Wednesday, August 23, 2006

PSC Replaces NYSEG Fixed Default Service Rates with Variable Rate Option

On August 23, 2006 the PSC issued an order rejecting fixed rate default service now received and desired by the overwhelming majority of NYSEG residential electricity customers. The Commission ordered substitution of a variable rate option as the "default" service, even for customers who previously rejected a variable rate option or who affirmatively chose fixed rate service.

NYSEG customers can avoid the variable rate option in 2007 only if they affirmatively choose the fixed rate. Those who do not take action will involuntarily be switched to the variable rate.This disrepects well known customer preferences for fixed rates.

The variable default service rate will change every month, based in part on prices of electricity in the volatile and unreliable NYISO energy spot markets.

This could disadvantage customers who assume the utility and the regulator would continue to set reasonable, stable rates, assume their prior selection of of the fixed rate option in NYSEG's "Voice Your Choice" program will be respected, and those who do not fully understand their choices or risks of the variable rate service.

The Importance of Stable Rates

Recent research shows that energy cost unpredictability creates serious difficulties for customers trying to manage their household budgets. The continuation of stable priced NYSEG residential electric service is supported by PULP and AARP, and the New York Attorney General.

NYSEG offered to meet residential customer expectations for stability and predictability by proposing to continue its system of setting stable fixed rates for residential service two years at a time. The utility manages the risk of securing the energy supply for fixed rate customers by, for example, buying energy well in advance, instead of relying heavily on spot market purchases. A result of the NYSEG rate policy is that its rates and bills have been very stable and predictable over the past decade, even during periods of major spot market price spikes, for example, after Hurricane Katrina.

In contrast, other utilities that more closely follow the New York PSC “vision” pass through more of the effects of spot market rates and rate spikes to their consumers. This can be seen by comparing the various New York utilities' Typical Monthly Residential Electric Bills, July 1994 - January 2006.

Perhaps in recognition of the customer preference for stability, the PSC said the new NYSEG variable default rate is to be "hedged." But there is no formula or method by which one could ascertain what future "hedged" variable rates will be or how much they could go up. The so-called "hedged" variable rates previously approved by PSC staff for NYSEG and other utilities have exposed variable rate customers to major month to month rate variations. In recognition of rate case controversies over rate volatility for default service customers, the PSC initiated a new generic proceeding to examine wholesale purchasing practices of utilities and PSC policies when it issued the order eliminating fixed rate default service for NYSEG customers.

In a baffling demonstration of doublespeak, the Commission stated in its order:
"The Company should not refer to this default rate as a "variable rate option", since that term has previously been used to describe an option based upon the flow-through of the spot market price. Although NYSEG can choose the precise terms it uses to name and describe the option, we note that appropriate titles would include "default" or "basic" and include descriptions such as "hedged" or "managed" or based upon a "supply portfolio." For example, we have generally referred to this default option as the "hedged portfolio" default. We do not in any way intend for NYSEG to mislead its customers or to minimize the potential variability of this default rate, which we assume will change monthly. Therefore, NYSEG can and should explain that this rate "will vary" or "be variable." We note only that "the variable rate" or "variable rate option" or "VPO" or "VRO" have taken on precise meanings in the context of NYSEG’s past offerings that are no longer accurate or helpful characterizations of this new default offering. We will continue to work with NYSEG and all utilities in the State to further educate customers regarding the panoply of supply portfolio options that could be available and to instill in customers an understanding of the distinction between "volatility" and "variability" in describing commodity rates."
The Commission order apparently prohibits NYSEG from saying that the Commission required default service is a "variable rate" or "variable rate option," but allows NYSEG to say the rate "will change monthly," "will vary" or "be variable".

Apart from the confusion, this government abridgement of speech may suffer from constitutional infirmity. A prior PSC directive ordering a utility to say that taking service from a competitive utility will not affect safety, reliability, or customer service was struck down in a court decision based on the First Amendment.

The New Default Service Rate Sets No Maximum
By adopting a rate that can change every month without limit, the PSC abdicated its longstanding responsibility under Section 72 of the Public Service Law to set reasonable maximum prices for full electric service. The Commission set no rate at all for the default commodity service, and established no formula from which the rate could be calculated.

The Commission relied on other parts of the Public Service Law which do allow electric rate adjustments for variations between the projected and the actual cost of fuel purchased for utility owned power plants. But those provisions anticipate that in a rate case, the Commission will establish a reasonable filed rate for full service as accurately as possible which will then be the total rate to be in effect in the future, so that any adjustments to that filed rate will tend to reflect only deviations from the initial projection and establishment of the filed rate.

Also, the rate adjustment provisions for changes in fuel costs utilize an established formula designed to minimize rate shock and permit orderly, transparent public and Commission review of purchasing prudence before new rate adjustments are implemented. In contrast, the variable rate option now being implemented for default residential service lacks any initial projection of the amount of the so-called "hedged" variable rate option, sets no goals for the "hedging," lacks a transparent methodology for implementing adjustments to the filed full service rate, and there is no standard for determining the prudence of utility efforts to "hedge."

On a brighter note, NYSEG's low-income program was modified to expand the availability of a small customer charge discount to all customers who receive Home Energy Assistance Program (HEAP) benefits.

The 1996 PSC "Vision"
Under the1996 PSC "vision", customers who want stable, predictable rates eventually must find that from new wireless electric companies whose prices and practices are not now being disclosed publicly or regulated. In its order rejecting NYSEG's fixed rate default service, the Commission said:
"We continue to believe that customers will ultimately best be served by a competitive market for retail electricity service, in which fixed price offerings are provided exclusively by ESCOs, while the utility provides only a default service."
But despite nearly a decade of costly forced and failed experiments of "Disconnected Policymakers," the new electric companies are not winning large numbers of new residential customers based on superior prices or service. To the extent migration has occurred, it may be due to subsidies of the new providers, short term promotional rates, destabilization of rates in order to spur "migration" of discontented customers, or artificial inflation of rates to provide additional "headroom" for competitive providers and short term incentives for customers to leave. Still, approximately 90% of New York residential customers continue to receive full service (both "delivery" and "commodity") from the only utilities that provide full electric service, i.e., both "delivery" and "commodity" service.

Effectuation of the PSC "vision" eventually would destroy all stable priced default service. This would eliminate a basis for consumers to compare past performance and predict future prices. This was also a key part of the model touted by Enron a decade ago. In that paradigm, wholesale electric generation would be functionally deregulated with FERC "market-based" wholesale rates, while retail rates of the "commodity" would be deregulated by states. The PSC attempted to accomplish this deregulation through a series of orders beginning with its "vision" order in 1996.

Under traditional retail electricity regulation, still followed by 34 states, the consumer receives the value of electricity prices based on the cost of providing the service. For example, if the cost of fossil fuels go up, a utiltiy with hydro and nuclear generation in a traditional state will not raise the rates for energy from those facilities, but in the restructured states, like New York, the generating plants are now owned by electric companies that only sell at wholesale market rates, in markets where the price of the most expensive energy used sets the price for all sellers, even those with much cheaper energy.

Once the principal consumer supporters for restructuring, the nation's largest industrial customers now realize that "electric restructuring generally has yielded higher prices, reduced reliability and lessened power quality. In short, consumers are worse off under the 'current' restructured markets than they were under the traditional regulatoryconstruct."

For further information see PULP's web page on the NYSEG rate case.

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