No Money, No Power:
To Prevent “Slamming” in an Open-Access Electric Environment,
Regulators Should Act Now

An Editorial by Mark C. Williams

The developing “open access” wholesale generation market has provided numerous opportunities for legitimate new market entrants to provide competitive services, often at market-based rates, which will undoubtedly lead to lower prices for power customers. Market restructuring at the Federal level, supervised by the Federal Energy Regulatory Commission, has already led to the FERC acceptance of several hundred new power marketing tariffs, and will lead to the continuing increase in price-competitive marketing and power brokering arrangements. Most active power marketers are large businesses, frequently affiliated with utilities or gas pipelines, and have collectively significant experience in the energy industry. Many wholesale customers are utilities, and are themselves highly sophisticated consumers.

At the retail level, several states have taken the first steps toward opening end-user markets, and power marketers have already decided that significant economic opportunities will exist at retail. However, recent state proceedings involving allegedly fraudulent retail marketing activities should alert regulators to the need to protect legitimate marketers, traditional utilities and consumers from inappropriate market activities by con artists.

In Pennsylvania, two businesses purporting to market power through “multi-layer” marketing, in which recruitment of additional sales agents entitles the recruiter to share in commissions, have entered into settlement agreements with the state attorney general which restrict certain of their marketing activities. In New York, a marketing entity has been accused by the state attorney general with seeking to sell power which it had not purchased, and with misleading retail customers who were not yet eligible to purchase power from other than their franchised utilities.

Telephone utilities first started to experience significant “slamming” difficulties in the early 1990s. Some of those slamming events involved market entrants who were unable to supply acceptable service at the rates they represented would be charged, and many customers found, to their surprise, that their long-distance bills had skyrocketed due to unauthorized, sometimes unlawful transfers of carriers.

These examples are undoubtedly the first of what may be many more “problem” marketing matters which will pose unfair competition problems for legitimate market entrants in the electric and gas industries. A compliant marketer or utility whose customers are swindled by a fraudulent actor is denied revenue, and the opportunity to fairly compete, when con artists enter the market.

The Pennsylvania and New York cases demonstrate convincingly that retail customers – particularly residential ratepayers – sometimes lack the sophistication to determine when they are liable to be deceived. As state regulators permit markets to be opened to competitors, they are also compelling utilities to provide marketing and other power supply firms to solicit retail business. Regulators should act now to assure that they are not burdening established power suppliers and the public by giving the appearance of approval to powerless marketers, to price-switchers and to slammers who may act without actual customer approval. At a minimum, state commissions regulating the retail markets should require that:

State commissions should recognize that unfair “slamming” causes customers to distrust all power suppliers, and harms the restructuring of markets. Legitimate competitors should not be tarnished by the absence of focused regulatory activity, which should begin well in advance of retail restructuring efforts.

REQUIRED ANNOTATION: This reflects the author’s opinion and not necessarily that of Milbank or any client, and does not constitute legal advice for any purpose.

Mark C. Williams, Milbank, Tweed, Hadley & McCloy, Washington, DC. The author practices exclusively in the area of utility law, and is a committee chair in the Federal Energy Bar Association.

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