Think Twice Before Switching Utilities

In 1996, the New York PSC adopted a utility "restructuring" paradigm prominently championed by Enron. Under that model, customers could deal with two utilities for electricity and possibly two more utilities for natural gas. The traditional utility, in that model, would stop selling electricity and gas, which would then be sold only by lightly regulated new "energy services companies" or "ESCOs." Enron wanted to be a major player in these new wholesale and retail markets.

This method of deregulation, described in "Disconnected Policymakers," created a synthetic competition. New wireless electric and pipeless natural gas utility middlemen would buy electricity and natural gas in wholesale markets and sell in deregulated retail markets, and the rates, terms and conditions of their service would no longer policed closely by federal or state regulators. This system was being considered in many states until the Enron bankruptcy debacle. Notwithstanding claims of utility deregulation proponents, serious studies have found no discernible consumer benefit in the states that "restructured" their utilities, several states that went down the road of utility deregulation reversed course, and others are reconsidering their decision.

Few residential customers in New York switched to ESCO service. Yet, over the past decade, the New York PSC has required many millions of dollars of ratepayer and taxpayer funds to be spent to promote migration to ESCO service. There is no analysis, however, showing that customers save money or receive different or superior service with ESCOs. Instead, the emphasis has been upon expensive PSC and utility advertising campaigns (paid for by utility ratepayers) and promotional gimmicks, such as small discounts for a limited period. These campaigns typically extoll the virtues of "choice" but are short on information on price and service.

In 2002, the legislature overruled the PSC by enacting the Energy Consumer Protection Act which requires ESCOs to follow HEFPA, the Home Energy Fair Practices Act. Even so, the PSC may be upholding unfair provisions in ESCO contracts. Small business customers have no HEFPA protection and they lose the protection of the non-residential customer protection rules when they switch to ESCOs. When customers discover that prices are far higher than the old utility, they may find that their ESCO contract contains very expensive early termination provisions.

In 2006, the PSC geared up its efforts to require all utilities to implement an "ESCO referral" program in which participating customers are assigned randomly to ESCOs. They will receive a small discount on the commodity part of their bill for two billing periods, and then be shifted to ESCO rates unless they take action to return to full utility service from the traditional utility. Typically ESCO rates, terms and conditions of service for the time after the introductory period are not disclosed at the time the customer decides to participate in the program. PULP objected to many aspects of this program in the ESCO marketing guidelines case. The PSC rejected PULP's arguments in its order approving the guidelines for ESCO referral and in its September 26, 2006 order denying PULP's petition for clarification and rehearing.

Utilities are continuing ESCO service marketing promotion, including elaborate "energy fairs" and advertising campaigns whose cost is charged to utility customers. Door to door sales abuses, high pressure and misleading sales practices have been reported. AARP has cautioned utility consumers to be wary of the program. PULP's website page on ESCO issues also has information about ESCO service and questions and answers for energy shoppers considering ESCO service.

Did Hedge Fund Attempt to Corner the Natural Gas Market for March 2007?

Amaranth, a "hedge fund," lost more than $6 Billion in its natural gas investments and 65% of its value in September 2006. McCullough Research asks the question, "Did Amaranth Attempt to Corner the March 2007 NYMEX at Henry Hub?" in a report issued September 26, 2006, and says

we think that Amaranth was a situation waiting to happen, given the lack of federal oversight of energy markets by FERC and the CFTC. Although some pundits assert that “the market” is strong enough to absorb Amaranth’s ripple, we are deeply concerned that a single, somewhat small hedge fund in effect may have attempted to corner the natural gas market.

The report attempts to estimate the huge trading positions that appear to have been necessary for Amaranth to have incurred such large losses, which far exceeded the amount needed to control the market price for natural gas in March - April 2007. Based on the little data that is available, McCullough concludes Amaranth's trading positions were consistent with a strategy to "corner" the natural gas market and demand monopolistic prices at a time when the amount of stored gas is lowest and the market is most vulnerable to manipulation.

The report also discusses the impact on consumer prices, rebutting the notion that this was simply a financial matter involving trading and speculation that did not affect prices. It highlights the continued lack of regulation of energy futures markets by FERC and CFTC due to exemptions won by Enron, and the need for effective market regulation.

Robert McCullough was one of the first analysts to identify market manipulation in the Western electricity markets in 2000 - 2001 at a time when officials were still claiming the California electricity price spikes and shortages were due to supply and demand rather than withholding of supply and market manipulation.

NYISO Costs Skyrocket, Benefits Questioned

From Power Pool to ISO
The New York Power Pool (NYPP) was formed in 1966 to coordinate the state's electric power grid after the 1965 major blackout in New York City. By agreement of its member utilities (seven investor owned utilities and the New York Power Authority), NYPP dispatchers issued orders to control which generators run at any given moment. This was intended to balance generation with the demand of customers for electricity at least cost, consistent with reliability rules designed to minimize the probability of blackouts by maintaining adequate reserves, consistent voltage and stable frequency in the bulk power grid.

The New York Public Service Commssion's 1996 "vision order" invited vertically integrated utilities to divest their power plants and form new holding company structures, and urged formation of a new entity, the "New York Independent System Operator" (NYISO), to adjust power production to meet demand and to set uniform prices for the merchant generation sector.
The NYPP was transformed into the NYISO in 1999. The NYISO was certified by the NY PSC as a non profit electric company, and FERC approved its tariffs. The NYISO took on the new role of managing wholesale spot markets for energy and ancillary services in the state. Rather than dispatch generation based on utilities' cost of production, as the NYPP had done, the NYISO dispatches power based on sellers' spot market"bids," or prices demanded which need not be related to costs.

The Federal Energy Regulatory Commission (FERC) approves the NYISO tariffs and market rules for setting wholesale spot market rates of market participants -- a subdelegation of its powers to a private utility not directly accountable to the public. FERC also allowed most sellers of wholesale electricity in New York to dispense with advance public filing of all their rates, allowing them to change rates daily and hourly, and to demand what the market will bear in bids kept secret under the NYISO market rules. NYISO rules allow sellers to offer the output of power plants in segments priced so as to withhold a portion from the market, and to triple their rates, based on prior bids.

FERC allows sellers to have market rates based on assessment of each seller's individual capability to move the market, without regard to evidence that sellers lacking individual market power can achieve monopolistic results in the auction markets run by the NYISO. FERC has a rule against "market manipulation" but that does not bar strategic bidding.

Higher Prices in Uniform Clearing Price Auctions
Since the advent of the NYISO, New York electricity prices have risen substantially. When costs of fuel, notably natural gas, rise, electricity prices rise too because in many hours of the day natural gas fueled power plants are called to run. Under the NYISO uniform clearing price system all sellers are paid the same price regardless of their costs. As a result, sellers can obtain prices at the NYISO based on bids of natural gas power plants, even if their plants use cheaper coal or other fuels and can produce electricity at far lower costs. As a result, much of the value of lower cost energy in the state generated from from hydro, nuclear, and coal now goes to the merchant generation sector and energy traders rather than to consumers. When those plants were owned by the retail utilities, the cost of the plants was depreciated and over time customers would pay only for the running costs and an allowance for remaining undepreciated costs. Now the divested power plants are in the merchant generation sector, and have higher values because of the higher prices available in the NYISO markets.

Higher Prices Through Strategic Bidding
Deregulation proponents often claim that energy spot market sellers would offer their service at their operating costs. By doing this a seller would never lose money when they run and they would benefit whenever another (more expensive) producer clears the market and sets a higher price that is paid to all.

But even if paying all sellers the system marginal cost of generation were a good idea - a debatable proposition - that is not being achieved in the ISO markets that pay the marginal bid.

Mathematical game theory analysis has demonstrated that repetitive auction markets such as those run by the NYISO are gamable even if no single seller has the power, acting alone, to drive prices up. A "Nash equilibrium" can be reached in which participants in the repetitive auctions mutually learn to increase their profits and achieve oligopolistic pricing results without overt manipulaiton or collusion.

For example, if multiple sellers utilize "hockeystick" bidding tactics by offering their output in "blocks" with higher prices as more is sold, this collectively withholds power and drives prices up. FERC has approved such bidding practices.

Shortly after the NYISO began, staff of the NY Department of Public Service issued a Draft Report finding that NYISO markets are not competitive and are vulnerable to abuse, due in part to the exercise of market power by sellers. PULP filed comments urging public disclosure of the sellers' costs so it could be determined if sellers were gaming the market by strategic withholding or otherwise not bidding their output at cost.

No "final" report was issued by the PSC. Sellers' price demands are still filed secretly at the NYISO instead of publicly at FERC, as the plain language of Federal Power Act Section 205 requires. Sellers' bid data that is released by the NYISO is more than six months old and does not identify sellers.

The NYISO has engaged in continuous revision of its market rules, but they do not requre public filing of rates demanded and do not require disclosure of costs to determine if bids are excessive. The NYISO retains a "market monitor" consultant who issues annual reports which uniformly assert that sellers are, in general, not manipulating the NYISO spot markets. The tests used by the NYISO market monitor are not designed to detect hockeystick bidding or other strategies that result in higher market clearing prices.

Higher Prices for Capacity Payments to Existing Generators Did Not Induce Building of New Generation Plants or Transmission Lines
In an effort to substitute market mechanisms for energy planning, NYISO created a capacity market which now pays existing power plant owners more, through capacity payments, to induce the creation of additional power plants by them or others, with no commitment, however, that the recipients of the payments actually build power plants. In NYISO's comments on an August 2006 DOE transmission study it is claimed that

NYISO’s markets have had considerable success in attracting investment. Approximately 2,143 new Megawatts (“MW”) of generating capacity was built in New York City from 1999 to 2005.

It might be more accurate to state that the new generation resources have been created after the failure of NYISO capacity markets.

A closer look would find that of the 2,143 MW of new generation built in New York City since the advent of the NYISO, most of it was due to reliance on government and the traditional local utility, and not in response to the capacity charges paid to existing generators and added to customer bills.

For example, the New York Power Authority built a number of small gas turbine power plants totalling 450 MW. This was done to avert an impending price and supply crisis that became apparent in the summer of 2000 - the first summer of the NYISO's existence - when electricity prices in New York City soared 43% despite it being a cool summer. The Power Authority states

We had launched a crash program in late August 2000 to install these PowerNow! plants in response to warnings from officials in the public and private sectors that the New York City metropolitan area could face power shortages in the summer of 2001.

The small power plants were rationalized as a temporary expedient, on the grounds that a long queue of larger merchant power plant projects were in line to be built. But even though some of these merchant power projects received all permits to go ahead, they fizzled after the Enron debacle. The small NYPA gas turbine generators continue to run regularly, and again the state, through NYPA, had to step up to build a new 500 MW baseload plant, saying

The highly efficient combined-cycle power-generating facility will provide New York City with adequate, reliable power supplies in the new era of electricity-industry deregulation.

The "new era of electricity-industry deregulation" ushered in by the state Public Servce Commission clearly failed if one of its goals was to assure market-driven supply of sufficient power at reasonable prices, because 44% of the supply for which the NYISO takes credit was actually due to the state, through NYPA, stepping in at the last minute to avert price and potential blackout problems. In addition, due to the failure of the NYISO market-driven approach, the previously scheduled closure of a NYPA power plant in New York City will be delayed in order to avoid reduction of supply and breach of longstanding reliability requirements.

The NYISO market failure does not stop there. The traditional utility, Con Edison, had sold nearly all its power plants, to comport with a NY PSC vision, popularized by Enron, that electricity should be sold as a deregulated commodity. Counted in the NYISO claim of new generation is a new power/steam generation plant which added 288MW to the New York City fleet of power plants -- built by Con Edison.

A merchant power company built a new 500MW plant at Astoria, (now managed by a non-utility subsidiary of a Japanese holding company), but according to a 2006 New York City Report, "the financing of this project was enabled by a 10-year power purchase agreement with Consolidated Edison Company of New York, Inc."

Thus, another 37% of the new generation supply in New York City claimed by the NYISO as being due to its markets was actually built directly by Con Edison or only with the guarantee that Con Edison - and ultimately Con Edison customers -- would buy the capacity from the plant.

In addition, due to the failure of NYISO markets to stimulate the added energy supply needed to meet growing demand for electricity, NYPA is stepping in to support, through long term contracts, the building of a new transmission line to supply 500 MW capacity from the PJM markets in New Jersey, to meet the needs of its New York City customers now that it has divested its nuclear plant at Indian Point. Retirement of the NYPA baseload Poletti power plant in Queens, has been postponed to maintain reliability due to a looming capacity reserve shortage in the New York City area. The transmission line will take advantage of market prices in PJM that are lower than NYISO prices. The cross-Hudson transmission line, which will connect a New Jersey power plant and mid-Manhattan, was fully permitted by the New York PSC in 2003, after the PSC found it is "necessary to meet near-term and anticipated long-term electric growth in the New York City market and improve electric system reliability." The line was stalled for more than three years because of market failures, until NYPA began the process of contracting to use the line so that it can be financed and constructed.

So, more than 80% of the new power plant capacity built in New York City since the advent of the NYISO was not induced by its capacity markets. Rather, when proposed market-driven projects did not materialize, the plants were built by the state (NYPA) or in reliance upon the traditional utility (Con Edison), which still has the duty to serve the public with safe and adequate service sufficient to meet demand at reasonable rates.

Growing NYISO Costs
The NYISO has grown. In 1998 the NYPP had employed approximately 111 people and had a budget of $14.5 million. Initially, the transformation of the NYPP into the NYISO was estimated to cost less than $5 million per year more than the NYPP. This rosy estimate is reflected in a Report prepared by the State of Georgia indicating at p. 121 that "New York Power Pool estimates an annual budget of $20 million." That, in hindsight, was laughably low, indicative of the wishful thinking of "Disconnected Policymakers" about markets that substituted for analysis of the economic and reliability costs of restructuring.

Similarly optimistic, a 1998 report issued by the California ISO reviewing costs and operations of other grid management agencies, as New York was changing the NYPP into the NYISO, states:

The 1998 operating budget for the [New York] power pool is $14.8 M with an additional $3-5M of operating expenses being deferred this year as part of the transition to ISO status. The total deferred expense and capital investment for the transition will be $30M by December 1998. The pool currently uses a main building and fixed assets owned by Niagara Mohawk. * * * * The total revenue requirements of the ISO when initially formed is estimated to be about $45M/yr."

Thus, at the formative stage of the NYISO, the NYPP had estimated that the added functions of the NYISO - mainly related to managing the day ahead and real time spot markets, would bring its budget from $14.5 to approximately $45 million per year -- three times what the NYPP had cost.

Tripling the NYPP budget turned out to be a gross "misunderestimation." The actual cost of the NYISO skyrocketed far beyond the initial projections. The NYISO expense of $148 million is now more than $100 million per year more than originally anticipated.

The NYISO moved into one of the largest buildings in Rensselaer County, and now employs more than 400 people, more than 300 more than the NYPP needed to coordinate the grid.
An article 1n 2005 found that six NYISO executives were among the top 25 highest paid employees of non profit agencies in the Capital District, with the following salaries:

NYISO CEO $945,810
NYISO VP, Chief Information Officer $531,593
NYISO General Counsel $452,662
NYISO VP Market Services $411,534
NYISO Chief Administrative Officer $376,492
NYISO VP Operations & Reliability $361,558
NYISO VP Government Affairs & Communications $285,013

A 2006 article again notes the highly paid NYISO staff and board of this non profit electric company:

The former head of the nonprofit organization that runs the state's electric markets was paid $656,000 last year despite working for only five months, and directors were paid as much as $130,000 while declaring they worked for only 12 hours a month, according to the group's tax returns.

Critics say the payouts are excessive, while supporters say they're necessary to attract and keep qualified executives.

The organization, known as the Independent System Operator, spent more than $148 million last year. That included more than $5 million on outside lawyers paid around $250 per hour, $2.5 million for conventions, meetings and travel, and more than $10 million for other consultants.

NYISO Costs Passed Through to Retail Consumers
The costs of the NYISO are passed on to New York electric customers as a surcharge on wholesale electric rates. That surcharge is approved by FERC with no serious review for reasonableness. New York's retail utilities then pass on the NYISO costs, as part of the energy bills consumers pay.

Accountability to the Public
In contrast to the $148 million/year NYISO cost, the entire New York Public Service Commission, which oversees more utilities than the NYISO, has a staff of approximately 532 employees and a budget of $65.9 million per year, i.e., greater responsibility, more staff, at less than half the cost of the NYISO.

Thus, "deregulation" of generating plants in New York created a new layer of privatized electric utility "market price watchers" far more expensive than the traditional state PSC rate regulation function. Consumer interests in NYISO committees are currently marginalized, outweighed by industry representatives, and the independent" NYISO board lacks even a token member accountable to the public or consumers.

The NYISO is a private utility. The NYPSC can require all electric companies in the state, including the NYISO, to operate in the public interest, so the NYISO could be held more accountable to the public.

Oversight of Rates Set by NYISO
Neither the NYISO corporate objective nor NYISO tariffs contain any duty or goal to achieve just and reasonable rates in its spot markets. FERC has the duty to assure reasonability of rates and the power to oversee NYISO costs and rates, but has assumed the market rates set by the NYISO based on sellers' demands are reasonable. As industrial customers recently pointed out, FERC has no evidence that these market rates are reasonable, and there is no effective FERC remedy when NYISO market prices are not reasonable.

Cost Effectiveness in Doubt
Adding to concerns about the ballooning NYISO costs are growing doubts about the putative benefits of this little known monopoly utility. A recent report of the American Public Power Association shows at page 13 that New York's electric rates are now second only to the state of Hawaii. Multiple Intervenors, representing New York's largest industrial customers, once proponents of market rates, have joined with other industrial groups in objecting to the effects of the NYISO and other ISO/RTO markets.

Empirical studies by academic researchers who expose their methodology and data to review -- in contrast to proprietary reports touted by restructuring proponents -- have found no discernible benefit to consumers in states like New York that restructured their electric industry to rely on effectively deregulated merchant generators selling at market rates in markets run by ISOs and RTOs.

Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed

After years of experimenting with "market-based rates" for wholesale electricty, at times with disastrous results for consumers, the Federal Energy Regulatory Commission (FERC) is proposing to adopt official rules regarding market rates. Currently, market rates for wholesale sales of electricity have been authorized by FERC under a series of generic orders and individual orders, which typically grant applications of sellers for market-based rates who satisfy the standards created in the generic orders.

One of the major features of FERC's system is that sellers are allowed to change rates without publicly filing them. As a result, new rates take effect without advance notice, an opportunity for consumers to protest, or regulatory scrutiny for reasonableness. Once the rates are in effect sellers argue that reasonableness cannot be challenged, except prospectively. With rates changed frequently and sales reported only quarterly there is no effective remedy for unreasonable rates. This result breaks the "bond" of consumer protection in the Federal Power Act, which is that all rates must be just and reasonable and that no charges will be imposed that have not first been subject to public scrutiny and review by FERC, which is ultimately accountable to the public.

In addition to codifying existing market rate standards and practices into official agency rules, FERC is proposing a number of changes that would ease requirements for sellers seeking market rates. Under current standards, market rates may be denied to sellers who fail a market power "screen," such as having large stand alone market share. Also, existing rules require closer scrutiny of some sales between holding company affiliates, for example, when a state regulated retail utility purchases energy at wholesale from an affiliated company owned by the same parent corporation. The new rules would eliminate some market power reviews, and would allow affiliate transactions even where there is market power if FERC deems that retail customers are not "captive." The new rules would also forbid the advance filing of contracts affecting rates in some situations, so that some rates could be kept secret and unreviewable before they take effect.

Consumer groups that commented in response to the proposed rules raised numerous objections in their August 7, 2006 initial comments. These groups were industrial customers, a group of consumer advocates who say the market rate system is illegal, and the National Association of State Utility Consumer Advocates (NASUCA).

NASUCA, in its initial comments, made the following points:

• State jurisdiction over generation should not be eroded or preempted.
• The Commission should repeal the exemption of post July 9, 1996 generating plants from market power assessment, as proposed.
• Sellers previously exempted from market power assessment should not be "grandfathered" without any review of market power.
• The Commission should not create a broad new category of sellers controlling less than 500 MW who would not be subject to market power review.
• The Commission should reexamine its standards for allowing market rates and assessing market power.
• The Commission should not allow sellers denied market rates to discriminate by charging any amount between incremental and embedded cost, should more closely define those terms, and should not eliminate statutory filing requirements.
• The Commission should not limit its scrutiny of affiliate transactions only to those involving a "franchised utility with captive customers."
• The Commission should not assume that inter-affiliate contracts with prices linked to spot market rates or proprietary price indexes or auction results are always just and reasonable.
• Contracts for the purchase of electricity by affiliates serving retail customers should be publicly filed in advance subject to protest and Commission review for reasonableness.
• Separation of function requirements should apply to any affiliate with retail customers, not just to those who are state franchised utilities.
• Record retention requirements should be six years.
• Definitions should be revised.
  
• The Commission should articulate a legal justification for the proposed rules and tariff modifications.
  

Industrial customers also expressed deep dissatisfaction with the existing FERC market rate system:

The Commission's current [Market Based Rate Authority] analysis is incompatible with the Federal Power Act's "just and reasonable" requirement because it is not prefaced with explicit Commission findings that a competitive market exists, as the analysis is required to do under established precedent, nor does it set forth a standard for making the necessary "competitive market" determination. Absent findings, based on empirical evidence, that competition exists, the Commission's MBRA scheme cannot be relied upon to ensure just and reasonable rates.

State consumer advocates from New Mexico, Utah, Colorado, Rhode Island, and non profit advocates PULP, National Consumer Law Center, and Public Citizen, stated:

The NOPR seems to claim that if sellers are competitive, rates will necessarily be just and reasonable. To the contrary, the Court decisions and statute require the Commission to ensure that this is the case. It certainly was not the case in California and the West in 2000 and 2001, and we are offered in this NOPR no way of determining whether it will be the case now. The NOPR simply proposes ways of encouraging competition, not ways of monitoring actual prices charged, to ensure that such competition has resulted in lawful rates under the Federal Power Act.
Consumer Advocates agree with the Industrial Customers that: “The time for evaluating whether market-based rate authority is delivering any value to retail customers is long past due.”

Utilities filed comments in early August 2006 seeking to loosen further the proposed standards for market rates. The utilities want to expand the number of sellers who would be exempt from any periodic review by FERC whether they could exercise market power, to broaden the scope of permissible transactions between sellers and holding company affiliates that have retail customers who must pay the wholesale rates passed through to them, and to eliminate most cost-based regulation -- even for sellers who have market power. Market participants who sell and buy electricity sought exemption from market power tests by seeking a very narrow definition of control over generation.

The consumer groups filed reply comments September 20, 2006. NASUCA's reply comments state that "NASUCA believes it would be unwise for the Commission to loosen requirements for market rates at a time when there is a lack of consensus on how to measure market power and how to assure that market rates are reasonable, as required by the Federal Power Act..." The advocates questioning FERC's legal authority stated:

Consumer Advocates believe that the Commission in this NOPR is relying on the same faulty premise as the Commission did in the settlement rejected in Tejas Power, viz., that at long as wholesale buyers agree to negotiated prices, this satisfies the Commission’s statutory obligation to ensure that wholesale rates are just and reasonable and not unduly preferential or discriminatory. Both the statute and the case law provide otherwise, and Consumer Advocates ask the new Commissioners to review the premise underlying the current MBR scheme that the NOPR proposes to perpetuate.

Nor may the Commission delegate its authority and responsibility to ensure that wholesale rates are lawful to the States, as it appears to try to do through certain auctions, RTOs, etc. The authority is not the Commission’s to delegate.

In October 2006, Attorney Generals from the states of Illinois and Connecticut filed late intervention papers and supported the views of the advocates questioning FERC's legal authority to dispense with rate filing.

To sum up, the energy producing and marketing utilities commenting on the proposed FERC rules generally favor more deregulation. The primary purpose of the Federal Power Act, however, is protection of utility customers, not advancement of utility interests. The reaction of consumers to FERC's latest move toward deregulation is not enthusiastic.

Customer Groups Urge NY PSC to Restore Fixed Rates

In 2005, the New York Public Service Commission (PSC) issued an order that led to the elimination of fixed utility rates for residential customers of Central Hudson Gas & Electric. The rationale of the PSC to eliminate the popular natural gas fixed rate option, requested by more than 9,000 customers, was to foster the provision of commodity service by alternative energy services companies, who had asked the PSC to abolish the fixed rate.

In its 2004 “end state” vision statement for utility restructuring, the PSC said it wants all customers eventually to buy electric energy or natural gas from new middleman utilities, which the PSC calls “Energy Services Companies” or “ESCOs”. These utilities do not have wires or pipes. They have been allowed to sell electricity and natural gas at prices, terms and conditions of service which, although not completely deregulated, have not been publicly filed, reviewed, and approved by the PSC for reasonableness.

Due to failure of customers to find discernible value in ESCO service, few have "migrated' to ESCO service despite minor tax breaks, promotional payments, and major PSC and utility advertising campaigns. For example, the PSC encourages the old utilities to develop costly marketing programs to promote ESCO services, costing many millions of dollars over the past decade. There is no evidence, however, that residential customers benefit over time from purchasing electricity and natural gas in this way. Indeed, they may pay more. The ESCOs are resisting a proposal to make their prices publicly available for effective comparison.

Since its 1997 order establishing an elternative regulatory regime for ESCO utilities, the PSC has assumed that ESCOs would meet customer demand for stable, predictably priced service at reasonable terms, and that more customers would migrate to ESCOs if the PSC eliminated stable, predictably priced service from traditional utilities like Central Hudson. But when the Central Hudson fixed rates ended, natural gas customers were exposed to monthly fluctuations in rates, including the post Hurricane Katrina price spikes in late 2005 and early 2006.

In the next Central Hudson rate case, concluded in July 2006, the Consumer Protection Board (CPB) and PULP urged Central Hudson and the PSC to reestablish fixed rates for residential customers. When Central Hudson, PSC staff, and other parties reached a tentative settlement agreement that did not contain fixed rates, CPB and PULP opposed the settlement proposal when it was being considered by the PSC. Despite the opposition from parties representing residential customers, the PSC denied their request for fixed rates in its order approving the proposed settlement and establishing a new rate plan for 2007.

The PSC order asserts that

Budget or levelized payment plans . . . provide a tool by which customers can achieve certainty with respect to their monthly bills. Moreover, the record shows there is a competitive market in Central Hudson's territory, which includes provision of fixed-price offers from competitive suppliers.

CPB filed a petition for rehearing, arguing that the Commission had made errors of fact. CPB said the record in the case, based upon the sworn testimony and documentary exhibits, did not support any Commission finding that ESCOs provide a fixed rate service comparable to the Central Hudson fixed rates, or that the budget billing option is an effective substitute for stable rates.

PULP filed a brief in support of the CPB petition for rehearing, and opposing Central Hudson's request to raise rates beyond the level it had accepted in the settlement.

PULP's brief contains excerpts from all of the so called “fixed price” contracts that were in the record before the Commission. In each contract there is "fine print" that allows the seller to avoid providing service at the fixed rate. Typically, this is achieved by language giving the utility the right unilaterally to change the price or to terminate the contract. Terms and conditions of ESCO service are in their form contracts, in contrast to normal utility service, which must be provided in accordance with published rules filed with and approved by the PSC. As a result, the "fixed rate" in all of the contracts in the record did not actually require the rate to be fixed. Indeed, some of the contracts impose penalties on customers who attempt to terminate the contract, while allowing the ESCO utility to freely change the terms or terminate.

Also, regarding the Commission's finding that budget billing plans enable customers to "achieve certainty with respect to their monthly bills," PULP cited the budget billing law, the PSC budget billing regulation, and the Central Hudson budget billing tariffs approved by the PSC. The law, the regulation, and the tariff all show that budget billing is intended to levelize customer variation in consumption from season to season. But when rates change every month, as the PSC prefers, budget billing does not provide either rate or bill stability. This is because budget billing amounts may be recalculated when underlying rates are changed. Indeed, customers with budget billing may see larger month to month bill increases than customers not on budget billing plans when rates rise.

Thus, PULP and CPB argue, the Commission order was based on errors of fact and should be revised to require Central Hudson to restore a fixed rate plan.

For more information, see PULP’s web page on the Central Hudson rate case.

US Justice Department Sues to Bar Connecticut Inquiry into Possible Warrantless Disclosure of Customer Telephone Records

Telephone records regarding calling and receiving numbers, the time and duration of calls are needed by the telephone companies for billing purposes. This information is considered to be “Customer Proprietary Network Information” ("CPNI"). Most state telephone regulators, including New York's PSC, strictly limit the use of CPNI. The New York PSC adopted general privacy principles and issued orders to protect this information, limit its use by telephone companies, and restrict its availability to third parties. The records of ordinary customer use of the telephone network generally are not made available to third parties. Records are made available to comply with a lawful subpoena or judicial warrant.

When news reports indicated that some telephone companies may have cooperated with the National Security Agency to provide certain records relating to telephone calls without judicial warrants or subpoenas, the Connecticut Department of Public Utility Control ("CDPUC") opened a proceeding to consider an ACLU petition to conduct an investigation. The Connecticut Office of Consumer Counsel urged that a full investigation be conducted to inquire whether Connecticut telephone privacy rules and policies had been breached. The CDPUC ordered AT&T to answer written interrogatories by September 7, 2006.

On September 7, 2006 AT&T refused to answer the written questions. AT&T cited a US Justice Department lawsuit filed the day before, in which the Justice Department is asking a federal judge to enjoin CDPUC from requiring telephone companies to answer questions whether they cooperated in providing data to the National Security Agency. In support of its refusal to answer the discovery questions, AT&T submitted a letter from the Justice Department indicating that the Director of National Intelligence is asserting the “state secrets privilege.”

On September 8, 2006 the Civil Liberties Union moved to hold AT&T in contempt of the prior directive of the CDPUC and to supply the answers required by the state regulatory agency. The Connecticut Office of Consumer Counsel also moved to compel answers to the questions regarding possible release of customer telephone records.

For more information, see PULP’s web page on New York’s telephone privacy policies.

Federal Electricity Competition Report Overdue

The Energy Policy Act of 2005 established a federal Interagency Task Force to "conduct a study and analysis of competition within the wholesale and retail market for electric energy in the United States." When that group issued a request for public comments on October 19, 2005, it portrayed its role as being to report to Congress on "the critical elements for effective wholesale and retail competition, the status of each element, impediments to realizing each element, and suggestions for overcoming these impediments."

Numerous commenters, including the National Association of State Utility Consumer Advocates (NASUCA) criticized the federal Task Force for appearing to have started out with a conclusion that retail and wholesale electric competition are desirable and should be promoted by the federal government, when that is decidedly not the view of the majority of states. Only sixteen states and the District of Columbia restructured their electric utilities to create wholesale and retail markets, no state has done so since 2000, and six states that had passed restructuring laws have now repealed them or delayed their implementation.

A draft report was issued by the federal Task Force June 5, 2006, giving the public only until June 26 to respond. Comments were filed by NASUCA, PULP and others pointing out shortcomings in the draft report.

The notice accompanying the Draft Report of the Task Force indicated that "A final report will be delivered to Congress on or before August 8, 2006 in accordance with the statutory deadline."

The "statutory deadline" has passed, and now nearly a month overdue, the Task Force report has not been filed.

Virginia Report: Restructuring Has "No Discernible Benefit" for Customers

The Virginia legislature passed an electric utility restructuring act in 1999. In broad outline the Virginia restructuring law is similar to New York's administrative restructuring, which was engineered by the New York PSC through agreements with each of the investor-owned electric utilities beginning in 1997, rather than by legislation.

A Virginia statute requires the Virginia State Corporations Commission (SCC), which regulates the state's retail utilities, to report annually on the status of wholesale and retail competition. The 2006 Performance Review of Electric Power Markets states:

“The evidence suggests that, at least so far, no discernible benefit can be seen for customers in restructured states once the rate caps have expired. Increasingly the evidence is now beginning to suggest that prices for customers in restructured states may actually be increasing faster than for customers in states that did not restructure.”

The survey was conducted for the Virginia SCC by Dr. Kenneth Rose, Consultant and Senior Fellow at the Institute of Public Utilities at Michigan State University and Carl Meeusen, a Graduate Research Associate from Ohio State University. Their report sets out detailed comparisons of electricity prices in restructured and unrestructured states, based on publicly available data.

In addition to New York and Virginia, fourteen other states and the District of Columbia attempted to implement full wholesale and retail restructuring. No state has passed restructuring legislation since 2000, when major flaws began to become apparent. Six states that had passed restructuring laws have now either repealed them or delayed their implementation.

Candle Fires: A Symptom of "Rolling Blackouts" Affecting Low-Income Households

The essential nature of electricity service in our society is often taken for granted. When a geographic area blackout occurs, due to grid failures or storms, it is major news when large numbers of people are simultaneously without power for a few hours. A "rolling blackout" occurs when electric grid operators deliberately shut power off to geographic areas on a rotational basis while a system-wide energy deficiency is being corrected. These outages are deliberately rotated in order to shorten the time customers are without power.

A less publicized, less visible, but more serious "blackout" affects many thousands of low income people every day throughout the nation, when utility trucks and crews roll through low income neighborhoods to disconnect service for non payment.

These less noticeable deliberate “blackouts” of selected customers last days rather than hours, and are resolved only when the customer makes payment arrangements or receives assistance from to pay what the utility demands. Some customer "blackouts" due to non payment may continue for weeks or months. This has to be deleterious to family life, and it is difficult to imagine how anyone, particularly children, can thrive in a situation without heat or light in the home.

The scope of these "blackouts" may affect even more customers as energy prices rise beyond the ability of low income customers to pay them, due to increased fuel costs and rising environmental costs. If utilities are allowed to continue existing collection policies, and if regulators continue to ease or "streamline" their rules to allow utilities to use service denial or interruption as a bill collection tactic, the situation will worsen.

Fires Common When Electricity is Off
The tragic 2006 death of six Chicago children in an apartment without electricity, where candles apparently had been used for months, illustrates a rather common situation. For example,

• An August, 2006 fire in a candle-lit Rochester, New York home without electricity:

  Candles left burning caused an overnight fire. It was not an act of carelessness on the part of the homeowner, but one of necessity. [The homeowner] was laid off, and unable to keep up with bills. She spent the summer without electricity.
  

• The 2005 death of a New York City child in a fire started by a candle while power was shut off. It was reported that the customer had made payment arrangements sufficient to be reconnected, the reconnection was scheduled for the next day, but the fire occurred during the intervening night:
  

  "[A] Con Ed spokesman ... confirmed electricity to the apartment had been cut off at 1:45 p.m. Monday. Two hours later, [the customer] appeared at a local Con Ed branch to pay $700 - almost half the outstanding bill. [A]n order to restore electricity within 24 hours was issued two hours later. Tragically, it was not in time - firefighters responded to the scene of the fatal fire at 10:45 p.m."

• In a 2003 Syracuse, N.Y. incident,

  "A Syracuse mother and her three children, who have been using candles to light their home since the power was shut off earlier this month, escaped unharmed when a candle ignited a blaze in a second-floor bedroom Friday morning.... [A] NiMo spokesman said the company disconnects the power when a customer is unresponsive to letters, calls and offers of payment agreements. He said company officials had a phone conversation with the customer Thursday to discuss the bill.

• In 2005, after state laws were changed to make utility terminations easier, four Pennsylvania residents without electricity died in a candle fire

  • "[The]director of the [Pennsylvania] PUC's Bureau of Consumer Services, said what was missing in the new law was the old requirement that Penelec go to the house 48 hours before shut-off. That requirement meant that a utility employee had to personally notify the customer and to leave notice tacked to the door if no one was home. As things turned out, that change probably was critical. That, and the failure of [the customer]to demand a medical deferral from shut-off because of ... chronic-health problems. They said they didn't know they could get such a deferral.... Penelec programs a computer to determine nightly which customers' service should be terminated.... The idea is to reduce human error, and no manager signs off, he said. "

In all these cases, service was shut off or denied to low income households due to non payment of past bills, illustrating how a lack of safe utility service can lead to life-threatening emergency situations.

Use of candles, of course, is not limited to the poor, and neither are household fires. The widespread use of candles as the sole source of lighting for significant periods of time, however, is quite common in low income households during periods when electricity has been shut off as a collection measure. This increases risks, particularly to children, when less safe alternatives are used to meet basic human needs for energy.

In addition to the tragic loss of life, injuries, and property damage, fires threaten the lives and property of neighbors, increase risks for firefighters and emergency service workers, lower community property values, and increase costs for public safety and insurance. The amount of arrears for which the utility service was terminated is far outweighed by the total cost to society of a fire.

New York's Home Energy Fair Practices Act (HEFPA)
The "blackout" or "outage" of a low-income customer for non payment of bills typically involves a component of customer default, but the decision to terminate service is a discretionary choice made by the utility. There is wide variation among utilities, and over time within the same utility in the degree to which service denial or termination is used to collect overdue bills.

New York led the nation in 1981 with its enactment of a bill of rights for electricity and natural gas utility consumers, the Home Energy Fair Practices Act (HEFPA), which declares it to be the policy of New York state that continuous provision of electricity and natural gas service to residential customers


"without unreasonable qualifications or lengthy delays is necessary for the preservation of the health and general welfare and is in the public interest."

HEFPA included many reforms, including stringent requirements designed to minimize terminations for non payment and to keep service on without threatening financial stability of the utilities. Enforcement of HEFPA has been responsible for limiting the number of utility terminations in New York state and is relied upon every day by utility customers to obtain and keep service.

New York's HEFPA law and regulations

• Clarified the right of individual applicants to obtain electricity and natural gas service promptly;
• simplified utility service application requirements,
• Eliminated most deposit requirements;
  
• Established rights to deferred payment arrangements tailored to individual circumstances for customers in arrears who cannot afford to pay total arrears when utility service is off or termination is threatened;
  
• Provided for continued service in medical emergency situations and while disputed charges are being resolved by the PSC;
  
• Added new notice requirements for service terminations and denials, with additional notices and protection for elderly and disabled custoemrs, and for tenants in buildings where service termination is iminent due to landlord payment defaults;
  
• Required a budget billing option to levelize seasonal fluctuations in usage and bills;
• Established a user friendly administrative customer complaint and bill adjudication system, and
  
• instituted a telephone “hotline” (1-800-342-3355) for speedy review by the New York Public Service Commission

The New York Emergency Utility Assistance Program and HEAP
In addition to enacting HEFPA in 1981, New York also enacted a unique public assistance program for households whose utility service may be terminated or denied due to nonpayment of prior bills for service, and who have exhausted their rights under HEFPA, for example, by breaking a minimum deferred payment agreement. This provides a necessary complement to the federally funded Emergency Low Income Home Energy Assistance Program (LIHEAP), known as “HEAP” in New York, which is seasonal and limited to heat-related emergencies. Significantly, the state assistance program is available as a loan to a customer who does not qualify financially for other public assistance programs. It is implemented by county departments of social services, and the cost is shared between the state and the counties.

Will Utility Service Terminations Increase?
Energy prices have soared in recent years. Households living on Social Security, public assistance, pensions, disability assistance or other fixed incomes have not seen their monthly incomes rise sufficiently to cover their increased energy costs.

Encouraged by the New York Public Service Commission, some utilities adopted volatile commodity pricing methods that flow through rate spikes, which result in unexpected bill increases. Recent research shows that energy cost unpredictability creates very serious difficulties for customers trying to manage their household budgets, particularly the substantial number of households who lack savings or credit.

Compounding the economic stress on households, some New York utilities have attempted to interpret HEFPA rules narrowly. For example, in 2003, with tacit approval from PSC staff, National Grid unilaterally changed its deposit policies and denied service to more than 1,000 applicants for service in the months before the practice was halted. In recent years, The New York Public Service Commission "streamlined" its HEFPA regulations "[i]n the interest of reducing regulatory requirements on utilities as utility service becomes more competitive" in ways that may increase the denial or discontinuation of utility service. In 2007, National Grid adopted harsh requirements for providing service to applicants with prior arrears, demanding up front payments of far more than applicants could afford.

New York utilities with PSC approved multi-year rate plans do not have any service quality target to reduce the incidence of service termination as a collection tactic. Under these plans, utilities have the incentive to reduce services, maintenance, and costs and keep the savings for investment in their new holding company subsidiaries. Utilities may seek to reduce costs by cutting personnel who negotiate payment plans or assist vulnerable customers in accessing public assistance or LIHEAP benefits, and then rely more on field crews to shut service off as a collection measure. Also, as a cost cutting measure, utilities may seek to close community offices where payment plans and reconnections were previously arranged on a walk-in basis, and may rely more on telephone contact with customers, not all of whom have access to phone service (which may also be disconnected) or the ability to communicate and advocate with distant call centers to preserve their service.

Meanwhile, the federal home energy emergency program, LIHEAP, remains limited, seasonal, and subject to major fluctuation in annual appropriations. When needy utility customers who have exhausted their remedies with the utility and the PSC (for example, by breaching a valid written deferred payment agreement and having no other claim for continued service), apply to local county departments of social services for energy assistance benefits to which they are entitled, there are instances of arbitrary or erroneous denials, possibly due to an effort to avoid county expenses for the portion of the assistance grant that is not borne by the state.

As a result of changes in utility, regulatory, and financial assistance policies, in the coming years we may see more shutoffs of utility service to households that cannot afford it unless concerted efforts are made to improve the situation.

PULP's Efforts to Achieve for Continuous, Affordable Utility Service
PULP originally championed HEFPA and the New York state utility assistance program when the laws were passed in 1981. At the time, the death of children due to candle fires in the homes of low income customers and deaths of elderly persons in unheated premises where utility service had been shut off raised public awareness of the need to address harsh and unreasonable utility practices. See New State Legislation Urged on Gas, Electricity Shutoffs, Albany Times Union, Jan. 14, 1981. See also, Senate in Albany Votes Rights Bill for Utility Consumers, New York Times, July 3, 1981, recognizing PULP's role in framing the legislation.

PULP continues to advocate for their enforcement and for improvements that will foster universal, affordable utility service. These utility and public aid systems are complex. Questions often arise concerning interpretation of regulations, tariffs, and practices concerning eligibility for deferred payment plans, service continuation for medical reasons, deposit requirements, billing disputes, shared meter responsibility, eligibility for federally funded HEAP or state funded financial assistance programs, and loans.

The PULP Help Center offers general information about specific topics that affect the availability of continuous service. PULP has a telephone hotline (1-800-255-PULP) for consultation with advocatesfor customers in difficult cases, and PULP provides information to individuals when local advocates are not available and PULP resources permit. PULP also provides training programs for advocates on how to prevent utility terminations and how to access the public assistance and HEAP programs for utility customers unable to afford service.

UPDATES

January 16, 2008: See Streamlined Utility Shut-offs Have Turned Deadly for the Poor.

January 26, 2008. See Man Freezes to Death After City Limits Electricity.

October 10, 2008. See No Electricity: Middletown Residents in Critical Condition from Lantern Fire,

October 29, 2008: See Testimony in National Grid Natural Gas Rate Case Urges Low Income Rates and Reform of Utility Termination Practices

Jan. 5, 2009 3 die in fire at Detroit home where power was cut, Jeff Karoub, AP, Jan. 5, 2009.

Jan. 6, 2009: Importance of Continued, Affordable Energy Underscored by Detroit Fire Deaths After Electricity Shutoff, PULP Network, January 06, 2010.

Dec. 31, 2010: Will Kane, John King,Matthai Kuruvila, San Francisco Chronicle Staff Writers, Oakland fire tragedy: 'My mama's burning', "Oakland -- Fire on a frigid night tore through an East Oakland apartment, killing a mother, her daughter and a man who lived in an upstairs unit that had its power shut off earlier this month. Desperate for electricity, the mother and her two children had dangled a heavy-duty outdoor extension cord over their second-story balcony and plugged it into their downstairs neighbor's outlet. That jury-rigged electrical system - used to power lamps, appliances and strings of Christmas lights - sparked just before 2 a.m. Thursday and ignited a blaze in the apartment at 82nd Avenue and Birch Street that shot flames out of the second-story windows."

New Concerns Raised About Manipulation of Natural Gas Prices

In recent years, prices for natural gas have risen steeply. The usual explanation given is that it is due to market forces, the natural consequence of supply and demand.

A few months ago, several midwestern state attorney generals issued a report on natural gas markets authored by economist Mark Cooper, Ph.D. Cooper frequently authors reports for the Consumer Federation of America. Their report concluded that pricing of natural gas is not being driven by fundamentals of supply and demand. Instead, the major price increases may be due in significant part to the trading activities of hedge funds or other speculators, or possible market manipulation.

A report on natural gas markets issued in August 2006 authored by economists for the conservative National Legal and Policy Center reaches similar conclusions, stating:

"high natural gas prices of the past five years, and current prices for natural gas futures likely reflect other factors, including the structure of the market, speculation not based on economic fundamentals and perhaps price manipulation. . . .

These distortions impose costs of many billions of dollars for the millions of Americans businesses and tens of millions of American households that depend on natural gas for heating and on utilities that use natural gas to produce electricity for air conditioning and other uses. . . . . Thorough investigations by the Congress and federal regulatory bodies may establish whether speculation and market manipulation contribute to the dramatic divergence of natural gas spot and future prices from their underlying economic fundamentals."

Major traders in natural gas markets have paid billions in fines in recent years to settle allegations that they manipulated prices.

Ripple Effect of Natural Gas Price Manipulation on Electricity Markets
Artificially increased prices for natural gas can have a leveraging effect on electricity prices in states like New York that "restructured" their electricity industries. Today, instead of operating a fleet of diversely fueled power plants and buying fuel in advance for them, New York utilities must buy electricity for their customers in weakly regulated spot markets where electricity is bought just one day or even one hour ahead of its use. The market clearing prices are volatile, and are paid to all sellers.

Electricity spot market prices are often based on the price demanded for natural gas fired generators. Their price demands incorporate natural gas spot market prices. As a result, a manipulated natural gas price could increase significantly not only the price paid for electricity generated from gas-fired generators, but also the price for electricity from all other sources, including generation sources that do not burn natural gas, such as hydro, nuclear, and coal.

For more information see PULP's web page on national utility energy issues.