After a long review of the bankruptcy of retail marketer Iroquois Energy Management in 2000, New York energy regulators have approved new financial requirements for retail gas and power marketers who offer prepayment plans or require deposits from customers. The requirements are designed to strengthen consumer protections in New York’s competitive energy markets.

In October 2000, National Fuel Gas Distribution Corp., the host of a choice program that served eight counties in Western New York, announced it would take over serving Iroquois Energy Management’s residential customers after the marketer reported that it would no longer serve them on the National Fuel System. Iroquois, which was unrelated to pipeline company Iroquois Gas Transmission, at the time said it would continue to serve its commercial and industrial customers. On Oct. 23, 2000, National Fuel was forced to cut Iroquois from its choice program after the company had gone three days without fulfilling its commercial and industrial customers’ gas supply needs. Then on Oct. 31, Hamburg, NY-based Iroquois filed for bankruptcy, leaving approximately 19,000 residential natural gas customers with an estimated $1.8 million out-of-pocket loss due to non-refunded pre-payments.

Iroquois had structured a contractual arrangement where customers might achieve a greater level of savings if they were willing to enter into a contract where they were pre-paying on a quarterly, semiannually, and in some cases on an annual basis. Some of the company’s customers who had prepaid their winter bills were unable to get their prepayments back in the subsequent bankruptcy proceeding.

The New York Public Service Commission has decided that retail marketers now will have to provide evidence of meeting the minimum bond rating from an independent rating agency before they can offer New Yorkers prepayment plans for electricity or natural gas supplies. Those who meet the bond-rating requirements will be able to require security deposits from customers. Those who don’t meet the requirements may require customer deposits by posting appropriate security in the form of an escrow account or a standby irrevocable letter of credit in the amounts of the deposits collected, but they will not be able to offer prepayment arrangements.

“The additional consumer protections balance key interests in the energy markets,” said New York Public Service Commission Chairman Maureen O. Helmer. “Specifically, our administrative flexibility enables us to balance vital consumer interests with the interest in offering innovative competitive energy services.”

The minimum bond rating as contained in the commission’s Uniform Retail Access Business Practices (UBPs) is “BBB” from Standard and Poor’s, “Baa2” from Moody’s, or “BBB” from Fitch. A marketer also may provide evidence of a minimum bond rating for its parent corporation and a copy of a contractual agreement between the company and its parent corporation, stating that the parent agrees to act as guarantor and will assume responsibility for return of prepayments and deposits. In addition, the commission retains the right to consider, on a case by case basis, alternative creditworthiness proposals advanced by a marketer unable to provide a minimum bond rating.

For deposits, but not prepayments, the new requirements allow a marketer, as an alternative to a credit rating, to satisfy the additional creditworthiness prerequisites by providing a standby irrevocable letter of credit issued by a bank, insurance company or other financial institution with at least an “A” bond rating, or by establishing an escrow account maintained in such a financial institution. A security deposit is generally required as a condition for providing service to poor credit-risk customers and is held aside for use in the event a customer defaults on bill payments. A marketer may refund a deposit to a customer upon establishment of a good payment record or voluntary termination of service.

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