AARP Cautions FERC Not to Relax Electricity Market Oversight

AARP filed comments January 19, 2007 in FERC's pending rulemaking proceeding in which the agency proposes for the first time to adopt official rules to reflect its market rate experiment of the past decade. Some of the proposed rules would mirror policies contained in prior FERC orders, but other proposed measures would further relax regulation and lessen FERC's oversight of wholesale electricity sellers.

For example, the proposed rules would make it easier for sellers to obtain and retain FERC's permission to charge unfiled market rates, would reduce restrictions on transactions between holding company affiliates that produce, trade, own and buy power among themselves, and would eliminate some rate and contract filing requirements, even for companies denied market rates because they fail FERC's market power tests.

In its comments, AARP observed as follows regarding FERC's market rate system:

[T]he envisioned benefits of restructuring have not been borne out by experience. Deregulation of sellers has not produced the promised rate reductions and competitive sources of supply. Studies have shown that in states that have adopted retail restructuring, consumers have experienced significant price increases that cannot be fully explained by fuel cost increases; rather, market power and other factors appear to be playing a significant role in the high prices experienced by consumers once price caps expire. Headline stories about consumer outrage over huge price hikes after removal of rate caps (e.g., in Maryland) exemplify the widespread concerns about today’s electricity markets and their impact on consumers. Studies of claimed savings from competition simply don’t match the experience of consumers. In fact, increasing evidence indicates that markets are not delivering the promised lower prices. * * * *

AARP has concluded that electricity markets have generally failed to provide benefits to consumers. This grim conclusion, combined with the great risk of the exercise of market power in the electric industry and the high costs borne by consumers from such abuse, causes us to urge the Commission to err on the side of caution in evaluating market power and authorizing market-based rates. Further, we urge the Commission to ground its MBR policy on fact and experience, not theory.

AARP has over 35 million members nationally, and more than 2.6 million members in New York State.

Other consumer groups including the National Association of State Utility Consumer Advocates, NASUCA, and large industrial customers previously objected to the proposed regulations. For further information about the proposed rules and comments of other parties, see "Consumer Groups Question FERC's Market Rates."

Governor Spitzer Promises Reform of Prison Inmate Telephone Charges

The New York State Department of Corrections (DOCS) contracts with MCI for prison inmate collect call telephone service. For many families whose relatives are incarcerated in distant prisons, this is the primary means of communication.

DOCS contracts require the telephone company to collect a 57% commission for the state on call revenue received from recipients of collect calls made by inmates. Approximately $20 million per year was collected by DOCS through the commissions. DOCS asserted that the money was used for several of its programs designed to benefit inmates, but community groups pointed out that the programs could and should be funded with general state revenues, and that DOCS had implemented an administrative "tax" without proper legislative authority.

The commissions create heavy burdens for low income family members. Those who cannot afford cost of the calls suffer financial hardship if they accept them. Despite objections from community groups and broad editorial oposition from the state's leading newspapers, the commission system continued for years.

When the contract was last renewed, along with community groups, PULP objected to the commissions in its comments to the PSC.

The PSC ruled that it lacked jurisdiction over the commission portion of the rate. The PSC also rejected PULP's petition for rehearing which argued that the PSC indeed did have full power to review and modify the rates for intrastate calls.

Litigation was brought on behalf of inmate families and others by the Center for Constitutional Rights seeking a judgment that the commissions are illegal and refunds of the overcharges. The trial court opinion upheld the commission system, and this was affirmed by the Appellate Division, Third Department. An appeal was taken to the Court of Appeals, New York's highest court.

The day before the case was to be argued in the Court of Appeals, it was announced by Governor Spitzer that the commission system will soon be halted.

This prompt correction of an longstanding injustice in the first week of the incoming Spitzer administration is a very welcome turn of events. Prospectively, elimination of the commissions will correct a DOCS policy that for many years hindered communication with inmates and caused major hardship to many low income families in New York State.

The issues still being considered by the Court of Appeals concern the claims of the plaintiffs for refunds of past commissions, if the court reaches the merits and finds that the commissions are illegal, and mootness claims and procedural defenses.

For further information, see PULP's web page on inmate telephone service.

FERC Commissioner Kelly: The Purpose of the Federal Power Act is to Protect Consumers

At a recent meeting FERC adopted rules to implement a new statutory provision, Section 219 of the Federal Power Act, which authorizes, in certain situations, extra financial incentives, through higher rates, for utilities building transmission lines needed to ease congestion that limits the availability of lower cost power in some areas.

Prior to the enactment of Section 219, FERC had proposed generous "incentive ratemaking" measures to encourage construction of new transmission lines with significantly higher returns on equity allowed as part of rate computations. The National Association of State Utility Consumer Advocates (NASUCA) vigorously opposed this in its 2003 comments to FERC. Also, NASUCA opposed a proposal for broader statutory authorization of higher transmission rates than the new FPA Section 219 allows, in testimony to Congress, stating that the proposal being considered "would authorize unnecessary and costly new federal financial incentives to encourage investment in transmission facilities, beyond the level of return on investors’ equity normally sufficient to achieve reliable service and just and reasonable rates."

In New York, utilities have built more than 10,000 miles of high voltage transmission lines without the need for "incentive" rates that are higher than rates would be to provide normal rates of return on private utility investors' equity. Also, the New York Power Authority has more than 1,000 miles of transmission lines which it built at cost, without providing any return to investors, because NYPA is publicly owned. With the "restructuring" of New York's electric industry under PSC orders, however, little has been done in recent years to construct new transmission lines, with the exception of lines built to serve the Long Island Power Authority.

Commissioner Suedeen Kelly, in her talking points at the FERC meeting which adopted rules to implement new FPA Section 219 pointed out that the statutory amendment which now allows higher than normal rates specifically requires that "ultimately it is the consumer that must benefit from the rule."

She noted that "the Final Rule does not require applicants to provide a cost-benefit analysis for incentive-based rate treatment," but still cautioned that "applicants will not receive incentives simply by asking for them, or by merely stating that incentives are needed to attract capital. Nor will applicants be rewarded just for the sake of building new transmission."

In recent years FERC has focused its efforts on deregulation and substitution of market mechanisms for its traditional mission of enforcing the Federal Power Act and reviewing rates for reasonableness. No credible study has found these measures to have lowered rates or otherwise to have benefited consumers.

In a refreshing statement, Commissioner Kelly said "we must always relate our action “to the primary aim of the [Federal Power] Act to guard the consumer against excessive rates.” Commissioner Kelly's rhetoric is in harmony with the Supreme Court's interpretation of the purpose of the Natural Gas Act (which has parallel provisions with the Federal Power Act): Congress intended the law and implementation of it by regulators to “The Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.” Atlantic Refining Co. v. Publ. Serv. Com’n, 360 U.S. 378, 388 (1959).

Without a cost-benefit analysis, however, and no yardstick of reasonableness, it is difficult to imagine how FERC will know whether higher rates requested for a transmission project are reasonable or will benefit consumers.