Power Outage Mystery

On June 27, 2007, one of the hottest days of the year, residents and businesses on the upper east side of Manhattan in New York City were affected by a Con Edison power outage. According to an AP story, "Consolidated Edison said the blackout affected 136,700 customers in all, or more than 500,000 people." This incident raises a number of questions regarding reliability and operation of New York's power plants and electric system.

Con Edison Restarts after Finding No Failure of Its Equipment
On the day the power went off, the AP quoted a Con Edison spokesman saying there had been a "transmission disturbance." Xinhua reported that

Con Edison Chairman and CEO Kevin Burke said Wednesday night that the blackout was caused when breakers opened at an Astoria substation and cut off power to stations servicing Yorkville and parts of the Bronx.

Why the breakers opened remains under investigation, but increased power demand due to the hot weather was not a factor, he said.

A June 28 Con Edison press release attributed the cause of the blackout to a "transmission disturbance."

Another, more detailed, explanation from Con Edison emerged in a June 29 New York Times story, It Was Lightning, Con Ed Says, That Caused the Lights to Go Out:

The utility’s managers have concluded that a bolt of lightning must have struck a small component of its network at or near its transmission substation in Astoria.... Although the lightning did not spark a fire, explosion or any damage, it caused the power system to respond as though there had been a significant mishap****

"It's a very low-probability event," said [Con Edison's senior vice president for electric operations] who has worked for Con Ed for 26 years. "I can't remember an event like this one that had this affect on transmission."

Local power failures caused by thunderstorms like the one that moved across the city on Wednesday usually result from wind and trees knocking down power lines.... This failure was unusual because after electricity was restored, no repairs were needed. ****

The best guess of the utility’s managers was that lightning struck a relay, a component that helps the system monitor how power is flowing through its lines. The high-voltage shock tricked the system into sensing a surge in power and reacting by shutting down some segments to protect others....

Within a fraction of a second, circuit breakers began cutting the flow of electricity to more than 135,000 customers on the Upper East Side and in the Bronx.... Each of those areas is supplied by one of two substations that sit across the street from each other in the southwest Bronx.

The substations shut down at 3:41 p.m. and did not start sending electricity to homes, stores and hospitals again until about 4:30, he said. In the meantime, Con Ed engineers searched for signs of damage but found no equipment that had been burned or blown up....

On June 30, a Newsday story similarly reported

A lightning strike near a Queens substation caused Wednesday's power outage that hit the Upper East Side and the Bronx, Con Edison said Friday.

Real-time lightning tracking data showed that detection instruments measured a lightning strike around the Astoria substation at 3:42 p.m. Wednesday, precisely at the time of the power loss, Con Ed said in a news release. The strike momentarily affected communication equipment that prompted circuit breakers on multiple transmission feeders to open, causing the service interruption, the utility said.

In sum, the public was informed about substations, equipment, relays, breakers, transmission lines, feeders, etc. involved in the shut down of service. But the Con Edison press release and the major news accounts do not directly mention that the incident depriving a half million people of electric service may also have involved the unscheduled shutdown of one or more power plants near the Astoria substation.

Did the Outage Also Involve the Sudden Shutdown of a Power Generation Plant?
Power plant shutdowns played a role in the California energy crisis, creating shortages that led to spot market price spikes. In July 2006, two power plants tripped shortly before the Queens outage events began, accompanied by a major price spike. New York outages and price spikes have been associated with power plant shutdowns or unusual grid events. For example, on August 2, 2006, the hottest day of the summer in New York City, NYISO operator messages indicate there were nine "large event reserve pickups," a possible indicator of abrupt power plant shutdowns, and a need to call on emergency resources, accompanied by spot market price spikes exceeding $1,800/MW . See Heat Pushes Power Prices Above Caps.

The NYISO has issued no public explanation regarding the state of the grid on June 27, 2007 event or the extreme price spike accompanying it. A NYISO Operator message indicates that on June 27, 2007 at15:43:31, "NYISO has initiated reserve pick-up." According to a NYISO Technical Bulletin, a "reserve pickup" may be needed after a generator has tripped off line:

The NYISO will initiate ten-minute operating reserve pickup if load exceeds current energy dispatch opportunities. This condition may be due to the loss of a generator**** The NYISO will terminate reserve pickup or maximum generation pickup when a sufficient level of energy has been reached.

In addition, the NYISO records indicate that three minutes after calling for spinning reserves to be used, additional electricity from the 1,160 MW Gilboa pumped storage plant was requested :

15:46:38 ISO REQUESTS GILBOA___3 OUT OF MERIT. COMMITED FOR ISO RELIABILITY AT START TIME 06/27/2007 15:00 FOR loss of con ed generation.

One of the features of the New York State Power Authority's Gilboa station is that it can increase production rapidly:

it stores water for emergency power production. If necessary, this project can be up and running within two minutes. It can "pinch hit" if another plant or line suddenly goes out of service.

The "reserve pickup" and request for Gilboa power suggests an outage of a large power plant or plants. Nothing in the NYISO operator messages mentions any "transmission disturbance" such as indicated in the Con Edison press release and news stories reporting Con Edison's explanation of a lightning strike that shut down transmission lines.

NYISO market data also indicate major anomalies during the June 27, 2007 outage. For example, real time spot market prices for wholesale electricity in the New York City zone soared from $276/MWH to $1,710/MWH from 3:50 to 3:55. The regular 5 minute report for 3:45 is missing. and instead there is a report at the exact moment the reserve pickup was initiated.

This huge price spike suggests there was an urgent need on the part of the NYISO grid managers to acquire a large amount of additional generation supply. If a large area of Manhattan were shut off due simply to a "transmission disturbance," however, the disconnection of customers would reduce electrical load temporarily and it is unlikely that there would be an urgent need for more power at far higher prices unless a significant generator that had been supplying power tripped off line.

The North American Electric Reliability Corporation (NERC) issued a press release on the day of the outage indicating

[t]he event involved the loss of generation, the loss of transmission lines over 100 kV, and the loss of service to customers.

This clearly indicates that one or more power generation plants tripped off line in the incident. The sequence of events is not known. For example, did a power plant outage precede or follow the tripping of Con Edison transmission lines? Did a power plant go off line unnecessarily after a relatively minor disturbance that should ordinarily result in just a flicker or momentary loss of service to customers?

NYISO Secrecy Rules Prevent Con Edison from Discussing Power Plant Tripping
Ostensibly, the NYISO is responsible for operation of the high voltage grid, but in practice Con Edison actually performs many functions in management of grid operations in the New York City area. If the power outage affecting consumers involved the loss of a power generation plant for any period of time, one might think Con Edison would say so. But Con Edison considers itself prohibited by NYISO rules from telling the public about unscheduled outages at merchant power plants.

For example, in a case involving the July 2007 Queens outages, Con Edison takes the position that it is prohibited from divulging information about tripped power plants, under NYISO tariffs approved by FERC. Only after PULP moved to compel disclosure, and being required to answer, did Con Edison reveal that there were two power plant outages approximately one-half hour before the unexplained secondary system fire considered to have begun the Queens event. Con Edison in its answer to PULP's discovery motion said it

cannot provide more detailed information on the generators that tripped. . . the Company is prohibited from disclosing generator outage information acquired as a transmission owner, to the extent such information is not made public by the NYISO.

The identities of the plants that tripped just before the 2006 Queens outage were not divulged, although Con Edison said one of them was "connected to the Astoria East substation...."

A History of Mystery
To conform with the PSC's restructuring vision, Con Edison sold most of its New York City area power plants to merchant power companies. (Con Edison was allowed to form a holding company, which now operates its own merchant power plants in other states, through an affiliate, Con Edison Development). In New York, Con Edison must now buy power from the merchant power companies for resale to retail customers. When power is scarce, for example, when a power plant is offline during periods of heavy load, the essentially deregulated market rates allowed by FERC may spike dramatically, even if costs to produce electricity do not go up.

Blackouts in New York since 2002 raise questions about merchant power plants tripping offline. These blackout incidents include:

1.The 2002 Reliant/Astoria Incident
A PSC Order considering reliability incentives mentions a 2002 incident where Con Edison and a merchant power generator, Reliant, traded accusations of misoperation:

On July 29, 2002, 9,251 Con Edison customers receiving power from the Queens radial system lost power up to five and one-half hours. The customer interruptions were attributed by Con Edison to an incident with a step-up transformer and its associated circuit breaker in the Reliant Energy’s Astoria Generating Station, and related impacts on Con Edison’s transmission and distribution systems (Reliant-Astoria incident).
****
Reliant, owner and operator of the Astoria Generating facility, acknowledges that its step-up transformer and associated circuit breaker (G5EN) failed. Reliant, however, argues that subsequent events, including the trip of Astoria Generating Units 2, 3, and 4, and the resulting customer outages in Queens, "were caused by Con Edison controlled relays, misoperations and the repeated closing of Astoria East breaker 4E into the G5EN."
****
Con Edison contends that it is not at fault for the outages associated with the Reliant-Astoria incident because it was Reliant’s equipment that caused two severe and simultaneous faults that exceeded the company’s design criteria for the electric distribution system.

The PSC decided that case without resolving the issue whether Con Edison or Reliant was responsible for the customer service outages.

2. The August 14, 2003 Blackout
The Joint U.S. - Canada Task Force Final Report on the widespread Northeast blackout of August 14, 2003 indicates at page 94 that in New York, some of the power plants sold off to new owners during the "restructuring" orchestrated by the New York Public Service Commission were set so they unnecessarily tripped at low disturbance levels, exacerbating the cascading outage:

In particular, it appears that some generators tripped to protect the units from conditions that did not justify their protection, and many others were set to trip in ways that were not coordinated with the region’s under-frequency load-shedding, rendering that UFLS scheme less effective. Both factors compromised successful islanding and precipitated the blackouts in Ontario and New York.

The Task Force Report at page 96 noted its frustration with information provided by the power generators:

Unfortunately, 40% of the generators that went off-line during or after the cascade did not provide useful information on the cause of tripping in their response to the NERC investigation data request. While the responses available offer significant and valid information, the investigation team will never be able to fully analyze and explain why so many generators tripped off-line so early in the cascade, contributing to the speed and extent of the blackout.

The Times said, "[a]ccording to the report, some were set to trip much sooner than protecting the generator required." The Task Force Recommendation for rigorous investigation into the relationship of industry restructuring and reliability was not fully heeded. Conferences were held, with numerous participants agreeing that restructuring had reduced cooperation and increased the risks of blackouts, but no agency made specific findings and recommendations. See What Happened to the "Independent Study" of the Effects of Electric Industry Restructuring on Reliability?

3. The July 17, 2006 Queens Outage
Just five days before the July 17, 2006 Queens outage, Federal and NYISO grid officials had warned that with major Con Edison transmission lines out of service, New York City was at risk of load shedding in the event of hot weather or further outages. See The Queens Blackout and Queens Power Outage Update. The hot weather came, and, as discussed above, further outages did too, including a power plant at the Astoria East substation, accompanied by a spot market price spike that roughly quadrupled prices for Long Island and New York City zones. Con Edison maintains that the power plants that tripped just prior to the beginning of the 2006 Queens outage are not related to the outage.

4. The June 27, 2007 Outage
Whether power plant tripping was involved in the June 27, 2007 New York City outage is not known. There are indications, however, that one or more power plants may have tripped off line in connection with this particular incident. These indications include

• Con Edison reports no damage to any of its equipment
• Con Edison mentions a power surge or disturbance
• NYISO operator messages indicate a reserve pickup and loss of Con Edison generation
  
• NYISO real time spot market prices spiked dramatically during the customer outages
  
• NERC's press release mentions a loss of generation

More Scrutiny of Power Plant Operations Needed
In addition to the above incidents, minutes of the New York State Reliability Council reveal that in the month of July, 2006 “Indian Pt. 3 and Astoria Energy East each tripped twice at near full load.” Obviously, the tripping of merchant power plants at times of heavy load should be fully investigated by the PSC and other entities that may have jurisdiction regarding either reliability, reasonability of rates, or market conditions. The Joint U.S. - Canada Task Force report on the 2003 blackout indicated that power plants in New York tripped unnecessarily at low disturbance levels.

Additional scrutiny is particularly important because the NYISO market rules allow sellers of electricity to reap vary large financial rewards at times of scarcity. Such scarcity can be created by a power plant tripping off at times when demand for electricity is high.

Although the New York PSC has adopted a policy of "lightened regulation" over new electric companies that purchased power plants from the old utilities, the PSC retains supervisory authority with respect to matters such as enforcement, investigation, safety, reliability, and system improvement, and has the power to see that all electric companies, including the merchant power generation companies and the NYISO, perform their public service duties. As stated by the New York State Court of Appeals in Matter of Astoria Gas Turbine Power, LLC v. Tax Commission of City of New York, :

the PSC maintains "light regulation" over AGTP covering "matters such as enforcement, investigation, safety, reliability and system improvement . . . . This light regulation also gives the PSC authority to limit AGTP's power in the market and any actions in contravention of the public interest.

The reliable operation of all electric companies in the state is a very major matter affecting the public interest, requiring continued vigilant PSC supervision. This duty cannot simply be "divested" by the PSC and left to NERC or FERC, the utilities, or other entities with whom they may have contracted to actually operate the power plants.

Non Utility Operation and Management of Power Plants
There is a recent trend for an owner of a merchant power plant to be a Limited Liability Corporations (LLC) formed by financial investors, the main asset of which is the power plant. The LLC then contracts with a third party company for services, such as actual operation of the plants, fuel purchasing, and possibly marketing of the output. In some cases, the actual operator of the plant is not a utility company regulated by either the New York PSC or FERC.

For example, an Astoria merchant power plant built to supply energy to Con Edison customers is not actually operated by the lightly regulated utility owner, but by an independent third party company, North American Energy Services Company. Notwithstanding a name suggesting the local hemisphere, North American Energy Services Company is actually owned by a large Japanese corporation, according to a June 16, 2006 press release:

North American Energy Services Company (NAES), a broad-based provider of services to the power generation industry, announces that it assumed full responsibility for the operations and maintenance (O&M) of the Astoria Energy Facility (Astoria) on May 21, 2006. * * * * NAES is owned by ITOCHU International Inc., the U.S. affiliate of ITOCHU Corporation. With operations in over 80 countries covering a broad range of industries, ITOCHU is among the world's largest corporations.

ITOCHU Corporation describes NAES as "the world’s largest independent power plant operation and maintenance firm." In November 2006, ITOCHU bought a U.S. company that sells natural gas -- the fuel used for the Astoria power plant -- and announced that "we intend to expand the sales territory to include the U.S. East Coast, which constitutes an immense demand." Hypothetically, if sales of the affiliate were expanded to the New York area, NAES could be in a position to purchase natural gas for the power plant from its affiliate, possibly affecting the cost of electricity to Con Edison customers if the contract between Con Edison and the power plant owner provides for fuel cost adjustments. The affiliated gas marketer, though subject to FERC regulation, would be dealing with NAES, not a utility affiliate, and so might not be subject to any of FERC's rules regarding affiliate transactions.

In its recent Order 697 adopting regulations for market rate sales of wholesale electricity, FERC considered criteria for deciding if an energy manager of a power plant has become a utility subject to the agency's oversight and jurisdiction. NASUCA reply comments urged FERC to "adopt a rule that at a minimum encompasses the exercise of control over prices, bids, or output, including the ability to affect the cost of fuel and other inputs to generation." The NYISO made a similar argument for broad inclusion of the new energy asset managers as utilities. FERC, however, decided not to issue firm guidelines on the degree of control sufficient to deem that third party asset managers are utilities subject to FERC oversight, instead leaving the determination to a case by case assessment. As a result, it is possible that some third party operators of power plants may not be utilities subject to direct jurisdiction of either the PSC or FERC.

July 12, 2007 Update: Three Astoria Power Plants Tripped
The United States Department of Energy (DOE) requires electric utilities to file reports of major distubances immediately, including incidents that affect service to large numbers of customers and outages of major power plants. The DOE website publishes summaries after a three-month lag. The reports filed with DOE by Con Edison and NYISO clearly state that the June 27, 2007 outage events involved power plants that tripped off line, and identify the power plants that tripped.

The Con Edison report to DOE of the June 27 incident states the event began at 15:41. In addition to substation breakers tripping, "the generator units Astoria Unit 3, Astoria Unit 4, and the NYPA CC1/2 plant, which were all connected to the Astoria West yard, tripped offline:

Con Edison is examining data and equipment to help determine what caused the outage. Engineers are examining possible links between the outage and lightning strikes in the area. It appears that there were several strikes near a transmission substation in Queens at, or near, the time of the event.

The Astoria power plants that tripped are very "near" to the Astoria substation.

The NYISO report states the event began at 15:42. NYISO states that "Consolidated Edison is the appropriate party for the DOE to obtain additional analysis of this local area event."

The detailed sequence of grid disturbance events (typically recorded in thousanths of a second) is not contained in the NYISO and Con Edison reports.

A detailed timeline of events could reveal if one of the power plants tripped off before the Con Edison substation breakers tripped, or if the breakers tripped first, followed by tripping of the power plants.

According to a news story, Blackout Boosted Power Price 900%, a NYISO spokesman said that the price spike on June 27 would be "unnoticeable" to consumers and the ISO does not believe the spike resulted from price fixing - which has been suspected recently in New York's electricity system."

Overt price fixing to rig the wholesale electricity markets was made a federal crime by Congress in 2005. FERC then issued regulations interpreting the law to require "scienter" or specific intent to sustain any penalty. If New York generators independently decided to allow their plants to trip more easily, as suggested by the U.S./Canada Task Force on the2003 blackout, and if they engage in FERC-approved hockey-stick bidding strategies, plants could trip unpredictably requiring emergency power at very rewarding rates that are not directly manipulated, as defined by FERC.

Medical Emergencies - Electricity Required for Insulin Refrigeration

New York's Home Energy Fair Practices Act protects residential utility consumers from service termination for non payment of bills in life threatening situations or where a serious medical condition would be aggravated by termination of service. Despite enactment of this law in 1981, we are reminded daily that it is not self enforcing, and that vigilant advocacy and action is needed to assure that the benefits of the law intended by the Legislature are effectuated by the utilities and the Public Service Commission (PSC).

Today, a 90-plus degree summer day, we received a call from a Con Edison customer with diabetes and a heart condition whose electric service was shut off for non payment. The customer reports that when he sought public assistance,

• He brought along a letter from his doctor stating that continued service was needed for refrigeration of insulin needed to treat his diabetes
  
• Although arrangements were being made for the bulk of the arrears to be paid with public assistance, the company increased the amount of its demand for a payment on arrears necessary to restore service and refused to turn on service
  
• The utility was advised that the customer had a doctor's letter saying he needed electricity to refrigerate his insulin
• The company representative said the customer could just keep his insulin on ice.
  

The American Diabetes Association warns that insulin must be kept at proper temperatures, and that it can be ruined if it is kept at temperatures below 36 degrees Fahrenheit. Icing it is obviously not appropriate.

PSC Medical Emergency regulations regulations require a utility to continue service to a "seriously ill" person, notwithstanding any unpaid bills, when the utility receives an appropriate letter from a doctor documenting that the illness would be aggravated by the absence of utility service:

Any certification of medical emergency shall be submitted on stationery of the medical doctor or local board of health, shall be signed by the medical doctor or an official of the local board of health qualified to make a medical judgment and shall state the name and address of the certifying medical doctor or local board of health, the doctor's State registration number, the name and address of the seriously ill person, the nature of the serious illness or medical condition and an affirmation that the illness or condition exists or will be aggravated by the absence of utility service. 16 NYCRR § 11.5

The regulations, which have the force of law, do not allow utility collection employees to override the judgment of a physician.

PULP referred the customer to the PSC Emergency Hotline, 1-800-342-3355 for action by the PSC. The PSC Hotline regulations empower agency staff to order a utility to restore service. The PSC Hotline is open from 7:30 A.M. to 7:30 PM.

For further information, see PULP's Help Center web page on medical emergency situations. It has a sample doctor's letter documenting a medical emergency situation due to the need for continued electric service to refrigerate insulin.

"Nonregulated" Sellers of Electricity Become "Market-Regulated" Under New FERC Rule

In 2006 FERC proposed to codify new regulations and "streamline" its market rate policies, currently contained in a number of lengthy orders. FERC claimed to be issuing the new regulations under Federal Power Act Section 205, although that section makes no reference at all to market rates.

FERC's "streamlining" of existing policies included modifications that would accellerate the agency's deregulation agenda. For example, market power assessments would no longer be required for sellers with less than 500 MW, contracts between a retail utility and an affiliate would not be publicly filed subject to protest and review if the retail customers have retail choice, and sellers who possess market power would be able to set their own rates for sales less than a year's duration. No bona fide consumer organization supported further relaxation of regulation over wholesale electricity rates. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed. This consumer skepticism of FERC's policies is informed by FERC's unwillingness to protect consumers from egregiously unreasonable market rates, FERC's opposition to granting refund remedies for unreasonable market rates in the Enron case and others, and inaction despite evidence of continued electricity market manipulation in the post-Enron era. See Consumer Groups Question FERC Market Rates, and the affidavit of the PJM Market Monitor recounting instances of market power exercise tolerated in the FERC-approved markets.

In the draft rules, FERC had referred to certain wholesale electricity sellers as "non-regulated."

Proposed § 35.36(a)(6) defined “non-regulated power sales affiliate” as “any non-traditional power seller affiliate, including a power marketer, exempt wholesale generator, qualifying facility or other power seller affiliate, whose power sales are not regulated on a cost basis under the FPA.

Perhaps the use of the term "non-regulated" was a Freudian slip because, although all wholesale electric rates are required by the FPA to be regulated, there is little evidence of meaningful FERC regulation of these entities' rates. The "non-regulated" sellers include holding company affiliates of traditional retail utilities, such as Con Edison Solutions, Con Edison Energy, and Con Edison Development. In some states, retail utilities are buying energy from such "non-regulated" entities, and passing the costs on to retail consumers. NASUCA objected to the use of the term "non-regulated" in its comments, pointing out that there is "no basis in the language of the FPA for the Commission to make any of these distinctions."

In Order 697, FERC adopted final rules. Perhaps in recognition that calling the wholesale power marketers "non-regulated" conveys the impression that customers are not being protected, FERC relabelled them: the "non-regulated" sellers are now deemed to be "market-regulated." The new term "market-regulated" appears 75 times in Order 697.

Although Federal Power Act and the courts give wide latitude to FERC's expertise in how the agency sets rates, the Supreme Court has said that the regulatory agency cannot simply let go and rely on markets exclusively to satisfy the statutory requirement that all rates must be just and reasonable.

we should also stress that in our view the prevailing price in the marketplace cannot be the final measure of "just and reasonable" rates ****Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price. ****Congress rejected the identity between the "true" [just and reasonable] and the "actual" market price.

The new "market-regulated" label may not save FERC's market rate regime. Traditionally, the "bond" of the Federal Power Act is that no rate will be charged that has not been subject to review for reasonableness. FERC is quick to claim that it is not relying exclusively on markets, but the reality is that FERC allows unreasonable market rates to be charged and collected with no prior public filing or possibility of review, no objective standard for determining when market rates are excessive, and no way for customers to receive refunds because FERC invokes the "filed rate" doctrine to protect from revision market rates that were changed, charged, but never filed by the sellers.

The Court of Appeals for the Ninth Circuit has required FERC to consider market rate refunds after FERC refused to do so, based on a theory that rates determined in malfunctioning markets can be revised. Public Utility District No. 1 of Snohomish County, Washington v. FERC, 471 F.3d 1053 (9th Cir. 2006). The court seems to be saying, if FERC can invent a market rate system with unfiled rates, then the court can invent a refund remedy to protect consumers when markets malfunction and rates are unreasonable. In Order 697, however, FERC signalled that it is reading court cases allowing for refunds of excessive market rates very narrowly:

The Commission recognizes that several recent court decisions by the United States Court of Appeals for the Ninth Circuit have created some uncertainty for sellers transacting pursuant to our market-based rate program. The cases raise issues with respect to the circumstances under which sellers’ pre-authorized market-based rate sales may be subject to retroactive refunds and the circumstances under which buyers might be able to invalidate or modify contracts based on the argument that the contracts were entered into at a time when markets were dysfunctional. The Commission’s first and foremost duty is to protect customers from unjust and unreasonable rates; however, we recognize that uncertainties regarding rate stability and contract sanctity can have a chilling effect on investments and a seller’s willingness to enter into long-term contracts and this, in turn, can harm customers in the long run. The Commission recently provided guidance in this regard, noting that these Ninth Circuit decisions addressed a unique set of facts and a market-based rate program that has undergone substantial improvement since 2001, and reiterating that an ex ante finding of the absence of market power, coupled with the EQR filing and effective regulatory oversight qualifies as sufficient prior review for market-based rate contracts to satisfy the notice and filing requirements of FPA section 205.5 Through this Final Rule, the Commission is clarifying and further improving its market-based rate program. Moreover, the Commission will explore ways to continue to improve its market-based rate program and processes to assure appropriate customer protections but at the same time provide greater regulatory and market certainty for sellers in light of the above court opinions

Given FERC's history of refusing consumer remedies for manipulated market rates until ordered to do so by courts, and its continued solicitude to sellers who do not want to refund unreasonable, unfiled market rates, it appears that FERC is more likely to continue to uphold unreviewed rates in the name of regulatory certainty and contract sanctity than to protect consumers from unreasonable rates. For example, in an incident of apparent capacity market withholding and possible market manipulation in New York in 2006, FERC simply closed the case in which market participants and the New York PSC had complained of market malfunction, and commenced no proceeding to consider refund remedies, despite evidence of a malfunctioning market that, under the Ninth Circuit standards, might result in consumer refunds. See, Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?

FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime

A number of state and not for profit utility consumer advocates, including Public Citizen and PULP, are raising in several cases the issue of FERC's legal authority to adopt a market rate regime for electricity that has no objective standard for determining whether a market rate is reasonable and which allows sellers to avoid longstanding rate filing requirements of the Federal Power Act. In a recent decision in one of these cases, Colorado Consumer Counsel, et al v. FERC, the Court of Appeals for the D.C. Circuit affirmed a FERC order that had ignored the legal issues raised by consumer advocates.

After the Enron debacle exposed widespread price manipulation of rates ostensibly regulated by FERC, FERC found all market rates to be unreasonable and illegal, and then adopted a set of limited behavior rules (since repealed) to discourage market manipulation. The Court accepted FERC's defense, that having found only one aspect of market rates to be unjust and unreasonable, and having addressed that aspect with the (since repealed) behavior rules, FERC was not obliged to consider other aspects of alleged illegality raised by the consumer advocates.

A FERC press release immediately hailed the court decision as an endorsement of FERC's market rate policies, claiming "[t]he short decision effectively dismissed arguments that the Commission could not authorize market-based rates. " The decision, however, only upheld FERC's efforts to avoid review in that case, and did not address the merits of the legal issues raised by petitioners, and so these legal issues remain for another day, perhaps to be taken up in the future in the D.C. Circuit or in the Supreme Court. These issues include:

• Whether FERC’s market rate system is out of compliance with the Federal Power Act, which requires advance public filing of all rates and charges, and changes in rates and charges, in order to protect consumers from unreasonable rates and effectuate statutory refund remedies

• Whether FERC, in effect, is relying on market results alone to establish reasonable rates, contrary to Supreme Court guidance in FPC v Texaco
  

• Whether FERC lacks any objective standard or test for determining whether a market rate is reasonable, as required by court decisions that have permitted limited reliance on competition in the rate setting and review process, and fails to oversee whether market results are reasonable, contrary to Appeals Court guidance in the Tejas and Farmers Union cases.
  

Also, the FERC Press Release claims that “[t]he U.S. Supreme Court’s decision earlier this week to leave the Lockyer decision in California undisturbed removed all remaining doubt about our legal authority to authorize market-based rates,” quoting Commission Chairman Joseph T. Kelliher. FERC had claimed in the Lockyer case that the "filed rate" doctrine prevented it from granting refunds -- even though the manipulated rates had never been filed in advance as section 205 of the Federal Power Act stipulates, and even though the sellers had ignored FERC's orders regarding subsequent reporting of rates after they had been charged. The Lockyer decision made it possible to review manipulated and unreasonable market rates (which FERC had refused) based on sellers' failure to follow certain reporting requirements in the tariffs. The Lockyer decision said that FERC could allow market rates, but did not analyze closely whether the market rate system can be squared with statutory filing requirements.

When the refund decision of the Ninth Circuit in Lockyer was being challenged by sellers who sought Supreme Court review, the State of California asked the Supreme Court, if it decided to hear the case, to review rate filing issues similar to those being raised by the consumer advocate petitioners.

The issues raised by California, challenging FERC's market rate regime as an alternative basis to support the refund claims, were not argued or decided because the Supreme Court denied review, leaving stand the Ninth Circuit decision that had directed FERC to consider refunds of illegal, unreasonable rates and charges. This does not preclude future litigation of the issues, as suggested by FERC in its Press Release.

It is basic that a denial of certiorari by the Supreme Court is not a ruling on the merits of any issues decided by the lower courts. A denial "imports no expression of opinion upon the merits of the case, as the bar has been told many times." Missouri v. Jenkins. No Supreme Court precedent is created, and the lower court decision is authoritative only within its area of jurisdiction. Thus, the issue whether FERC's market rate regime can pass legal muster under the Federal Power Act and controlling court opinions remains very much alive.

FERC has begun to address its legal authority to adopt its market rate regime in a pending rulemaking proceeding, in which an effort is being made to codify FERC's market rate rules in regulations. Not surprisingly, in its 600-plus page Order 697 adopting regulations, FERC found that it can dispense with the statutory requirements for advance public filing of rates and rate changes. FERC rests its justification, however, not upon any statutory language of the Federal Power Act, but upon a D.C. Circuit Court opinion that by its terms never reached the issue whether a market rate settlement agreement in a natural gas case could pass muster under filing requirements of the Natural Gas Act. This is a weak basis indeed for the FERC market rate program, because subsequently, the Supreme Court held in MCI v AT&T, in the context of deregulatory initiatives by the FCC, that a federal regulatory agency cannot create alternative systems that ignore a filed rate regulation system created by statute.

PULP Urges Changes in Furnace Replacement Component of State Home Energy Assistance Program

The New York State Office of Temporary and Disability Assistance (OTDA) has issued a draft plan for administration of the state's low income Home Energy Assistance Program (HEAP) in 2007 -2008. Under the federal Low Income Home Energy Assistance Program (LIHEAP), states are given wide latitude in designing programs to meet home energy needs.

Most of New York's HEAP funds are used for cash assistance to eligible households, i.e., "Regular" HEAP and energy crisis assistance, or "Emergency" HEAP. Typically, federal funds for these payments run out in the springtime, and New York's cash energy assistance program closes until reopening in the fall, typically, on November 1. (When the HEAP program is closed, other state and local assistance, with eligibility standards more restrictive than HEAP, may be available to avert utility shutoffs).

The current HEAP plan, and the draft plan for next year’s program, provide for use of a portion of federal HEAP funds for weatherization and to replace inoperative or unsafe furnaces in the homes of eligible households. The furnace replacement program element is important because it can address otherwise intractable household energy crises, prevent hardship and loss of life from inoperable or unsafe equipment, forestall future crises, and lessen future low income household energy burdens. Under the current and proposed HEAP plans, 58 local social services districts (New York City HRA and departments of social services in each county outside New York City) administer the HEAP furnace replacement program in accordance with OTDA guidelines.

The draft state HEAP plan, however, contains no specifications that would require installation of efficient furnaces and heating systems. As a result, there is no assurance that HEAP dollars are being used to install equipment that satisfies any efficiency or quality standards.

The purchase of more efficient Energy Star heating system equipment is being promoted, at considerable state and utility ratepayer expense, by the New York State Energy Research and Development Authority (NYSERDA). PULP has recommended to OTDA that it modify the state HEAP plan to specify that only equipment with Energy Star certification may be installed.

Presumably, local social services districts contract with local heating equipment vendors for installation of new furnaces on a lowest bid basis, with a result that bids to supply the lowest cost units will tend to be selected. While the initial cost of Energy Smart equipment may be higher, a more efficient furnace will consume less fuel and reduce future household energy burdens and provide additional environmental benefits. Due to the lack of any efficiency standard, however, it is possible, if not likely, that furnace replacements purchased on a least initial cost basis with state HEAP program funds will have higher future operating costs and adverse environmental impacts over the life cycle of the system.

An OTDA Energy Star requirement for furnace replacements in the state HEAP plan would be in harmony with the spirit of state Executive Order 111, issued June 10, 2001. That order states:

Procurement of Energy-Efficient Products.
Effective immediately, State agencies and other affected entities shall select ENERGY STAR energy-efficient products when acquiring new energy-using products or replacing existing equipment. NYSERDA shall adopt guidelines designating target energy efficiency levels for those products for which ENERGY STAR labels are not yet available.

PULP believes that with Energy Star home heating system equipment readily available, the state HEAP Plan should not allow state - administered HEAP funds to be used by local districts to purchase non Energy Star equipment that could not be purchased by OTDA if OTDA were buying the equipment directly.

PULP has recommended to OTDA that the draft HEAP plan for 2007 - 2008 be modified to include this requirement:

Local social services districts shall require that all furnace system replacements be Energy Star certified and installed in accordance with the manufacturer’s specifications, best practices, and applicable codes.

Also, the new draft HEAP plan includes a restriction on furnace replacement and repair assistance that would deny aid to households who are buying their home under a contract for deed. This will exclude eligible households who are responsible for the heating systems in their homes but lack funds to repair or replace them. Indeed, some of the neediest households may be those who are buying their home through a contract for deed because they cannot qualify for a mortgage.

The cost of repair or replacement of essential heating equipment is often far beyond the means of low income households. The risks to health and safety from unsafe or inoperable equipment are high. Denial of HEAP program assistance could lead to homelessness or other tragedies. Prior state OTDA policy allowed furnace replacements on a case by case basis for households with contracts for deeds. PULP believes there should be no exclusion of households with contracts for deeds, and that the draft plan should be changed to allow more flexible administration of the program.

For further information visit PULP's web page on the HEAP program.

Justice Department Investigating NY Energy Markets

New York's wholesale energy market is being investigated for possible antitrust violations, according to a recent news report. A Newsday story indicates that a subject of the investigation may be possible withholding of capacity from the market, to drive prices up. This revelation has raised further questions regarding the proposed merger of National Grid and Keyspan, which controls significant amounts of generation capacity in the New York City markets.

Wholesale prices for electricity are under FERC jurisdiction. In a recent case at FERC, some market participants and the New York PSC claimed that due to withholding of capacity from the market, prices were inflated by as much as $157 million in 2006. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006? That case involved no claim for refunds of unreasonable charges, which were passed through to retail customers by New York CIty area utilities, principally Con Edison. Instead, the parties sought to revise flawed rules of the NYISO to limit the amount of future overcharges. A proposal to that effect was rejected by FERC.

It is unclear whether there is an antitrust remedy that would protect consumers. Indeed, the structure of the private utility markets allowed by FERC to set rates seem to allow sellers to withhold electricity from the market through various techniques and bidding strategies. Sellers accused of price manipulation may invoke FERC's approval of the NYISO market rules that allow price manipulation through withholding tactics and gaming that does not involve overt conspiracy.

The situation illustrates a major weakness of FERC's market rate system. FERC allows wholesale prices to be set in secret auctions; inflated new prices can be charged without the possibility of public scrutiny and regulatory review, and unreasonable charges are passed through to retail consumers, with no refund remedy. The lack of transparency, elimination of regulatory review and elimination of refund remedies, in the view of some utility consumer advocates, including PULP, violates the Federal Power Act. Cases in the D.C. Circuit Court and in the U.S. Supreme Court are now raising the issue whether FERC exceeded its powers in allowing unfiled unreasonable rates and rate changes.