U.S. Supreme Court to Decide Electricity Market Rate Refund Case

On September 24, 2007 the Supreme Court granted a writ of certiorari to review a December 2006 decision of the Court of Appeals for the Ninth Circuit in Morgan Stanley Capital Group v. Snohomish County. The Ninth Circuit held that FERC must consider reasonableness of long term electricity contracts made at a time when the market prices were manipulated.

FERC refused to review the Snohomish contracts for reasonableness and possible refunds based on its interpretation of the "Mobile-Sierra" doctrine established in two prior Supreme Court decisions. The effect of the Mobile and Sierra cases was to limit FERC's power to revise contract rates for wholesale electricity. The issue in the Sierra case was whether the contract rate had become too low, and the seller could not be relieved of its obligations unless the impact of holding the seller to its deal would harm the "public interest."

The contract rates in the Snohomish case, in contrast, were excessive, not too low. Further, the sellers had received market-based rate "authorizations" from FERC. FERC relieves sellers with such authorizations from the statutory duty to file their rates, rate schedules and contracts affecting rates in advance, and only requires abbreviated post hoc quarterly summaries of sales.

FERC's "market-based rate tariffs contain no rates or rate schedules or formula from which the price can be calculated, and allow prices to be what the seller and buyer agree, in private, with no public filing of the rates or contracts before they take effect. This agency waiver of advance filing requirements is not authorized by the language of the Federal Power Act, and was simply made up by FERC. See May the FERC Rely on Markets to Set Electric Rates.

In MCI v AT&T, in the context of analogous deregulatory initiatives by the FCC, the Supreme Court heldthat a federal regulatory agency cannot create alternative systems that ignore a filed rate regulation system created by statute. In other pending litigation, consumer groups have raised the issue whether FERC can dispense with the statutory requirement of advance public filing of wholesale electricity rates and contracts simply because FERC believes the sellers lack market power. See FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime , and Consumer Groups Question FERC Market Rates.

When buyers sought relief from unreasonable wholesale market rates for electricityduring the California crisis, FERC threw consumers to the lions, allowing sellers protection under the "filed rate doctrine" that allows only prospective modification of previously established rates (thus thwarting any refunds for prior overcharges) and the "public interest" standard that militates against revision of contract rates. Perversely, the Federal Power Act -- statute designed to protect consumers by subjecting all rates and contracts to public scrutiny, agency review and public accountability -- was turned by FERC's interpretations into one that insulates excessive utility charges from any public or agency scrutiny.

In a 2004 decision in Lockyer ex. rel California v. FERC creating refund remedies for consumers injured by excessive market rates, the Ninth Circuit uncritically accepted a doctrine of the D.C. Circuit Court of Appeals which said that FERC can allow market rates to be charged when the agency deems that sellers lack market power (the ability to drive prices up) . The D.C. Circuit, however, had avoided grappling with the inconsistency of unfiled market prices and longstanding core statutory rate filing requirements. The Ninth Circuit nonetheless allowed refunds for the benefit in Lockyer on a theory that if FERC's initial assessment of sellers' market power turned out to be wrong wrong, and if sellers did not make quarterly reports, FERC could require refunds of excessive charges.

In Snohomish, the Ninth Circuit elaborated on its Lockyer doctrine:

Market-based rate authority provides a meaningful opportunity for prior review and approval of rates under the FPA, an essential prerequisite to the Mobile-Sierra mode of rate review, only insofar as FERC implements and uses an effective oversight mechanism after the market-based rate authorization is initially granted. Only then can FERC meet its statutory duty to ensure that all rates are “just and reasonable.”

In effect, the Ninth Circuit said FERC could invent a new system of market rates, and the court invent a remedy when the market rates are discovered to be unreasonable. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

Sellers sought review of the Lockyer decision in the Supreme Court. California argued in its conditional cross-petition that if the case was accepted for review, the Supreme Court should hold that the market rates were subject to plenary review for reasonableness (as opposed to prospective revision barring relief for prior overcharges) because the rates had never been filed as required by the Federal Power Act Section 205. The Supreme Court denied review in the Lockyer case in June 2007, and so the rate filing issue raised by California was not decided in that case.

Sellers in the Snohomish case that will now be heard by the Supreme Court essentially claim that their contracts should not be revised under the Mobile-Sierra doctrine. Examination of the Mobile and Sierra cases, however, shows that the contracts there had been properly filed before they took effect, had been subject to public scrutiny, protest and intervention by interested parties, and had already been reviewable for reasonableness by the regulatory agency.

The Supreme Court's decision in Mobile emphasizes the importance of the public advance filing requirement, a factor not present in Snohomish:

"This contract was filed with the Federal Power Commission as an amendment to the general supply contracts between Mobile and United, and, with the approval of the Commission, became a part of United's filed schedules of rates and contracts."
* * *
In June 1953 United, without the consent of Mobile, filed new schedules with the Commission which purported to increase the rate on gas for resale to Ideal to 14.5 cents per MCF, a rate more closely approximating that for other gas furnished to Mobile by United. Claiming that United could not thus unilaterally change the contract rate, Mobile petitioned the Commission to reject United's filing.
* * *
The Act 3 requires natural gas companies to file all rates and contracts with the Commission (4)(c)) and authorizes the Commission to modify any rate or contract which it determines to be "unjust, unreasonable, unduly discriminatory, or preferential" (5(a)). Changes in previously filed rates or contracts must be filed with the Commission at least 30 days before they are to go into effect ( 4 (d)***
* * *
In construing the Act, we should bear in mind that it evinces no purpose to abrogate private rate contracts as such. To the contrary, by requiring contracts to be filed with the Commission, the Act expressly recognizes that rates to particular customers may be set by individual contracts.
* * *
Recognizing the need these circumstances create for individualized arrangements between natural gas companies and distributors, the Natural Gas Act permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts, which to that end must be filed with the Commission and made public.
* * *
The provision of the Natural Gas Act directly in issue here is 4 (d), which provides that "no change shall be made by any natural-gas company in any such [filed] rate . . . or contract . . . except after thirty days' notice to the Commission," which notice is to be given by filing new schedules showing the changes and the time they are to go into effect.
* * *
These sections are simply parts of a single statutory scheme under which all rates are established initially by the natural gas companies, by contract or otherwise, and all rates are subject to being modified by the Commission upon a finding that they are unlawful.
* * *
The basic duties are the filing requirements: 4 (c) requires schedules showing all rates and contracts in force to be filed with the Commission and 4 (d) requires all changes in such schedules likewise to be filed. In addition, 4 (d) imposes the further requirement that the changes be filed at least thirty days before they are to go into effect. It may readily be seen that these requirements are no more than are necessary to implement 4 (e) and 5 (a): the filing requirements are obviously necessary to permit the Commission to exercise its review functions, and the requirement of 30-days' advance notice of changes is essential to afford the Commission a reasonable period in which to determine whether to exercise its suspension powers under 4 (e).

In the Sierra case, which involved the Federal Power Act, the Supreme Court again emphasized that the contract at issue "was duly filed with the Federal Power Commission."

The Morgan Stanley cert petition and associations of energy sellers urged the Supreme Court to undo the remedy for consumers fashioned by the Ninth Circuit by applying the "public interest" standard of review rather than a "just and reasonable" standard, but did not come to grips with a major distinction: the contracts at issue in their case had never been publicly filed at FERC and thus had never been subject to its review for reasonableness and possible revision before taking effect. In contrast, the more stringent standard for contract review developed in the Mobile-Sierra cases came into play only after advance public filing and after the agency had reviewed them for reasonableness.

The Ninth Circuit was right to require FERC to consider refund remedies for excessive charges. Otherwise, it would be possible for unreasonable and illegal rates to burden customers with no remedy from the agency whose mission includes the duty to see that no unreasonable charges are imposed to the eventual detriment of consumers.

The Ninth Circuit's decision could be affirmed by the Supreme Court on an additional or alternative ground more firmly anchored in the language of the governing statute. The deference normally accorded to a wholesale electricity contract arises only after the contract has been filed publicly in advance, subject to public scrutiny, intervention and protest, and FERC review to determine if rates are just and reasonable. Because the Snohomish contract sellers had market rate authorizations, their actual rates, charges and contracts were not publicly filed in advance. Thus, as in any case where the seller has not filed rates in accordance with the law, FERC has power to review them for reasonableness when the excessive charges became apparent and buyers objected, from the date the contract began.

FERC and the sellers have maintained that a screening for market power and a post hoc reporting requirement is sufficient to justify waiver of the statutory public rate filing requirements. The Supreme Court, however, in MCI v. AT&T, rejected such administrative deregulation by the FCC without congressional action to modify the agency's governing statute:

our estimations, and the Commission's estimations, of desirable policy cannot alter the meaning of the [statute]. 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 ....

We do not mean to suggest that the tariff-filing requirement is so inviolate that the Commission's existing modification authority does not reach it at all. Certainly the Commission can modify the form, contents, and location of required filings, and can defer filing or perhaps even waive it altogether in limited circumstances. But what we have here goes well beyond that. It is effectively the introduction of a whole new regime of regulation (or of free-market competition), which may well be a better regime, but is not the one that Congress established.

Sellers cannot have it both ways, i.e., escaping initial public and agency scrutiny of unfiled rates for reasonableness while demanding the protection of the filed rate and Mobile Sierra doctrines.

Significantly, after the Supreme Court struck down the FCC's attempt at agency deregulation in MCI v. AT&T , Congress enacted a new statute, the Telecommunications Act of 1996 which took into account changes since the 1930's, recast the duties of utilities, revised the powers of the agency, established standards for relaxation of regulation and reintroduction of regulation. Further, Congress added significant new universal service and consumer protection measures the federal agency either lacked any power to create, or which, in its deregulatory zeal, it had overlooked.

This broader, congressional solution is exactly the result contemplated by the Supreme Court in FPC v Texaco, another case that discussed energy agency departure from statutory requirements:

It is not the Court's role, however, to overturn congressional assumptions embedded into the framework of regulation established by the Act. This is a proper task for the Legislature where the public interest may be considered from the multifaceted points of view of the representational process.

The actions taken by Congress in the aftermath of MCI v. AT&T included

• requiring all local telephone companies to offer reduced price Lifeline and Linkup service for low income customers
  
• requiring comparable and affordable telephone rates for customers in urban, rural, and low income areas, and
• requiring low cost internet broadband service for schools and libraries.
  

If the Supreme Court affirms the obligation of FERC to review questioned rates for reasonableness, and follows MCI v. AT&T precedents and trims back FERC's effort to deregulate wholesale electricity utilities without statutory authorization, it is possible that Congress would respond with new statutory alternatives to the longstanding consumer protection provisions of the Federal Power Act. If so, it is to be hoped that Congress would begin to correct the glaring deficiencies in FERC's minimalist approach to review of market rates and abysmal record on consumer protection. In addition, as it did in the Telecom Act of 1996, Congress could address universal service and affordability issues presented when rates are based on market forces.

Marketizer Revisionism: FERC Reinvents Itself as Overseer of Markets, Abandoning Review of Utility Rates

Traditionally, reasonableness of wholesale electric rates has been determined by some measure of cost and the level of utility profit, neither of which have been matters of much concern to FERC lately. This is because FERC is attempting to substitute competition and markets for price regulation. In essence, FERC prefers to be more like the SEC, which polices the stock markets, generally without concern about reasonableness of the price of any particular stock on any day.

Unlike the SEC, however, Congress requires all utility rates and charges for wholesale electricity and interstate transmission under FERC jurisdiction to be "just and reasonable." The Federal Power Act also declares that any unreasonable utility rates are illegal. Congress charged FERC with the duty to enforce the reasonableness requirement and gave it the power to review utility rates for reasonableness before they are implemented, and to revise current rates prospectively if they become unreasonable.

FERC's shift in emphasis from rate regulation to market oversight was clearly stated in a five-year plan adopted in 2002, which explicitly states its goal is to "foster nationwide competitive energy markets as a substitute for traditional regulation." A key assumption of FERC is that so long as the market cannot be skewed by any single seller, a market rate will be a reasonable rate. This becomes justification for not reviewing the rates and not providing effective refund remedies when a market rate is excessive and unreasonable.

Today, there is growing public and judicial disenchantment with FERC's market rate regime. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

FERC is now more circumspect and less direct in public statements about replacing traditional regulation with markets and competition than it was in 2002, but the effects of the agency's direction and recent actions remain the same: oversight of utilities and their charges for electric service is being reduced. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed.

In a recent rule making proceeding, FERC invoked a court decision to support its emphasis on market structure and competition rather than oversight of the level of rates set in the markets:

The Commission’s core responsibility is to “guard the consumer from exploitation by non-competitive electric power companies.”[citing National Association for the Advancement of Colored People v. FPC, 520 F.2d 432, 438 (D.C. Cir. 1975), aff’d, 425 U.S. 662 (1976)]. The Commission has always used two general approaches to meet this responsibility—regulation and competition. The first was the primary approach for most of the last century and remains the primary approach for wholesale transmission service, and the second has been the primary approach in recent years for wholesale generation service.

One might observe that in recent years, FERC's "primary approach" of relying on markets to set utility rates results in market manipulation, consumer exploitation, and many billions of dollars of wealth transfer from consumers to essentially deregulated "competitive" generators, marketers and energy traders like Enron. Also, since its enactment in 1935, the Federal Power Act has permitted sellers and buyers to set prices in contracts, so long as the contract prices, terms and conditions were just and reasonable and non discriminatory. FERC has eased up on review without authorization from Congress to change the regulatory system. The major deviation is to eliminate the statutory transparency requirements which require public notice by filing of all rates and contracts affecting rates in advance.

Interestingly, the snippet FERC quoted from the decision of the Court of Appeals in National Association for the Advancement of Colored People v. FPC, was not adopted by the Supreme Court when it reviewed the case. Instead, in its discussion of the statute's purpose, the Supreme Court said:

In the case of the Power and Gas Acts it is clear that the principal purpose of those Acts was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices. **** 16 U.S.C. § 824a (a) (The purpose of the Power Act is to "assur[e] an abundant supply of electric energy throughout the United States with the greatest possible economy"); Pennsylvania Power Co. v. FPC, 343 U.S. 414, 418 ("A major purpose of the [Power] Act is to protect power consumers against excessive prices"); FPC v. Hope Gas Co., 320 U.S. 591, 610 (The "primary aim" of the Natural Gas Act is "to protect consumers against exploitation at the hands of natural gas companies").

Conspicuously absent in the Supreme Court's opinion is any reference to "non-competitive" companies. The statutes require all rates to be reasonable, without regard to whether the seller is "competitive" or "monopolistic." The Supreme Court had just decided a case the year before, in 1974, in which it emphatically rejected any conflation of the notion of a "competitive" market rate with the "reasonable" rate required by law:

Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price.... This does not mean that the market price of gas would never, in an individual case, coincide with just and reasonable rates or not be a relevant consideration in the setting of area rates...; it may certainly be taken into account along with other factors.... It does require, however, the conclusion that Congress rejected the identity between the "true" [just and reasonable price] and the "actual" market price.

Thus, the lower court's emphasis on competition was at odds with longstanding teachings that the statute's purpose is protection of customers from excessive and unreasonable charges. See FERC Commissioner Kelly: The Purpose of the Federal Power Act is to Protect Consumers. Also, FERC's notion of "letting go" regulation of the charges of competitive providers and regulating only those who are monopolistic is at odds with the language of the Federal Power Act and teachings of the Supreme Court which do not allow the agency to forbear regulation of any rates based on its notions of competition. The wisdom of Congress is borne out by the example of "competitive" utilities extracting billions of dollars from consumers by exploiting their market rate waivers from rate review and FERC's blindness to market manipulation.

FERC's effort to recast the purpose of the Federal Power Act from reasonableness of prices to competition and regulating spot market structure is now being touted by a prominent advocate of deregulated spot markets as a foundation for even greater reliance on wholesale spot markets with even more "scarcity" pricing and fewer limits on market prices ultimately paid by consumers. See Looking for the “Vroom”: A Rebuttal to Dr. Hogan’s “Acting in Time: Regulating Wholesale Electricity Markets”. But no matter whether a utility is "competitive" or monopolistic, and no matter how "workable" the market is, the law still requires all rates and charges to be just and reasonable and subject to review and revision by FERC.

More Doubts About FERC's Market Rate Regime From Ninth Circuit

In several opinions in recent years, the Court of Appeals for the Ninth Circuit has remanded cases to FERC to consider refunds to remedy flagrant market rate manipulation by sellers with FERC-approved "market-based rates." Also, for at least five years, consumer advocates have been asking FERC and the federal courts to consider whether the FERC private market rate regime is consistent with the public filing requirements of the Federal Power Act. To date, the courts have not ruled on the merits of their claims, which are based on the plain language of statutory filing requirements of the Federal Power Act and a Supreme Court decision involving analogous efforts of a federal regulatory agency to implement price deregulation without a change in the law establishing a filed rate regulation system. See May the FERC Rely on Markets to Set Electric Rates?

The Ninth Circuit has indicated further judicial impatience with FERC arguments that market rates, never filed or reviewed, should receive the same deference courts normally give to reasoned federal agency decisions based on a full record and their expertise. Circuit Judge Fletcher, in a case questioning whether the "filed rate doctrine" should be followed when rates were never filed subject to FERC review, stated in her concurring opinion:

Without minimum standards for FERC oversight, the Filed Rate Doctrine threatens to come unmoored from its rationale of respecting the actions of a federal agency to which Congress has delegated authority. Instead, I fear respect is being given to agency passivity, allowing anticompetitive and otherwise illegal actions to escape review. E & J Gallo Winery v. EnCana Corporation, No. 05-17352 (9th Cir. Sept 19, 2007)

Several consumer advocates have been pressing claims that the current FERC system allowing unfiled market rates and unfiled contracts for wholesale electricity sales is inconsistent with Supreme Court decisions involving similar statutes which hold that a federal regulatory agency cannot disregard rate filing and review procedures contained in statutes enacted by Congress. See Consumer Challenge to FERC "Market-Based Rate" System Proceeds; FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime; Consumer Advocates Seek Rehearing of D.C. Circuit Court Decision Allowing FERC to Avoid Consideration of Statutory Filing Requirements

To date, the Court of Appeals for the District of Columbia, which wrote opinions generally supporting FERC's deregulation agenda in the 1990's, has never analyzed the argument of consumers -- supported by strong Supreme Court Decisions rejecting attempts of other federal regulatory agencies to deregulate the industries they were charged by Congress to regulate -- that under Section 205 of the Federal Power Act, all rates for wholesale electricity must be publicly filed in advance, subject to FERC review and protest by consumers. On four recent occasions the court has dismissed petitions without grappling with the apparent inconsistency of FERC's relaxation of filing and review requirements with longstanding statutes. The Ninth Circuit decisions have arisen in cases where FERC invoked the "filed rate doctrine" as a bar to refunds of charges inflated by rate manipulation, even though the actual rates and charges had never been filed and thus were never publicly known or subject to FERC review for reasonableness before the charges were imposed.

Some utilities ordered to give refunds under other Ninth Circuit decisions are challenging whether those decisions permitting refunds of excessive market rates -- involving billions of dollars -- are correct. Eventually, these cases, or cases brought by consumers, may reach the Supreme Court.

Excelsior! Con Edison Residential Rates Spike (Again)

Typical Bill Reports
The New York Public Service Commission (PSC) for many years has published a series of reports on typical utility customer bills for each major customer class. These reports show what a typical electric bill would be at various levels of usage and permit comparison of prices of the major electric utilities. The reports provide a "snapshot" over time of typical bills for the months of January and July.

Reflecting the New York state motto "Excelsior!" (ever upwards) the most recent typical bill report shows once again that Consolidated Edison Company of New York (Con Edison) has the highest prices of the major investor owned utilities in New York State, and, perhaps, the nation:

(click on chart to enlarge)

The Effects of Restructuring and Con Edison Reliance on NYISO Wholesale Spot Markets for Energy Supply
The chart also illustrates how Con Edison rates began to increase and destabilize beginning with the first summer of operation of the NYISO wholesale electricity spot markets in 2000. See Con Ed Bills Spike 43%: Hike Despite Cool July; and PULP Testimony to Westchester County on Summer 2000 Con Edison Price Spikes.

Con Edison agreed to divest nearly all of its New York City area power plants in voluntary restructuring agreements with the PSC in 1997. Its long term buy-back contracts with the new owners of its divested power plants were designed to expire when the NYISO spot markets were initiated. The idea at the time, promoted by Enron and adopted by the PSC as its vision, was to allow the wholesale sellers to charge what the market would bear (regardless of their costs of production) and eventually to allow the retail utility simply to flow through spot market energy prices to retail customers, without the retail utility attempting to control price levels and volatility by producing electricity at its own plants or by purchasing outside the spot markets to assemble a portfolio of wholesale supply contracts for long term, medium, and short term energy needs.

The PSC "vision" in 1996 was that a new group of middlemen- including traders like Enron - would eventually supply energy to all customers, while Con Edison's role as a producer and seller of electric energy for its customers would diminish or end. See Disconnected Policymakers. Enron went bankrupt in 2001, no state has followed the lead of New York since then, a number of states that implemented the restructuring model have turned away from it, and others are experiencing electric restructuring remorse as their electricity rates soar and their electricity intensive industries close down operations.

In November, 1999, the NYISO began operations, and in May 2000, the PSC allowed Con Edison to flow through month to month price changes, which are often dramatic. At the time, the New York Times reported:

In April [2000], the regulatory commission authorized Con Ed to pass along to users its cost of buying electricity on the new spot market. By contrast, upstate utilities, including New York State Electric & Gas, which covers parts of northern Westchester County and Putnam County, provide energy to residential customers at fixed prices that do not fluctuate with spot market prices.

The commission's critics say that by eliminating Con Ed's risk when buying electricity on short notice (and shifting that risk to its customers) the commission gave the utility little incentive to try to make long-term deals with suppliers that could result in lower prices. Con Ed is allowed to recover part of the savings it gets when it makes such deals and buys electricity at below-market prices, but it can also lose money if it makes the wrong prediction and gets stuck with electricity that costs more than the market price.

Con Ed officials say they have been forced to buy on the spot market because a shortage of power plants has meant that the long-term deals needed to meet the surging demand have not been available.

Deregulation and Weather Fail to Cool Electric Rates, NY Times, August 22, 2000.

Con Edison had enthusiastically adopted the restructuring "vision" of the 1996 PSC, and reshaped itself into an Enron-like utility holding company, with new affiliates engaged in energy trading, power production at plants built in other states, a retail energy seller, and a now-defunct telecom company. See Con Edison Subsidiaries. In its June 30, 2007 SEC 10-Q report, at page 43, Con Edison's Income Statement indicates that $1.26 billion was invested in its power production affiliate (Con Edison Development) and that $241 million was invested in its energy trading affiliate (Con Edison Energy).

There was no net income from these holding company affiliate ventures, which represent about 6% of the company's total assets. Con Edison's main income remains from its regulated subsidiaries. In May 2007 Con Edison of New York filed for a major increase in rates - 17% - to fund new investment in its regulated operations. See Con Edison Asks PSC for 17% Increase in Residential Electric Rates: Low Income Customers Would Pay Even More

Con Edison still provides energy to nearly all residential and small commercial customers in its service territory. It still has legacy long-term contracts and residual generating plants, and so it has only partially implemented the 1996 restructuring "vision." Con Edison is increasingly dependent upon purchases of energy from a small number of sellers at the NYISO, at spot market rates, and it may be planning to become even more dependent on the spot market for future energy purchasing. Con Edison's Exhibits 45 and 48 in the 2008 rate case (Adobe pages 19 and 22) indicate that in 2006, Con Edison acquired 24.6% of the energy supply for its customers through spot market purchases, and that it plans to acquire 49% of its customers' needs from the spot market by 2011, approximately doubling its reliance on the spot market.

Heavy reliance on next day and next hour purchasing was criticized by FERC after the California electricity spot market rate manipulation of 2000 - 2001. Basically, FERC acknowledged that market rates it had allowed in the spot markets are unreasonable, and said no one should heavily depend upon them, just as no consumer would buy all household food and necessities at a convenience store:

we would expect any responsible retail supplier to rely on a portfolio of resources and to turn to the spot market only to engage in economy transactions or to meet portions of its load that could not be predicted well in advance or which were not
anticipated due to resource outages greater than are covered by prudent reserves.

San Diego Gas & Electric Company, FERC Docket No. EL00-95-000, p. 10 (Aug. 23, 2000).
See also, NYISO Costs Skyrocket, Benefits Questioned.

Some maintain that retail utilities can buy at the spot markets and control for price and volatility through purchase of exotic financial derivative contracts, in which one party pays the other when spot market prices exceed or fall below certain designated points. Con Edison's 2008 rate case exhibit indicates that in 2006 the company incurred net hedging costs of $169,335,578. One can only wonder, when looking at the chart of 2006 prices, what bills would have been without "hedging."

Customers of Other New York Utilities Fared Better with Less Reliance on NYISO Spot Markets
In contrast to Con Edison, the chart above shows that the major investor owned utility with the lowest rates in New York state is now RG&E. That utility did not embrace the Enron model and did not divest its power plants (except for its interest in the Ginna nuclear plant, which was sold with a long term buy-back contract).

In contrast, the utility that previously had the lowest rates, Central Hudson, eventually agreed with the PSC to sell its power plants. Unlike Con Edison, and despite PSC resistance, Central Hudson entered into energy buyback agreements with the new owners that kept rates low for several years after divesting the power plants. The idea was to stabilize retail prices during a "transition" period until wholesale and retail markets developed. According to a 2002 article

The short-term future for Central Hudson consumers is price stability -- an achievement of which the company is proud, and that it pioneered by being the first to persuade the PSC to allow power supply deals with Dynegy Inc. and Constellation Nuclear, the buyers of its plant interests.

''Importantly, this agreement also means that we can promise price stability during the next few years while the deregulated energy markets mature here in New York -- and that is priceless,'' Senior Vice President Arthur Upright said last August.

Now, Central Hudson is hoping that maturation occurs before its favorable deal with Dynegy runs out after 2004.

After 2004, however, due to expiration of the initial energy buy-back contracts,Central Hudson began to flow more of the impact of NYISO wholesale market rates through to its customers. A 2005 article describes what happened:

If you're a customer of Central Hudson Gas & Electric Corp., you might want to grab a stiff drink before opening your next bill.

The utility's electric customers can expect to pay about 15 percent more this July than they did a year ago, even if they use the same amount of power.

The higher bills are largely the result of Central Hudson's growing reliance on the state's deregulated power market. When Central Hudson sold its power plants to Dynegy Inc. in 2000, the companies signed a four-year contract allowing Central Hudson to buy varying amounts of power at fixed prices for four years.

That contract expired in October, leaving the utility at the whim of the state's power market, where prices are higher and more volatile than its customers are used to.

Central Hudson's market supply charge - the price it passes through to customers based on what it pays for electricity - is 7.3 cents per kilowatt-hour for July, said spokesman John Maserjian. Last July, with an assist from the Dynegy contract, the price was 5.4 cents per kwh.

Year-over-year, that's an increase of about 35 percent.

Central Hudson's residential rates, once lowest in the state, are now destabilized, and are higher than RG&E's. See A Failed Experiment: Why Electricity Deregulation Did not Work and Could not Work.

In essence, what RG&E customers pay for energy is closer to what the power costs to produce locally at the utility's power plants, and the cost of RG&E's long term wholesale power contracts. As a result, the price of service from RG&E is less affected by NYISO spot market rates. The benefit of low cost power plants still flows to RG&E consumers, not to merchant power producers, because the energy can be acquired at cost, not at whatever price the market will bear in the seriously flawed wholesale markets. Those markets pay all producers the same price, regardless of their costs, at the price level demanded by the last seller needed to meet demand.

Con Edison Rates Eclipse LILCO/LIPA Rates
The chart also illustrates how Con Edison surpassed those of LILCO, which was bought by a publicly owned utility, the Long Island Power Authority (LIPA). LILCO once had the state's highest rates, mainly due to the $7 billion cost of constructing an unused nuclear power plant. When LILCO was taken over by LIPA, the stranded cost of the abandoned nuclear facility could be financed with lower cost municipal bonds. Also, with no investors in the publicly owned utility, there was no longer a need to set rates at a level necessary to provide an ample after-tax return on their investments. LIPA rates dropped below Con Edison's in 1999.

NYISO spot market prices are in many hours far higher for Long Island than for Con Edison's area, but LIPA has managed to keep its rates lower than Con Edison's. This appears to be due to LIPA's proactive energy planning, long term contracting, construction of transmission lines to non-NYISO areas, all of which reduce dependence on NYISO spot market energy purchasing. Also, because LIPA still owns an 18% interest in the Nine Mile 2 nuclear plant in upstate Oswego, NY, low cost power from that facility may benefit LIPA ratepayers. LIPA refused to divest its interest when ownership of the plant shifted from Niagara Mohawk to Constellation. In contrast, Con Edison divested its nuclear facility at Indian Point to Entergy, and also sold most of its other power plants, including Ravenswood, which has capacity for about 25% of the New York City area market. As a result of divestiture, Con Edison today has little power available at the cost of production, requiring more purchases of power at market-based rates.

Other states that restructured and required their utilities to do what Con Edison has done voluntarily to comport with the 1996 PSC vision are now considering whether to allow power plants again to be built by retail utilities. Then, power can be produced and made available to consumers at state regulated cost based rates instead of buying it all at federal wholesale market rates, which are not meaningfully regulated by FERC. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed