Consumer Challenge to FERC "Market-Based Rate" System Proceeds

The Federal Energy Regulatory Commission (FERC) has jurisdiction over wholesale electric rates and rates for interstate transmission of energy. In recent years it has allowed sellers of wholesale energy to file standard "market-based rate" tariffs that, instead of containing schedules specifying all rates and charges, simply say rates, terms and conditions of all sales shall be made at undisclosed prices to be established by future confidential agreements between the purchaser and seller.

FERC is allowing sellers to bypass longstanding Federal Power Act (FPA) Section 205 requirements for advance public filing of schedules containing all rates, rate changes, and contracts affecting rates. The primary purpose of the FPA is the protection of consumers. The purpose of prior publication is to inform the public of proposed changes and to permit agency review and revision before they take effect. Under the "filed rate doctrine," once utility rates take effect, unreasonable rates can only be changed prospectively under FPA Section 206.

FERC’s system of "market-based rates" eliminates prior public filing of rates and changes in rates and contracts. This effectively eliminates the protections of FPA Section 205. FERC's "market-based rate" regime has resulted in unreasonable retail rates for consumers, and blackouts due to efforts to manipulate market prices. In an August 2, 2006 decision in cases arising from the California market rate debacle, the Ninth Circuit Court of Appeals described the failure of FERC’s market rate experiments as follows:

“[T]he CPUC and the California legislature commenced initiatives to restructure the California electric energy industry. The aim was to convert California’s investor-owned, regulated
utilities, to a deregulated market, in which the price of electricity would be established by competition, and consumers could select their electrical power supplier. The theory was that competition would lead to better service and a price reduction for consumers. * * * *

As we now know, something happened on the way to the trading forum, and the best laid regulatory plans went astray. The plan to establish a competitive market, while keeping the
exercise of monopoly and monopsony power in check, failed to account for energy economics and the sophistication of modern energy trading. As became clear in hindsight, even those who controlled a relatively small percentage of the market had sufficient market power to skew markets artificially. In short, the old assumptions, based on antitrust theory, that market power could not be exercised by those who possessed less than 20% of the market share proved inaccurate in California’s energy market. * * * *

Sellers quickly learned that the California spot markets could be manipulated by withholding power from the market to create scarcity and then demanding extremely high prices when scarcity was probable. The energy market is highly dependent upon weather; heat waves or cold snaps inevitably produce demand. Thus, it was quickly apparent to sellers that there was little risk and great profit in withholding capacity when high demand was anticipated based on weather forecasts. In addition, traders soon developed other purely artificial means of market manipulation, such as shutting down power plants when electric demand was high in order to destabilize the electric grid, and to increase prices. In order to maximize profit, traders engaged in anomalous bidding practices, including “hockeystick bidding,” in which an extremely high price is demanded for a small portion of the market, and “round trip trades,” in which an entity artificially creates the appearance of increased revenue and demand through continuous sales and purchases.”

While not as extreme as the market failure in California, market rate systems in the Northeast also have been plagued by price run ups in the FERC-approved private “spot markets” which establish daily and hourly spot market rates. Utility consumer advocates, including PULP, question whether FERC may rely on this particular market system to set electricity rates.

In a long-running case at FERC that began after the California debacle, FERC held that all existing market rates were unjust and unreasonable, and in 2004 it adopted a set of standard "market behavior" tariff conditions intended to deter manipulation.

FERC did not, however, prohibit witholding of energy to drive prices up, did not require public filing of rates and rate changes, and did not articulate any standard other than market results to measure whether "market-based rates" satisfy the "just and reasonable" standard required by the FPA.

That "market behavior" case is now on review in the Court of Appeals for the District of Columbia. The consumer advocates contend that the market-based rate regime as it has been implemented by FERC is out of compliance with the filing requirements of the FPA, and has no meaningful standard for determining if the market results are "just and reasonable." While the case was pending in court, FERC rescinded the "market behavior" tariff conditions and began a new rule making proceeding proposing essentially to continue its "market-based rate" regime without fundamental change.

The Consumer Advocates' initial brief filed August 30, 2006 argues that while FERC has considerable latitude in choosing methods to set “just and reasonable” rates, the agency lacks any power to deviate from the public rate filing procedures established by Congress in the FPA.

The petitioners rely on major Supreme Court precedents which nullified efforts of other federal regulatory agencies, the FCC and ICC -- which operated under regulatory statutes similar to the FPA -- to waive statutory filing and review provisions established by Congress in order to implement a new agency vision that would substitute market competition and deregulation for agency review of rates to see if they are just and reasonable. In the leading FCC case, the Supreme Court said:

"For better or worse, the Act establishes a rate regulation, filed tariff system . . . and the Commission's desire "to `increase competition' cannot provide [it] authority to alter the well-established . . . statutory filed rate requirements. . . . As we observed in the context of a dispute over the filed rate doctrine more than 80 years ago, 'such considerations address themselves to Congress, not to the courts. . . .'"

After the Supreme Court struck down the FCC efforts to deregulate, Congress amended the Federal Communications Act in 1996. The new law granted limited powers to the FCC to deregulate some services when Congressionally established standards are met, and Congress adopted a number of consumer protective measures that went well beyond what the FCC could or would do. These included a new national telephone lifeline assistance program to make phone service affordable for low-income customers, and programs to bring broadband services to schools, libraries, and rural areas unlikely to obtain timely, affordable service.

FERC must file its answering brief in the "market behavior" case by October 30, 2006. Check PULP's web site for further information on the FERC "market behavior" case.

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.

Doublespeak
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.

ALJs Warn of Federal Override for Proposed NYRI Transmission Line

PSC Administrative Law Judges on August 14 issued a procedural ruling warning parties objecting to the controversial proposal of New York Regional Interconnect (NYRI) to build a new transmission line:

“should this case get dragged out by interminable motions or otherwise, the decisions regarding the best interests of New York State may simply be made in Washington, D.C. * * * * [I]t seems clear that this case must be run efficiently, especially in light of the recent National Electric Transmission Congestion Study (US Dept. of Energy, August, 2006) concerning the designation of a transmission corridor of national interest in New York. Our failure to do so may result in the decision being preempted by the federal government.”

The NYRI situation illustrates how in the absence of concrete plans of the state, utilities, or the Power Authority, major decisions affecting the state for decades may be made by new specialized federally regulated utilities with narrow interests or the federal government.

The New York PSC comments to the U.S. Department of Energy earlier this year pointed out that a broader societal benefit test should be used to assess whether the federal government should preempt states to implement proposed merchant transmission company projects. Also, transmission "congestion" that thwarts some long distance sales of energy to areas where far higher prices can be obtained under FERC's deregulated wholesale electric market rate system can be alleviated by means other than construction of new transmission lines. The New York PSC stated:

"carefully sited generation facilities or investments in demand reduction can offset the need for transmission investments. While there may be congestion at certain points of the transmission system, mitigating that congestion does not necessarily require investments in transmission. It may include investments in generation, or demand reduction, or both."

The PSC also stated that the interjection of federal siting of transmission lines without coordination with states "may cause developers of bona fide generation or demand-response projects to decide against going forward with their proposals due to the possibility that the proposed projects will be supplanted by a NIETC transmission facility." The PSC asked DOE to wait for the "NYISO’s Final Comprehensive Reliability Planning Process Report, scheduled to be completed in June, 2006." That report has not yet emerged, and appears to be overdue.

A March 2006 report of a multi agency "State Energy Coordination Working Group" indicates that a number of New York state approved power plants are still not being built, presumably because utilities that asked for the permits are now unwilling to make the investment to build the plants:

"As of January 1, 2006, 13 projects, totaling about 7,300 MW of net capacity, had obtained such Certificates. Five of those projects, about 2,380 MW of net capacity, are now in commercial operation and one additional 500 MW project is under construction. Two of the projects awarded Certificates, about 1,240 MW of capacity, were subsequently cancelled. Six projects, about 4,000 MW, were cancelled before receiving Certificates and five projects, about 3,600 MW, are still in the application review phase."

The New York ISO, the private utility that manages the grid in New York and which operates spot markets where sellers can sell electricity at market rates, in December, 2005 issued a Reliability Needs Assessment and then issued a letter to downstate utilities asking them to propose both market based and regulatory solutions, including their building of power plants or transmission lines. Apparently that was unsuccessful and the NYISO in March issued another call to the downstate New York utiltities to come forward voluntarily with backstop regulatory solutions in the event of continued market failures to avoid impending reliability concerns in their area. To date, if there are such solutions, they have not been publicly announced.

With a better articulated energy policy, the state would not be simply in the role of waiting for the NYISO to issue plans it lacks authority to implement, of for lightly regulated utilities to build merchant power plants or merchant transmission lines on routes that may not be optimal. The absence of clear state electricity planning was criticized recently in the Utica Observer Dispatch and the Gannett papers. For more information see PULP's web page on the NYRI proposal.

Solar Revolution or Cold Fusion?

The quest for cost effective solar electricity has until now been almost as elusive as cold fusion. Improvements in cost effectiveness seemingly are always just around the corner, but even with higher fuel prices there is long way to go before the cost of solar cell technology is reduced enough to displace significant amounts of conventionally generated electricity from fossil or nuclear fuel.

David Freeman (former head of the New York Power Authority, Tennessee Valley Authority, and LADWP) and Jim Harding recently wrote an article regarding a recent major breakthrough in nanotechnology and production processes that could begin soon to increase the amount of cost effective solar electricity generation. The materials breakthrough may permit distributed generation by incorporating solar electricity generating devices into building structures. Rapid development and expansion of this renewable source of electricity could help deal with growing demand, perhaps reducing the need for more conventional central station power plants.

Freeman and Harding state that "the prospect of this technology creates a conundrum for the electric utility industry and Wall Street. Can -- or should -- any utility, or investor, count on the long-term viability of a coal, nuclear or gas investment? The answer is no. In about a year, we'll see how well those technologies work. The question is whether federal energy policy can change fast enough to join what appears to be a revolution."

For more on renewable energy, see PULP's webpage.

GridSpan Goes to Washington

On April 26, 2006 representatives of National Grid and KeySpan met privately with the FERC Chairman and two FERC Commissioners in Washington, D.C. to brief them regarding the proposed acquisition of KeySpan by National Grid. National Grid is a British holding company with utility and non-utility operations in the United Kingdom, United States, Australia, and elsewhere in Europe. KeySpan is also engaged in utility and non-utility operations in Massachusetts, New York, New Hampshire and Rhode Island.

Section 203 of the Federal Power Act requires FERC approval of the proposed merger. The primary purpose of the Federal Power Act is the protection of consumers. The standards currently used by FERC to evaluate whether a merger is in the public interest include consideration of the effects upon competition, rates, and regulation. The utilities bear the burden to prove to FERC that the merger qualifies for approval under each factor, and other factors can be considered.

Under federal law, private ("ex parte") contacts by utilities with FERC decision makers who will act on their petitions are not illegal, but they must be disclosed by filing a public notice of the contact and what transpired in the official record of the proceeding so that other parties and the public are aware of the communication and can have a fair chance to counter it.

No disclosure of the April presentation to Commissioners was filed when the FERC merger case began in May. The law is being interpreted by FERC and the utilities as applying only after the case has begun with the filing of a formal petition by the utilities, even though the filing was inevitable and was a topic of the meeting.

Public Citizen obtained from FERC copies of some of the documents related to the Commissioners' meeting with the merging utilities by filing a request under the Freedom of Information Act and filed a protest seeking more complete disclosure. National Grid defended the pre application meeting with Commissioners in its answer to the motion, and Public Citizen filed a forceful rebuttal in its reply papers.

Customer Benefits from the Takeover?
Local presence?
A document from the pre application meeting with the Commissioners, Exhibit D to the Public Citizen protest, touts putative “benefits for consumers” from the proposed merger, claiming that after the merger, customers “will be served by a larger company that has a significant local presence.”

National Grid has no walk-in customer service offices for its upstate New York residential electricity and natural gas customers. Since taking over Niagara Mohawk Power Corporation, National Grid has made repeated efforts to adopt harsher deposit and collection policies.

In a survey of utility customers conducted by the University of Michigan in the first quarter of 2006, National Grid ranked last in its sector in terms of customer satisfaction for gas and electric service while KeySpan was ranked second in its sector for gas service. According to the survey, National Grid’s customer satisfaction rating has declined by 11% since first being surveyed in 2002, declining 9.7 % since last year alone.

In contrast, KeySpan’s customer satisfaction rating has increased 4.4% since first being surveyed in 2001. See ACSI Survey, 1st Quarter 2006.

Efficiencies?
Another claim at the FERC presentation was that “[E]fficiencies from combined operations will benefit customers.” The document does not describe what will be changed or cut at National Grid or at Keyspan, which have no overlapping or adjacent service territories, to achieve those “efficiencies”. According to a May 31, 2005 Buffalo News article, Niagara Mohawk Not the Same Power Company "The electric and natural gas utility has gotten a lot leaner since National Grid Transco acquired the company three years ago, trimming its work force by about 20 percent and reducing its overall costs by a similar amount. . . . The company also has saved money by consolidating some of its facilities and selling others, including the historic Electric Building in downtown Buffalo that was the headquarters of NiMo's Western Region offices."

Reliability?
The FERC Commissioners were also told that “National Grid continues its commitment to safe, reliable energy delivery....” In New York, the PSC "penalized National Grid 8.8 million dollars for not meeting two important standards for reliability in 2005: the frequency of non storm related power outages, and the duration of those outages. Last year, 98 percent of national grid customers experienced a loss of power at least once. The state standard is 92 percent. Those outages also lasted longer, an average of two hours 20 minutes or about 15 minutes longer than the state allows." National Grid has also been the subject of criticism for frequent outages slow post-storm servoce restoration in upstate New York.

National Grid has failed to meet electricity reliability performance standards in other states. According to the Massachusetts Attorney General, “[w]hen comparing the performance over the past four years of two safety and reliability performance benchmarks, System Average Interruption Duration Index (“SAIDI”) and System Average Interruption Frequency Index (“SAIFI”), National Grid accrued penalties in two of the four years for failing to meet the SAIFI benchmark (for a total of approximately $6.2 million before offset by incentives) and three of the past four years for failing to meet the SAIDI benchmark ($9.2 million before offset by incentives).

Other Parties Express Concerns
New York City filed comments with FERC raising questions whether the combination of the companies will exacerbate the apparent problems of electricity market power in New York City, citing concerns about possible withholding of .capacity by sellers in New York City markets seeking to drive prices higher.

The New York State Department of Public Service commented to FERC on the issue of vertical market power, “[t]hat is, the merged entity would own generating facilities in the transmission-constrained New York City area and transmission assets in the upstate area. Thus, the entity may potentially be able to influence both the amount of electricity that may be transmitted into New York City and in-City electric prices.”

The Massachusetts Attorney General comments raise concerns about the intent of the utilities not to seek approval of the merger in Massachusetts. Massachusetts has stringent requirements for merger approval that include a showing of net benefits to consumers, and which could limit the extent of job cuts. Regarding the effect on competition, the MA Attorney General stated that the utilities in their application “have not analyzed the effect of the merger on the gas-electric convergence market and the control that the combined companies will hold over the combined gas-electric retail distribution system and retail gas-electric service.”

New York State Considering Approval of the KeySpan Takeover
New York State PSC approval of the proposed merger is required, in addition to FERC approval. National Grid and KeySpan have filed a petition with the New York State Public Service Commission on July 20, 2006. For more information see PULP's web page on the GridSpan merger.

CATO Institute Rethinking Electricity Restructuring

The Cato Institute, generally an advocate of less regulation and free markets, has published recent papers questioning the wisdom of electricity industry restructuring as it was done by 16 states, including New York, and the District of Columbia. This comes at a time when a federal task force is completing its report on wholesale and retail electricity competition.

In 2004, Cato published "Rethinking Electricity Restructuring," which states

The poor track record of restructuring stems from systemic problems inherent in the reforms themselves. We recommend total abandonment of restructuring and a more thoroughgoing embrace of markets than contemplated in current restructuring initiatives. But we recognize that such reforms are politically difficult to achieve. A second-best alternative would be for those states that have already embraced restructuring to return to an updated version of the old, vertically integrated, regulated status quo. It’s likely that such an arrangement would not be that different from the arrangements that would have developed under laissez faire.

In 2006, Cato published "Vertical Integration and the Restructuring of the U.S. Electricity Industry," by Robert J. Michaels (July 13, 2006), which states

Politicians and policy analysts have almost totally disregarded a large body of academic literature regarding the efficiencies that are gained through vertical integration in the electricity sector. At the same time, those parties have enthusiastically embraced other studies that purport to estimate the benefits of switching to a so-called restructured regime consisting of independent generation and integrated transmission and distribution. The result has been the passage of electricity utility restructuring laws that may create production inefficiencies that shrink the net benefits of any move toward market provision of power supplies.

This resonates with the experience of the nation's largest industrial customers, once enthusiastic proponents of electricity restructuring, who a decade later are now dissatisfied with the outcome. They recently stated in their comments to the federal task force on electricity competition:

"After at least ten years of effort to reform wholesale electric markets such that workable competition replaces cost-based rate regulation as the primary paradigm for setting the rates, terms and conditions of power sales and services in interstate markets, there is very little evidence that any tangible benefits have accrued to end-use consumers. To the contrary, Industrial Consumers submit 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 regulatory construct.

PULP's comments to the federal electricity competition task force also point out problems with New York's experiment with electric industry restructuring. For more comments, see PULP's web page on the federal interagency task force on electricity competition. The task force is expected to issue its final report in August, 2006.

Court Reverses FCC Preemption of State Wireless Telephone Consumer Protection Measures

Wireless telephone consumers were dealt a severe blow when the FCC issued an order preempting states from protecting wireless telephone consumers. Although states cannot regulate the rates of wireless phone companies, the federal law allows them to regulate other terms and conditions. But when states responded to consumer complaints and attempted to regulate the presentation of new and confusing additional line item charges on wireless consumers' bills, the FCC essentially said that such truth in billing measures affected "rates" and so were preempted.

The National Associaton of State Utility Consumer Advocates (NASUCA) sought judicial review when its request for rehearing was denied by the FCC, and won a resounding victory in the Court of Appeals for the Eleventh Circuit. Relying on the plain meaning of the statutory language and dictionaries, the court decision rejects the FCC's reasoning, saying the agency's expansive interpretation of its power to set rates could not defeat the intent of the law allowing states to regulate terms and conditions of service other than rates:

A “rate,” as defined by the Oxford English Dictionary, is “[t]he amount of a charge or payment . . . having relation to some other amount or basis of calculation.” Oxford English Dictionary (2d ed. 1989). Other dictionaries define a “rate” as “[a]n amount paid or charged for a good or service,” Black’s Law Dictionary 1268 (7th ed. 1999), or “a charge per unit of a public-service commodity,” Merriam-Webster Online Dictionary, available at www.mw. com/cgi-bin/dictionary (last visited June 27, 2006). “[A]s a basic rule of statutory interpretation, we read the statute using the normal meanings of its words.” Horton Homes, Inc. v. United States, 357 F.3d 1209, 1211 (11th Cir. 2004) (quoting Consol. Bank, N.A. v. Dep’t of Treas. 118 F.3d 1461, 1463 (11th Cir. 1997)). “In the absence of an indication to the contrary, words in a statute are assumed to bear their ‘ordinary, contemporary, common meaning.’” Walters v. Metro. Ed. Enters., Inc., 519 U.S. 202, 207, 117 S. Ct. 660, 664 (1997) (quoting Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 388, 113 S. Ct. 1489, 1494 (1993)).

The prohibition or requirement of a line item affects the presentation of the charge on the user’s bill, but it does not affect the amount that a user is charged for service. State regulations of line items regulate the billing practices of cellular wireless providers, not the charges that are imposed on the consumer. Because the presentation of line items on a bill is not a “charge or payment” for service, Oxford English Dictionary (2d ed. 1989), it is an “other term or condition” regulable by the states, 47 U.S.C. § 332(c)(3)(A).

Due to the ineffective FCC policies that do not protect consumers, efforts are underway in New York to protect consumers by reasserting state PSC jurisdiction over "terms and conditions" of wireless telephone service other than the rates. The state PSC dropped its supervision of wireless companies in 1997. See PULP's web page on wireless telephone consumer protection.

Also, it is expected that the wireless industry will redouble its frequent efforts to change the federal law to completely eliminate state consumer protections, and that consumers will vigorously oppose those efforts. Stay tuned.

Consumer Groups Question FERC Market Rates

Restructuring Increased Reliance on Wholesale Rates Under FERC Jurisdiction
After the New York PSC encouraged Con Edison to "restructure" in its 1996 "vision order", Con Edison agreed with the PSC in a 1997 rate/restructuring agreement to sell nearly all of its power plants to three new owners, from whom Con Edison now buys much of the wholesale energy it needs for its retail customers. The new owners of the divested power plants have "market-based rate" permission from FERC, which sets wholesale rates, and so now they can sell at privately negotiated rates or in the NYISO spot markets without publicly filing in advance their rates or any changes in rates demanded.

Similar arrangements, described in PULP's summary of restructuring orders, were made with the other New York investor-owned utilities, with the exception of Rochester Gas and Electric, which still owns non-nuclear power plants, and is less dependent on purchases in wholesale markets.

The premises of FERC’s market rate regime are (1) rate regulation is needed to protect customers only because of the monopoly nature of traditional vertically integrated utilities, which gives them market power, (2) new market systems could be designed in which no single seller has market power, (3) the results of a market rate system would be competitive rates, (4) if markets are competitive, FERC need not require filing and review of rates because competitive rates are necessarily just and reasonable, satisfying the basic requirement of the Federal Power Act and FERC's duty to protect consumers from any unjust and unreasonable rates.

These are controversial assumptions.

The New "Organized Markets" Promoted by FERC Can be Gamed by Sellers to Achieve Monopolistic or Oligopolistic Pricing
Sellers can can change their prices every day without filing new schedules of rates and charges. The price established by the most expensive energy needed to meet demand is paid to all sellers in the NYISO spot markets. Also, the NYISO allows "virtual" trading by sellers who do not own power plants.

Mathematical game theory analysis and empirical studies have shown that by strategic bidding of their output, sellers can achieve a "Nash equilibrium" that effectively manipulates spot market prices upward without overt collusion. According to a New York Times article:

critics of the current system have found ammunition in a study at Carnegie Mellon University by Sarosh N. Talukdar, who used computer models to simulate a market in which 10 utilities bought electricity and 10 producers sold it.

In that experiment, the buyers and sellers learned to manipulate the price within 100 rounds of bidding, capturing from 50 percent to 90 percent of the prices an unregulated monopoly would have charged. Instead of falling, prices soared.

Earlier experiments at Cornell University and George Mason University found the same thing, with simulated trading by students, professors and even members of Congress.

Such high prices suggest collusion, which is illegal in real markets, but collusion was impossible in Professor Talukdar’s experiments because the trades were made by simple computer programs, not humans.

“My studies show it is easy to learn from the signals given by others how to get the benefits of colluding without breaking the law,” Professor Talukdar said.

“Economists have this faith in markets, this blind faith that markets are always a good thing,” the professor said, “but the design of markets matters a great deal and the design must be verified to see if it really works as a free market.”

FERC currently allows sellers to demand progressively higher amounts as they near the maximum output of a power plant, and NYISO allows sellers to bid increments of power plant output at sharply increasing prices.The cumulative effect of such "hockey-stick" bidding, if done by several sellers, can result in economic withholding of power from the market, so that higher priced energy must be called for by the NYISO. The Wall Street Journal reported on August 4, 2006 that during the recent heat wave, "In New York City, the price of wholesale power paid by Consolidated Edison Inc. rose as high as $1.33 a kilowatt hour during the afternoon, more than 10 times an average price."

Consumers Question FERC's Proposed New Rules for Market Rate Sellers
Consumer groups filed comments August 7, 2006 regarding FERC's proposed new rules to codify for the first time and modify further its system of market-based rates, which is now based on a series of orders rather than official rules. The comments of the National Association of State Utility Consumer Advocates (NASUCA) raise concerns about FERC's tests for assessing market power, proposed relaxation of rules governing energy contracts between sellers with market rates and their affiliates with retail customers, and sufficiency of FERC's legal authority to adopt the proposed rules. Once supportive of electricity deregulation, large industrial customers commented that the system is not working and that rates are neither competitive nor just and reasonable. Other organizations, including state utility consumer advocates from Rhode Island, Colorado, New Mexico, and Utah, and private consumer advocates including Public Citizen, the National Consumer Law Center, and PULP, maintain that the entire market based rate system as it currently operates is out of compliance with longstanding Federal Power Act rate filing requirements. No bona fide consumer organization has supported the further relaxation of FERC oversight proposed in the new rules

Judicial Challenges to FERC Market Rates
Under traditional regulation, utility rates for power from plants owned by vertically integrated utilities would be set by the state regulator so that the utility had a fair opportunity (not a guarantee) to recover the cost of energy production or purchase and a fair return on their capital investment, taking into account prudent original cost and depreciation. Once set, only the filed rate could be charged, and before changing the filed rate, the utility was required publicly to file new schedules of rates and charges in advance, subject to public scrutiny and possible agency review before taking effect.

In the states that restructured, like New York, most of the energy must now be purchased for end users at wholesale market rates under FERC jurisdiction. In contrast to the public filing and opportunity for administrative review of rates before they could be changed, the FERC market rate system allows wholesale utilities privately to change the rates without public filing. This is being challenged in court by some consumer groups. FERC has made efforts to avoid judicial review but recently the court issued an order restoring the case to the argument calendar and argument was held March 14, 2007. At argument, FERC argued that the legality of its market rate system should not be decided in this aprticular case because FERC did not deem that issue to be within the range of issues it was considering when it found all market rate tariffs to be illegal and adopted certain behavior rules (now repealed) to correct the perceived illegality. Consumer advocates argued that more needed to be done to fix legal rates as required by the Federal Power Act, and that once the tariffs were declared unreasonable, it was within the parameters of the case for intervenors to propose additional measures, including compliance with longstanding rate filing and public notice requirements.

The Queens Blackout

Investigations of the July 2006 Queens blackout are getting underway.

The scope of the outages and brownouts in Con Edison's Long Island City network, which at times affected over 100,000 persons, was not known for days. The lack of accurate communication is the source of considerable dissatisfaction on the part of local and state officials and others concerned about public health and safety. Previously, the PSC faulted Con Edison for poor communication with the public in connection with the 1999 Washington Heights outage.

Community groups, including Power For the People, have protested the outage and are seeking reforms.

Maintenance and Investment
Much attention will likely be paid to the record of Con Edison maintenance and investment in infrastructure. According to the Times, reports to the PSC filed by Con Edison show that the area where the outage occurred "has been problematic for years. It had some kind of breakdown 71 times in 2005 and 60 times in 2004, more than any other Con Ed underground network in both years." Blackout Area Has a History of Breakdowns

In the 1999 Washington Heights outage case, a PSC staff report stated that "Beginning with the 1994 through 1998 period, the [Con Edison] budget instructions reveal the company's growing concern with being prepared for competition.... Con Edison reduced its budgeted operation and maintenance expenses over the period Staff reviewed and even underspent those budgets in 1995, 1997, and 1998." A PULP report shows that in the years after the Washington Heights outage, Con Edison continued to reduce budgets for Maintenance Programs -- and then underspent those reduced budgets.

FERC and NYISO Warned of Blackouts the Week Before the Queens Outage.
Other areas for investigation include whether there were any unusual conditions or disturbances in the portions of the electric grid under Con Edison's control, beyond very high load conditions that would be expected in hot weather. In the week preceeding the blackout, on July 12, 2006, the Chairman of the Federal Energy Regulatory Commission (FERC) and the CEO of the New York Independent System Operator (NYISO) testified to Congress that New York City was at increased risk of blackouts, load shedding and price increases due to the outage of two Con Edison transmission lines, one of them between Westchester and Queens.

The FERC Chairman testified

"During the last two weeks, two of four major transmission lines into New York City from upstate New York have failed. They will be for some time. Our Division of Reliability is consulting closely with the affected transmission owner to ensure that the outages have no reliability effects. Nonetheless, the loss of these two lines means that New York City as well as Long Island will be tested during any periods of sustained hot weather."

The NYISO official, in charge of the high voltage grid in New York state, testified

"the possibility for voltage reductions or controlled, localized load shedding remains somewhat elevated under extreme weather or the loss of additional facilities."

The next day after this testimony, Greenwire reported

"two 345 kilovolt lines in New York failed, one on June 24 and the other on June 28. The outages took the capacity of the four-line system that imports power from upstate New York to the high-demand centers around New York City and Long Island from 3,400 megawatts to 2,000 megawatts."

On Friday, July 14, the New York Post reported that "Con Ed Vows No Power Cut to the People," and that there would be no customer bill impact due to the transmission line outage.

Wholesale electricity spot market prices for New York City July 17 at 4 PM, set on July 16, "more than doubled to $295.85 today, from $113.31 on July 10," according to Crains. According to a Con Edison exhibit in its last rate case, Con Edison buys about 40% of the energy for its customers in the NYISO spot markets.

On Sunday, July 16 Con Edison - the day before the outage - notified the PSC that it was opening its emergency command center. According to testimony of the PSC Chairman, at p. 10, such notification to the PSC occurs when there are "significant power outages, injuries, shocks, accidents, and unusual events."

On Monday, July 17, a 27 KV feeder in Queens failed at 3:50 P.M., and subsequently other feeders failed, resulting in outages. The chronology of the feeder failures is set out in Con Edison's report to the Mayor. According to the report, all the feeders were operating within rated capacities at the time of failure. This report identifies the time certain feeders and equipment failed but does not indicate the root cause or causes of the failures.

A History of Misoperation?
A 2003 PSC decision indicates that when a Queens power plant unexpectedly shut down in 2002, there were allegations that Con Edison "misoperated" its system, and that it should have been able to weather the disturbance in the high voltage system without the widespread customer outages that occurred. The PSC did not decide the issue.

The Times reported that early in the crisis, "Con Edison did not shut down the western Queens network, even as 10 of 22 feeders failed, and other equipment kept burning out." The Times in another story reported that "In 1999, in Washington Heights and Inwood, Con Ed, faced with failing power, shut down the entire network serving those neighborhoods, causing a blackout for 200,000 but also saving equipment from further damage and allowing for a relatively smooth return to normal power."

In the 1977 blackout litigation, the state Court of Appeals found support in the record for a claim that Con Edison had not operated its system reasonably and had not shed load at a critical point when the system was unbalanced due to a lightning strike that put out transmission lines in Westchester. That decision indicates that although Con Edison had been directed by the Power Pool grid manager to shed load by blacking out areas temporarily until sufficient power was available to replace power lost due to the transmission line outages, Con Edison did not shed the load and a widespread blackout followed.

Customers can recover some losses, for example, for food spoiled due to the lack of refrigeration due to the outage, under current Con Edison tariiffs.

Con Edison may also face potential liability to customers if gross negligence is proven. After the 1977 New York City blackout, a jury found Con Edison grossly negligent and liable for damages, and the verdict was upheld by the state's highest court in Food Pageant v. Consolidated Edison. Also, the City of New York won damages in Koch v. Consolidated Edison. Although gross negligence requires proof of more than ordinary negligence, a lesson of these cases is that juries and courts may expect a utility to exercise a very high level of care in the operation of its system.

For more information, see PULP's Queens Blackout 2006 web page