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How the “Purchase of Receivables” System Drives Up Everyone's Electric Rates in Massachusetts

In Massachusetts, customers of Eversource, National Grid, and Unitil receive electricity bills that are split into two sections: distribution (or delivery) and supply. The distribution section pays for the utility that physically puts up the wires that move power. When it comes to the supply side of bills, Massachusetts is one of a minority of states that allows residential customers to buy their electricity supply in three ways, from their utility (also known as basic service), from their community through a municipal aggregation plan, or a third-party supplier sometimes called a “competitive supplier.” Even when a customer has chosen to get their supply from a municipal aggregation program or a third-party supplier, they almost always receive one bill sent by their distribution utility with charges for both distribution and supply.

Distribution utilities are required to ensure that third-party suppliers get paid for the power customer’s electricity use through a “purchasing their receivables” system. What that means is that utilities pay suppliers for a customer’s usage before the customer pays for it. The system works fine unless the customer of a third-party supplier fails to pay their bill. In that case, the bad debt would have to be absorbed by the utility who then would pass it onto every ratepayer in their territory, even those who are getting their electricity supply from their utility or from a municipal aggregator.  

To account for the fact that not all customers will pay their bills, Section 1D of Chapter 164 allows the Department of Public Utilities to let utilities pay third-party suppliers slightly less than face value for those unpaid electric bills. Per state law, that discount is not based on the risk of that supplier’s customers failing to pay their bills. Instead, it is based on the average rate of non-payment among all residential customers of that distribution utility. This essentially assumes that all customers are equally likely to be unable to pay their bills. 

This is a problem because if residential third-party suppliers charge higher rates, disproportionately target low-income customers, and use variable rate contracts to steadily increase the rates they charge their customers over time (all common practices), it could easily result in higher rates of bill non-payment among third-party supply customers versus aggregation or basic service ratepayers.

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The difference in what a supplier is paid for their customer’s yet-to-be-paid bills minus the actual value of those bills, after the risk of non-payment is considered, is passed on to all residential customers of that distribution utility. This means that our purchase of the receivables system can act as an unintended subsidy for residential third-party suppliers, especially those who overcharge their customers the most. Under this system, third-party suppliers will get paid the same amount whether their customers can actually pay their electric bill or not.


How much does this system cost ratepayers?  

The cost of this purchase of receivables system to electric ratepayers has been neither consistently tracked by the Department of Public Utilities nor included in the Attorney General’s report on the impact of third-party suppliers on the state’s residential electric ratepayers. However, information from old rate cases and other jurisdictions suggests that the purchase of receivables system could cost electric ratepayers across the Commonwealth millions of dollars a year. 

In a recent filing by the Potomac Electric Power Company to the Public Service Commission of the District of Columbia, the electric distribution utility said that the net-write-off (unpaid bills minus late fees) rate for residential competitive supply revenue was 6.7%. This means for every $100 dollars residential third-party supply customers were supposed to pay they only paid $93.40.  

In comparison, in Massachusetts, third-party suppliers are being paid by utilities as if for every $100 their customers owe on their bills those customers are paying: $97.01 (National Grid), $98.67 (Eversource), or $96.77 (Unitil). That means if residential third-party supply customers are failing to pay their bills near the same level as what is being seen in D.C. then the effective subsidy for third-party supply companies could be around $3-5 for every $100 of electricity supply sold to residential customers by third-party suppliers.  

This problem also isn’t new. When the purchase of receivable system was first put in place in the mid-2010's, the Department of Public Utilities required utilities to track how much third-party supply customers owed and how much they paid. All of the subsequent utility's filings showed a marked difference between the value of third-party supply bills sent out and actual customer payments.  

One utility filing showed that in 2014 third-party suppliers sent residential customers in National Grid’s distribution area bills worth $78.2 million, but National Grid only received $63.2 million in payments from those customers, or $80.81 for every $100 owed.  

Unfortunately, after these filings early in the purchase of receivables program's history, the Department of Public Utilities stopped requiring utilities to report how often third-party supply customers have been failing to pay their bills. This leaves us without good data on the extent to which aggregation and basic supply customers' electric payments are being funneled to third-party suppliers through the Commonwealth’s broken purchase of receivables system.  


What can be done about this?  

The simplest solution is to make this a moot point by banning residential third-party supply contracts, which would be a good idea regardless of this issue (find out more here). Short of that, the Legislature could modify Section 1D of Chapter 164 to repeal the purchase of receivables system (except for municipal aggregation programs where it can serve a productive role), something Maryland did recently.  

If you're one of the millions of residents of Massachusetts who is not in the Legislature, please contact your State Representative (you can find their email here) and ask them to support An Act relative to electric ratepayer protections, a bill that would ban residential third-party suppliers and has already passed the Senate but still needs to make its way through the House.