to LIPA, according to the utility. The tax exemption never applied to residential customers, few of whom signed up for such service on Long Island.
Direct Energy, one of the three energy service companies that participated in LIPA's Long Island Choice program, said the state tax change torpedoed its offering.
“Direct Energy provides customers with energy choices, but the current Long Island energy market will not allow us to offer the plans and options that we offer in the rest of the state," the company said in a statement to Newsday. "Our Long Island customers have expressed they still want energy choice, and we hope to work with local stakeholders to create an advanced, competitive energy market that offers plans to fit customers’ needs.”
At LIPA’s recent budget meeting announcing a 2.45% hike in its delivery charge, acting chief financial officer Kenneth Kane disclosed the service company change and its impact. He described it as the “elephant in the room” in explaining a $55 million increase in LIPA’s operating expenses for 2020, a cost that he said would be largely offset by new revenue from these customers.
ESCO’s are a creation of a deregulated energy market in the state during the 1990s. As part of that initiative, former Gov. George Pataki in the early 2000s sweetened the pot by providing the tax break, which in some cases made up the bulk of the savings that customers received by switching to a third-party service company.
That “loophole,” as Kane called it, was “closed” by legislative action this July, when the state budget excluded the exemption.
“When that closed, almost all those customers, and they were our larger customers who were getting energy from ESCOs, have migrated back to LIPA,” he said.
Eliminating the loophole will also put tens of millions of dollars back into local budgets, the state said.
Energy service companies are "now established entities and eliminating the tax exemption, which New York City did in 2009, returns the power market to a level playing field while providing local governments outside of New York City with approximately $48 million in new revenue," said Freeman Klopott, a spokesman for the state Division of the Budget.
The exemption also had applied to natural gas suppliers in the commercial sector. National Grid spokeswoman Karen Young said the number of customers in the company's Natural Choice ESCO program on Long Island has remained "fairly steady" at around 41,000.
For LIPA, even though the migration means the authority has to secure additional energy for the influx of big customers, the impact on LIPA’s traditional customer base won’t be felt, Kane said. The service companies used LIPA’s transmission and distribution system to deliver energy to the customers.
“The customers were using the same amount of energy before as they are going to tomorrow,” Kane said. “They were buying it from an ESCO as opposed to buying it from us, so now we’re going to have to supply the power, supply the energy, so our cost of power is going to go up.”
But, Kane said, LIPA will show an “almost ... dollar-for-dollar offset” in incoming revenue as a result.
“So there’s not an overall impact to the other customers to these people migrating back,” he said.
ESCO’s have had a mixed reception in the state and Long Island. State regulators have criticized some of the companies for high complaint levels, including deception in switching customers from traditional utilities. On Long Island, ESCO’s saw limited success — only three are currently listed for the region’s commercial customers, and there are indications some are now leaving the market.
The move may also impact commercial segments of the burgeoning market for state programs called community choice aggregation, where local municipalities such as Southampton Town and Hempstead are working to buy energy or natural gas direct from suppliers, to offer discounts or green-energy options.
Glenn Weinberg, director of Joule Community Power, which was awarded a contract to implement community choice for Southampton, among others, said most of the company's potential customers, upward of 90%, are residential. Loss of the tax exemption is "not affecting our work plan in Southampton," where cost savings and renewable energy are primary goals, Weinberg said, though, it "may impact how much [money] small commercial customers are able to save."
Richard Berkley, executive director for the Public Utility Law Project, a watchdog group that has pushed for tougher enforcement of ESCO practices, said the subsidy for the service companies amounted to around $120 million a year statewide. He said the companies that objected to the removal of the subsidy can’t have it both ways.
“They were getting the free market they always said they wanted, and now they’re complaining they can’t compete anymore” without the tax exemption, he said.