N.Y. Court of Appeals Revives Suit to Recover Excessive Charges for Inmate Telephone Calls

Litigation has been pending for years in state and federal courts challenging excessive rates and charges for collect calls made by state prison inmates to relatives and friends, who often are so poor they experience financial hardship or simply cannot accept the calls. The main cause of the expense is a high "commission" on each call paid to the state; in New York, the commission is established under a contract between the New York State Department of Corrections (DOCS) and the telephone company contractor. In soliciting bids for telephone companies to provide secure calling services, a major factor in selection of the winning bid is the amount of the commission the company will remit to the state.

Currently, the commission paid by Verizon Business Services to the state is 57.5%, amounting to approximately $20 million per year collected from some of the poorest people in the state. The high commissions make it unaffordable for many New Yorkers living in poverty to accept calls. In 2003, according to a DOCS newsletter:

Approximately 500,000 inmate calls are now completed each month, totaling roughly 9.5 million minutes. Attempted calls that are not completed add in excess of 2 million phone uses per month.

All contracts and rates for telephone service in New York state must be approved by the Public Service Commission (PSC). When the PSC approved a contract between DOCS and MCI (now Verizon Business Services, after a merger) in 1998, it approved the entire rate -- including the commission -- in an order that was quietly issued without any SAPA notice and which waived the general statutory requirement for publication of notice in newspapers. The order in Case 98-C-1765 was not posted on the PSC website, and was not published by LEXIS until PULP brought it to the attention of LEXIS after it was referred to in a court decision in a case begun in 2000, Bullard v. DOCS. That case was dismissed by the state court of claims on May 1, 2002 (ironically, "Law Day") because the plaintiffs had failed to exhausted administrative remedies at the PSC in what amounted to a secret order in a secret proceeding. The Appellate Division affirmed, stating, in its decision on July 3, 2003:

since the alleged injury asserted by claimants arose directly from their payment of the filed rate approved by the PSC,'[t]he filed rate doctrine bars [judicial proceedings] against regulated utilities grounded on the allegation that the rates charged by the utility are unreasonable.'

Meanwhile, the DOCS contract was revised in 2001 and again in 2003. When the PSC considered the revision of the contract in 2003, public notice was given. In light of the 2002 court of claims decision faulting plaintiffs for not objecting about the rate at the PSC, many parties, including relatives of inmates, community, legal, and religious organizations intervened and filed comments protesting the commissions. Even though the PSC had approved the entire rate in 1998 (when no one had intervened in the case), this time, the PSC decided it had no jurisdiction over the commission portion of the rate on October 30, 2003.

PULP promptly petitioned for rehearing on November 26, 2003, pointing out the plenary power of the PSC over all contracts for telephone service under section 92 of the Public Service Law and precedent of PSC modification of rates set in a contract between the state police and a telephone company. Although N.Y. Public Service Law § 22 specifies that "the decision of the commission granting or refusing the application for a rehearing shall be made within thirty days," the PSC denied that petition more than a year later, on January 12, 2005.

Meanwhile, following the PSC's refusal to review the DOCS commissions, plaintiffs represented by the Center for Constitutional Rights commenced a new action against DOCS in 2004, Walton v. DOCS, challenging the 2001 DOCS contract as modified and approved by the PSC in November 2003. The plaintiffs asserted numerous causes of action, including violations of equal protection, freedom of association, unconstitutional taxation, and due process. Judge Ceresia dismissed the action at the trial level in a decision finding six of the seven causes of action to be untimely because plaintiffs had sued too late to challenge the underlying 2001 contract within four months of its approval, and rejecting one cause of action based on the November 2003 PSC decision. The Appellate Division affirmed in a January 19, 2006 decision.

The state's highest court, the Court of Appeals, granted a motion for leave to appeal in Walton v. DOCS. On the brink of oral argument held January 9, 2007, New York Governor Spitzer announced that the practice of collecting commissions on inmate calls would cease as of April 1, 2007. See Governor Spitzer Promises Reform of Prison Inmate Telephone Charges. With the need for a prospective injunction mooted, the issue of damages claims remained. In a decision issued February 20, 2007, the Court of Appeals effectively reversed the decisions of the lower courts insofar as they held that the constitutional claims were untimely, and remanded the matter to the trial court for consideration of four claims and damages flowing from any constitutional violations. In a concurring opinion, Judge Smith indicated his belief that some of the constitutional claims are "quite substantial" and joined with three other judges in finding that the case had been timely commenced.

Plaintiffs and petitioners in Walton v. DOCS are represented in their herculean effort to reform the prison inmate telephone commission system by Rachel Meeropol of the Center for Constitutional Rights. For more information on inmate telephone issues in New York and other states, see PULP's web pages and archive web page on the topic.

City Bar Committee Issues Report on Electricity Regulation in New York

The Energy Committee of the Association of the Bar for the City of New York (ABCNY) issued a report on Electric Regulation in the State of New York on February 8, 2006. The report attempts to take stock of the electricity restructuring experiment of the New York Public Service Commission (PSC). This was accomplished by "rate/restructuring" agreements with most of the major investor owned utilities, who agreed to sell their power plants in exchange for being allowed to form new holding companies. The ABCNY Energy Committee previously issued a report on electricity restructuring in 1998. Their 1998 Committee report mainly catalogs what the PSC and utilities agreed to do in their "rate/restructuring" plans.

Until now, the ABCNY Energy Committee made no report assessing the electric industry restructuring, even though serious flaws were obvious years ago. See, e.g., Disconnected Policymakers (Electricity Journal 2001) ;Deregulation of Electricity Isn't Working out as Hoped (Buffalo News 2001); Power Politics: A Failed Energy Plan Catches Up to New York (N.Y. Times 2001); The Perfect Storm (NY Assembly 2002); and other articles and reports at PULP's archive web site, and at PULP's current web page on New York Utility Energy Issues.

Notably, the ABCNY Energy Committee watched without comment as the PSC attempted to eliminate the consumer protections of the Home Energy Fair Practices Act ("HEFPA") with repect to energy purchased from "ESCOs". After flagrant consumer abuse occurred, that deregulation effort eventually was rebuffed by the state legislature with the enactment of the Energy Consumer Protection Act of 2002. Non-residential customers of ESCOs, however, do not have the protection of HEFPA or the PSC rules for dispute resolution and protection, and many small businesses have been victimized by ESCOs promising better rates than the traditional utility only to find they are locked into more expensive boilerplate contracts for long durations with high early termination fees.

Despite the well recognized dysfunction of the wholesale and retail energy markets in the aftermath of the PSC/utility restructuring, the ABCNY Energy Committee cites a 2006 New York PSC Staff report which claims the agency's restructuring to have been a success. An academic review of that unsigned report has found it to be unconvincing and its methodology flawed. See APPA Study Debunks NY PSC Report on Electric Restructuring. Rates in the areas that most completely adopted the PSC model increased and became more volatile. Rates of New York utilities that -- contrary to the recommendations of the PSC Staff -- retained their power plants, or sold them more slowly and entered into long term energy buyback contracts when they sold their plants, remained stable and predictable, while rates of those utilities who relied more heavily on NYISO wholesale spot market purchases increased and became unpredictable. The PSC Staff report left out data on major rate increases in 2005 for the utilities with more volatile rates, and appears to have left out data on LIPA increases affecting most of Long Island, which rose due to rising prices for energy purchased from divested generating plants at FERC market rates. By leaving off major increases in 2005 (the data was available when the PSC issued its report in 2006) and by averaging typical bills of the higher priced utilities (i.e. Con Edison) with the bills of upstate utilities such as RG&E and NYSEG, whose lower, stable rates (maintained despite opposition from the PSC and PSC Staff) the real effects of what occurs when the PSC Staff model is implemented are masked. The Staff report also is based on just two snapshots for typical bills in each year. Although most utilities have stable rates, the rates of Con Edison and other utilities that have most fully followed the PSC preferences have become volatile from month to month, with major price spikes occurring in months other than January and July data used in the PSC staff repport. The ABCNY Energy Committee report fails to go beneath the surface and uncritically accepts the unjustified conclusion of the PSC Staff report.

The Committee Report does little more than address two issues: the failure of the PSC's deregulatory approach to result in the construction of new power plants sufficient to meet growing demand, and the absence of meaningful public energy planning and implementation process. Currently, the energy planning function has been abdicated by the state to utilities and the NYISO, a private utility which has no real power to implement a plan, and which is not directly accountable to New Yorkers.

The report acknowledges, belatedly, the failure of a largely deregulated merchant power generation sector to bring adequate supplies of power, when new power plants are generally considered to be necessary for reliability and reasonable prices, particularly in downstate areas:

the only truly merchant plant built in New York City since 1999 has been KeySpan-Ravenswood’s 250 megawatt (“MW”) project. Orion Power also invested approximately $25 million in restarting a retired unit at the Astoria Generating Station. Otherwise, all major new plants have been either built by the New York Power Authority (“NYPA”) or under long-term contract to the Consolidated Edison Company of New York, Inc. (“Con Edison”) or the Long Island Power Authority. Outside New York City, however, plants have been constructed on a merchant basis.

To that, one might add, the owner of the largest merchant power plant constructed outside of New York City went bankrupt, and other merchant power plants have been shut down by owners who deny having any obligation to serve. The Power Authority of the State of New York has become the de facto builder of last resort due to the failed reliance on markets and the private sector to increase supply needed for reliability.

It is often assumed that price relief will flow from construction of new plants (or from conservation or demand response measures), but if the merchant power sector maintains its ability to withhold power from the market, by physically shutting down, mothballing plants, or by bidding strategies, price relief may be illusory even if new plants are built.

The courses of action proposed by the Committee are narrow, and continue the main elements of the PSC deregulation agenda. To achieve more power plant construction, a new NYISO capacity market is proposed, for long term capacity. (As Robert Kuttner has observed in Everything for Sale, the Virtues and Limits of Markets, the deregulators' solution to market failures is always the same -- a new market). A long term capacity market would involve making large payments to owners of existing power plants in the hope that this largess will attract new companies (and the investment banking industry) to invest and build new plants, but with no requirement that anyone actually build any plant. Billions have been paid to power plant owners through past and current NYISO capacity markets with no discernible effect. A similar capacity market plan of the New England ISO ("NEISO") drew major resistance in New England.
The cost of the proposed long term capacity payments is paid, ultimately, by consumers. The capacity market proposal, if adopted, could raise New York's high electricity rates further, without assuring that future power needs will be met, resulting in opposition as it did in New England. Maine is considering leaving the New England ISO and joining a Canada grid group due to high capacity payments that will add $335 million to Maine customer bills in the next five years, and attorneys general of Massachusetts and Connecticut are opposing New England ISO capacity markets in litigation. Also, attorneys general of Connecticut and Rhode Island have joined in challenges to FERC's market rate regime in a pending FERC rule making proceeding on market rates.

Perhaps in recognition that yet another capacity market approach will not work, the ABCNY Energy Committee Report proposes that new generation be attracted by having utilities who sold their power plants, or a public authority such as the New York Power Authority, enter into long term agreements to purchase power and capacity from a new power plant, or otherwise to guarantee a stream of payments to enable a merchant power plant developer to attract investment capital. For an interesting discussion of long term financing contracts, see the recent comments of New York City in a PSC proceeding that is considering energy purchasing practices.

The stream of long term contract payments needed to assure financing of the new plants would be collected, ultimately, from consumers. The ABCNY proposal represents a major departure from the Enron model adopted in 1996 by the PSC, in which the assumption of risk by the merchant power sector was touted as a consumer advantage, because consumers would no longer be saddled by capital cost overruns of large central station power plants built by the old utilities. The Committee proposal puts risk back on consumers, who will be required to pay for the output of the plant at rates high enough to rapidly recover the capital cost, but with no assurance that the customers will receive long term benefits. Essentially the utility consumer will provide the security demanded by lenders, and the consumer will pay for the power supply contract via the distribution utility.

When plants were built by the old utilities, the cost was amortized over the lifetime of the plant, and as the plant depreciated, the cost of energy could go down, because customers would pay cost based rates set by the state PSC. When plants are built by the merchant sector with utility or public power guaranteed contracts, the capital cost of the plant may be rapidly amortized long before the lifetime of the plant expires, but once the contract obligation needed to obtain financing expires, the merchant power plant owner may sell the output at the market price set in wholesale spot markets by the most expensive plants, so the producer rather than the consumer will receive the value of low production costs.

There is nothing inherently wrong with long term contracts. New York once had a law (it expired along with the Article X siting law) which required utilities to attempt to purchase power rather than build new power plants if that was the least cost solution. Long term contracts could be a good idea, but only if they ultimately benefit the consumers who essentially would assume the risk of stranded costs (i.e., that during the term of the contract, less expensive energy could become available through new transmission lines or less costly new plants). What is missing in the ABCNY Committee Report is any benchmark test -- that a long term power supply agreement used to induce construction of a merchant plant must be more cost effective in the long run, over the life of the plant, than if the plant were built by a state regulated utility or by the Power Authority.

Other states that restructured also lost control over the cost of power, once state regulated, because when it is unbundled from a vertically integrated state regulated utility it must be purchased at wholesale rates, under a FERC system of market rates that is not based on the actual cost of production. Other states (Connecticut, Virginia, and others) are now moving to allow distribution utilities to build power plants again, whose rates would again be under state jurisdiction and control. New York utilities still have that option, because the state legislature never changed the laws to prevent distribution utilities from building power plants. Also, public power entities such as NYPA and LIPA have been quite proactive in recent years to address the failure of the deregulated markets to deliver power needed to maintain reliability. The ABCNY report does not consider the obvious option of plants built by state regulated utilities or public power entities, and instead perpetuates deregulation dogma with talk of new capacity markets and transfer of investment risk to ratepayers or the general public without assurance of benefits.

Competition is a means to an end, not an end in itself. That end is defined by New York, in its public service law, as safe and adequate service to consumers upon demand at reasonable rates.The continued adherence to marketizer solutions in the absence of evidence they work anywhere - for the benefit of consumers - reflects the ABCNY Energy Committee "agenda". The Committee agenda promotes a deregulation - competition model and focuses mainly on shareholder concerns, as follows:

Agenda includes increasing the competition in the energy marketplace, utility shareholder equity and environmental issues. The Committee also deals with nuclear power issues and international energy projects.

An examination of the roster of the ABCNY Energy Committee (at the end of the Committee report) shows that the Committee is predominantly comprised of attorneys who represent the very utilities and merchant power entities who supported and continue to support the PSC restructuring experiment, with some environmentalists, but no attorneys from consumer groups.

The ABCNY Committee Report says it is occasioned by "[t]he election of a new Governor, following a twelve-year administration by a Governor who supported the Commission's restructuring initiative * * * [presenting] an appropriate opportunity to examine the regulation of New York's electric utility industry."

The Committee held its tongue and did not issue reports when failure of the deregulation approach was obvious for years. The Committee did not signal the now apparent supply crisis, and did not previously publish a report describing corrective measures. Instead, the Committee remained silent until the election of a new Governor who has already indicated openness to long term contract solutions such as those described in the ABCNY report. In describing its long term contracting solutions the Committee has done little to identify fully the complex scope of the public interests that would need to be addressed through those contracts. The report excellently represents the corporate and self interests of the merchant generators and utilities. These interests will be important actors as New York works through the long agenda of energy needs left behind by the last set of energy policymakers in Albany. Regrettably, it leaves unaddressed the consumer and public interests which must be heard and accommodated before a new set of new energy ventures are undertaken.

President Proposes $61 Million Home Energy Assistance Cut for Low-Income New Yorkers

The proposed federal budget submitted to Congress by President Bush would reduce 2007 - 2008 funding for the Low Income Home Energy Assistance Program (LIHEAP) by $502 million, in relation to the current LIHEAP funding level.

The current level was set by a continuing resolution when Congress failed last year to pass a number of 2007 major appropriations bills, including a bill to fund the Department of Health and Human Services, which administers LIHEAP grants to the states. The continuing resolution will expire February 15, 2007 and agreement has not been reached as to the funding level for the remainder of the 2007 federal fiscal year.

If the funding for 2007 is established at the continuing resolution level, and if Congress were to reduce funding for 2008 as requested by the President it is estimated that 2008 LIHEAP funds for New YorkState's Home Energy Assistance Program (HEAP) would be reduced by approximately $61 million, or 25%.

LIHEAP grants are distributed on a first-come first-served basis until the program closes. Approximately 33% of the New York households eligible for LIHEAP receive a benefit. In the 2005 - 2006 HEAP year, New York State utilized approximately $382 million in LIHEAP funds to assist more than 850,000 low-income New York households. The President's proposed LIHEAP reductions, if approved by Congress, could result in benefit cuts, or a significant reduction in the number of low-income New York households served, or both.

The President's proposed LIHEAP appropriation for 2007 - 2008 is approximately $1.7 Billion less than the 2005 - 2006 funding level, which was increased by Congress in early 2006 in response to major energy price increases for home heating fuels. The newly proposed level would reduce federal aid to New York's low income households by $198 million in relation to the amount allocated in 2005 - 2006 to New York.

The National Energy Assistance Directors Association (NEADA) is seeking $5.1 Billion for the LIHEAP program. The President's new budget proposal for LIHEAP is less than 30% of that recommendation. NEADA estimates that the proposed LIHEAP cuts would eliminate home energy assistance to more than one million eligible low-income households.

Governor Jodie Rell of Connecticut condemned the LIHEAP cuts in the President's budget:

These cuts interfere with the fundamental responsibility of government: to safeguard the lives of its citizens,” Governor Rell said. “Whether we are helping struggling families stay warm through the harsh winter months or protecting homes and residents against terrorism and natural disasters, we expect our federal partners to carry their fair share. The cuts to these programs place extraordinary burdens on the states – and do so at a time when Connecticut’s own budget is facing severe pressures.

Governor Rod Blagojevich of Illinois called upon Congress to block the proposed cuts and restore LIHEAP funding to last year's level.

For further information see PULP's web page on HEAP in New York.

Queens Power Outage Update

DPS Staff Issues Draft Report
Since our prior post on the Queens power outage, the New York Department of Public Service (DPS) staff issued a Draft Report. The report, expected to be finalized by February 14, 2007, criticizes Con Edison for misoperation of its system, poor situational awareness, and inadequate communications with the public during the events and outages which began July 17, 2006, and recommends that the Public Service Commission commence a prudence proceeding.

A New York State Assembly Task Force on the outage issued a report critical of both Con Edison and the Public Service Commission on January 30, 2006.

PULP filed comments on the draft report on January 31. PULP identified ten matters needing further attention. Con Edison, as expected, did not agree with many of the Staff findings and recommendations. In particular, Con Edison opposed the Staff recommendation for a prudence proceeding, and opposed Staff's finding that it should have shut the network down completely for repairs instead of attempting to operate with several major feeders out of service, which Staff says exacerbated the crisis and damage when even more of the remaining overloaded feeders also failed. Con Edison's comments defend the decision not to shut down the network:

A shutdown of the entire network would have had an enormous impact on the people living, working or commuting through the neighborhoods covered by the LIC network. We preserved electric service to the many unaffected customers and the public by repairing and restoring feeders. . . .

Comments of other active intervenors in the investigation proceeding are at PULP's website page on the Queens outage.

Was there an Outage, Reactive Power Deficiency, or Grid Disturbance Just Prior to the Fire that began the Outage Events?
Discovery is still underway concerning a possible power plant outage on the afternoon of July 17, 2007 which may have occurred 25 minutes before the a distribution system feeder failed due to a fire at 3:50 PM. The substation serving the Long Island City network is located very near a number of power plants.

• There are indications that voltage dropped in the Long Island City network at 3:25 PM on July 17, 2006. At about the same time
• New York City load suddenly dropped by about 95 MW (even as temperatures were rising)
• the NYISO declared a "large event reserve pickup" that required drawing upon generators to provide emergency spinning reserves of energy. (A "reserve pickup" is directed in cases where a major generator has tripped gone off line unexpectedly), and
• NYISO real time spot market prices for energy quadrupled. (A sudden spike in spot market prices may also indicate that a generator has tripped off line).
  

At the time of the outage, a major Con Edison transmission line from Westchester to Queens was out of service, making New York City more reliant on local generators for both energy and reactive power. Reactive power deficiencies are sometimes manifested by lowered voltage and overheating of distribution system facilities. See "New FERC Rules to Impose Voltage Stability Obligations on Local Utilities."

On July 12, 2006, five days before the July 2006 Queens outage, FERC and NYISO grid officials testified that due to outage of two transmission lines from Westchester to New York City, the City was at increased risk of load shedding and blackouts in the event of hot weather or another outage.

It appears that both events may have occurred, and that the predictions of the grid officials were accurate. Minutes of the New York State Reliability Council indicate that "Indian Pt. 3 and Astoria Energy East each tripped twice at near full load" in the month of July. On July 17, 2006, a very hot day, the Con Edison distribution system cascaded into failure, shortly after the apparent disturbance in the bulk power grid.

The question remains whether there was sufficient reactive power (MVARs) at all times, and whether a reactive power deficiency -- or other disturbance -- in the bulk power grid may have caused or contributed to overheating of the distribution system wires and the fire that began the outage events. The reports of Con Edison and the draft DPS staff report do not discuss this. They begin their event time lines with the unexplained cable fire and feeder failure at 3:50 PM, without examination of grid conditions preceding the fire.

In the independent investigation report of the 1977 blackout, Con Edison was criticized at p. 28 for not having its transmission lines in good repair. In that incident on July 13, 1977, lightning hit major transmission lines importing power through Westchester while another major line connecting Con Edison with a New Jersey utility was not in service, making it unavailable to provide energy to support the system:

the system was not up to its designed strength. The Hudson-Farragut connection between New York City and PSE&G in New Jersey had been out of service since September 4, 1976. . . . Each of these outages significantly weakened the capacity of the system to withstand transmission emergencies. The availability of the Hudson-Farragut tie alone would have prevented the collapse of the transmission system on July 13.

The outage of the Hudson-Farragut transmission line was a factor mentioned by the state Court of Appeals in its decision affirming a lower court and jury finding that Con Edison had been grossly negligent in 1977.

In 2006, with import capability restricted, was Con Edison's system more vulnerable to disturbances flowing from an unscheduled outage of a local power plant?

FERC Holds New Enron Hearings After Court Remands

FERC is still holding administrative hearings to determine whether wholesale electricity buyers are owed refunds from Enron due to market manipulation in 2001. The prehearing statement of issues in dispute indicates that the gap between the litigation positions of the parties is large. The buyers claim that Enron made $1.6 billion due to market manipulation; in defense Enron says at most it owes less than $1 million.

Enron trader Timothy Belden has been scheduled to testify at a FERC hearing February 5, 2006, but may take the Fifth Amendment and refuse to testify. He previously pleaded guilty to federal criminal charges of conspiracy to commit wire fraud, and entered into a plea agreement.

For a refresher, see this excerpt from The Smartest Guys in the Room, the Oscar-nominated film which contains audio tape excerpts of Enron traders urging the unnecessary shutdown of a power plant in order to drive prices higher, and cheering as fires reduced transmission import capability and made California markets more suceptible to the exercise of market power.