Governor Spitzer Nominates NYISO Executive for PSC Post

First Choice for PSC Chairman Withdraws
Consumer groups supported Governor Spitzer’s first pick for chair of the Public Service Commission, Angela Sparks-Beddoe, a utility executive who served on his transition team. In her work for the utility, she was well aware of inadequacies of the deregulatory approach of the past decade, and she indicated openness to new solutions. See AARP Commends Governor's Choice for Commissioner of Public Service Commission. Importantly, she was aware of and supported consumer concerns for affordable and stable pricing, and had a track record of personal concern and action regarding the needs of low income households. When she was not confirmed during the legislative session, she withdrew.

Consumer Groups Snubbed in Second Choice
Consumer groups, including the 2.5 million member New York AARP, then urged the Governor to nominate another Chairman who also had a demonstrated commitment to consumer concerns. See Governor Spitzer Asked to Name Pro-Consumer PSC Chair. After months of rumors involving possible nominees, including nationally known experts in utility and environmental policy, Governor Spitzer nominated a new candidate for Chairman of the PSC, Garry Brown. Consumer groups were not consulted on the latest nomination, a candidate who for many years has worked for merchant power interests and the New York Independent System Operator, a utility created to privatize wholesale electricity rate setting. According to the Governor's press release

Mr. Brown currently serves as Vice President of External Affairs at the New York Independent System Operator. From 2002 to 2005, Mr. Brown served as Vice President of Strategic Planning within the same company. Mr. Brown worked for Sithe Energies Inc. from 1995 to 2002. While there, he served in several capacities including Manager of Government and Market Relations; he also served on the Board of Directors of the Independent Power Producers of New York. Previously, Mr. Brown served as a Senior Policy Analyst for the New York State Energy Office.

The Role of the State PSC in Overseeing the NYISO and Merchant Power Providers
The NYISO newsletter lauds the nomination, and describes the PSC position

The PSC regulates New York’s electric, gas, steam, water and telecommunications services. It sets rates and ensures that the state’s utilities provide adequate service to New York consumers.
PSC Commissioners serve six-year terms; they are appointed by the Governor and confi rmed by the state Senate. The Chair is selected by the Governor and is the chief executive offi cer of the Department of Public Service, the staff contingent of the PSC.

Not mentioned by the NYISO newsletter article is the role of the PSC in overseeing the NYISO as to certain of its functions under state jurisdiction. Some claim the NYISO is not under PSC jurisdiction, but that is not supported by prior PSC orders. While some NYISO functions are under FERC jurisdiction, the state retained important supervisory powers.

Also, even in matters in which FERC has unquestioned jurisdiction the state PSC intervenes as a party in FERC proceedings involving the NYISO. These FERC proceedings investigate and review NYISO rates, costs, and tariffs, and functioning of the NYISO markets. These cases often involve whether the NYISO organized markets actually are producing the reasonable rates required by the Federal Power Act, and in other matters. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed

In recent years, questions have been raised about the wholesale market sector of the electric industry, for example,

• possible market gaming and manipulation by the merchant power providers. See Justice Department Investigating NY Energy Markets, and Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?
• spikingwholesale rates set in the private NYISO markets for energy. See NYISO "Scarcity Pricing" Events
• dysfunctional NYISO capacity markets costing more than $1 billion per year without stimulating intended market responses. see Investment Performance in Deregulated Markets for Electricity: A Case Study of New York State
• reliability issues, e.g., a lack of "black start" arrangements when the August 2003 blackout occurred, and
  
• mushrooming NYISO costs, which now amount to nearly one cent per kilowatt hour, or $5 to $10 per month for residential customers. See NYISO Costs Skyrocket, Benefits Questioned

Anti-Consumer Positions Taken by the NYISO
The NYISO in a recent FERC filing opposes refunds to New York consumers of possible overcharges due to market manipulation or malfunction to benefit consumers. See NYISO Opposes Possible Refund of Overcharges Due to Sellers' Market Power.

In another case in which FERC has begun to examine flaws and costs of organized private wholesale markets including the NYISO, the NYISO is opposing more accountability, in part, on the grounds that the NY PSC is provided confidential market data about rates demanded and is performing certain oversight functions. See NYISO comments objecting to proposals for greater accountability. In the same case, the New York PSC filed comments stressing the importance of PSC oversight of NYISO functions:

New York's Public Service Law assigns the NYPSC with the responsibility to ensure that electric corporations, such as the NYISO, furnish safe and adequate service at just and reasonable rates.'' Moreover, we have observed that "the manner in which bids are made, generators are committed, and the performance of generators in meeting those commitments, can and often do have profound impacts on the reliability of electric service in New York State and, ultimately, on retail rates.

NYISO comments in the same case cite the presence of PSC staff, their oversight role, and access of certain PSC staff to secret NYISO data on prices demanded by sellers, which could reveal withholding or market gaming tactics used to drive prices up, as reasons for FERC not to require greater accountability.

FDR Appointed a Market Insider
The PSC has an important role to play in the supervision of merchant power producers and the NYISO, all of which are New York electric companies that must operate in the public interest. The PSC chair will have the power to examine whether the lightly regulated utilities and the NYISO in which prices are privately set are functioning in the public interest. Despite the apparent lack of consumer-friendly credentials, perhaps the latest nomination will turn out to be analogous to Franklin Delano Roosevelt’s pick of Joseph Kennedy, Sr. as Chairman of the Securities Exchange Commission in 1932, in the aftermath of egregious stock market manipulation scandals and the stock market crash.

An SEC history shows FDR's selection of person attuned to the manipulation of markets turned out to be a very good pick:

while some pushed for the appointment of progressive reformers to the Commission, FDR confounded partisans by appointing Joseph P. Kennedy one of the SEC's first five Commissioners and insisting that the group designate Kennedy as Chairman. Kennedy had profited handsomely from financial manipulation, but he understood keenly the need to balance the interests of the people with the imperatives of the financial markets.

Conclusion
So, based on the experience of FDR’s pick of Joseph Kennedy, perhaps Governor Spitzer's nomination of an electricity market insider who was a merchant power and NYISO executive to lead the PSC will result in more robust and fearless supervision of the NYISO by the PSC, a crackdown on hockeystick bidding, investigation of possible market gaming by NYISO market participants, a more pro consumer tilt in PSC filings at FERC, meaningful state oversight and action to limit the ever rising costs of the NYISO itself, less blind faith in failed NYISO markets, rejection of further market nostrums, and transparency in energy planning to deal with the state’s future energy needs and future energy costs.

Veto Clouds New York's HEAP Program: More than 200,000 Households May Be Affected

The federal LIHEAP program makes "block grants" to the states for use in their home energy assistance programs, including New York's HEAP program. Because of the combination of a large population and a cold climate, New York state receives the nation's largest LIHEAP allocation. In the 2006 - 2007 HEAP year, New York issued more than one million HEAP benefits to needy low income households: 844,530 households received a regular HEAP benefit and 163,007 received an additional emergency grant.

Most of the "regular" and "emergency" HEAP funds are used by New York State to assist eligible household with their immediate home energy costs incurred for the current winter. They are not designed to pay old utility bills accrued from past years.

Under Section 97 of the New York Social Services Law, 15% of the LIHEAP funds received by the state are required to "be used for low-cost residential weatherization or other energy-related home repair for low-income households...." Further, "[n]o less than ten percent of the funds available to New York state under the federal low-income home energy assistance program shall be allocated to the division of housing and community renewal for its weatherization assistance program and shall be expended as provided in the annual New York state weatherization plan."

The federal Department of Health and Human Services (HHS) administers the LIHEAP funds and programs, and the New York State Department of Temporary and Disability Assistance (OTDA) oversees the program in New York State. New York announced the opening of the winter 2007 - 2008 HEAP program on November 1, 2007. The program operates until the federal funds are depleted.

Even though the 2008 federal fiscal year began October 1, 2007, the amount of federal funding for the current winter's program is not yet certain.

The Energy Policy Act of 2005 authorized up to $5.1 billion for LIHEAP but appropriations have not approached even half that level. President Bush proposed a budget for 2007 - 2008 that would cut the LIHEAP program 17.6% from last year's level, from $2.16 billion to $1.78 billion.

In contrast, if the LIHEAP program had simply kept up with the general level of inflation since it began in 1981, the funding level would be $4.2 billion. The House of Representatives proposed to increase the 2008 program to $2.66 billion, but subsequently a lower House-Senate compromise funding level was reached at $2.42 billion.

President Bush on November 13, 2007 vetoed the federal HHS budget bill containing a $2.42 billion appropriation for LIHEAP, saying "it spends too much." See Bush Veto Hits Heating Bill Aid Program for Poor.

According to a November 8, 2007 report from the Center on Budget and Policy Priorities, the reduced level of funding proposed by the President in his budget for the LIHEAP program would result in $76.4 million less for New York's HEAP program. As a consequence, CBPP estimates that approximately 207,900 fewer New York households would receive assistance. Also, under the President's proposed reduction in funding, New York state's low-income weatherization programs would face reductions of at least $7.6 million in 2008.

With expected 2007-2008 winter heating costs rising by more than 10%, more LIHEAP funding, not less, is needed to assist households in making this winter's energy burdens more affordable, and for the longer range cost effective weatherization programs that reduce future energy burdens of low-income households by making their homes more efficient.

For more information about the New York HEAP program see PULP's Winter Extra.

NYISO Opposes Possible Refund of Overcharges Due to Sellers' Market Power

New York consumers pay about one billion dollars a year in passed through NYISO capacity charges paid to owners of existing power plants, in addition to high prices for the energy actually produced. These charges are intended to provide market signals that would entice new entrants to provide the additional power needed in the future. According to Cornell professor Tim Mount, this strategy has been ineffective and has not had the desired results:

Hundreds of millions of dollars are being paid through the capacity market to the owners of installed generating capacity to supplement their earnings in the wholesale market. The main accomplishment of these extra payments is to increase the market value of existing generating capacity. There is no obligation placed on generators to build new capacity when and where it is needed.
* * * *
the LICAP market has been an expensive and an ineffective way to maintain generation adequacy. In 2005 and 2006, customers paid over $1 billion/year in the LICAP market in NYC and merchant investors were still reluctant to commit to specific in-service dates for new generating units that have already received licenses for construction. This amount of money is enough to finance over 12,000 MW of new peaking capacity at a capital cost of $80/kW/Year (from Table A1 in the Appendix), and this amount of additional capacity would more than double the installed generating capacity in NYC.

See Investment Performance in Deregulated Markets for Electricity: A Case Study of New York State

The NYISO sometimes claims that its capacity markets have led to construction of new power plants. Actually, it is the dismal failure of NYISO capacity markets to function as intended that led the state, through the Power Authority, LIPA, and Con Edison to step in to get plants built. See City Bar Committee Issues Report on Electricity Regulation in New York, PULP Network Feb. 9, 2007. The response of the marketeers has been that the capacity payments to existing power plant owners need to be even higher to induce private sector investment, and that a revised capacity market design is needed. See Looking for the “Voom”: A Rebuttal to Dr. Hogan’s “Acting in Time: Regulating Wholesale Electricity Markets,” by Robert McCullough, analogizing the marketeers’ perennial new market solutions to the “Cat in the Hat.”

Making matters even worse, the 2006 NYISO capacity market allegedly was manipulated by seller(s) withholding of capacity to drive prices up to the limit of a price ceiling. The addition of new power plants had no effect on the price that was charged. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?, PULP Network, March 21, 2007. This appears to have been recognized by Con Edison, which bought much of the capacity and apparently passed the cost through to customers without meaningful oversight, via its "Market Supply Charge."

Con Edison, the PSC, the NYISO and others made no request to FERC for a refund of excessive charges imposed in 2006. (In the Ninth Circuit, the court of appeals has required FERC to consider retroactive revision of unfiled market rates when markets were manipulated and conditions were not competitive. See U.S. Supreme Court to Decide Electricity Market Rate Refund Case, PULP Network, September 25, 2007).

Instead of seeking correction of the unreasonable, excessive rates, the New York utilities reached an agreement with the NYISO to change the capacity market rules and price cap going forward, in an effort to limit the extent of future price gouging in 2007. In a March 6, 2007 order, however, FERC rejected that proposed deal to revise future NYISO capacity market auction rules, and directed parties to enter into settlement talks. FERC also established a "refund effective date" going forward, making refunds a possibility -- at least with respect to the exercise of market power in future capacity market auctions.

When the confidential talks failed to produce a new agreement, the merchant power producers proposed that a "paper hearing" be held, and they were supported in their request by the NYISO.

Other parties -- New York Transmission Owners; Consolidated Edison Solutions, Inc.; Multiple Intervenors, the New York State Consumer Protection Board, Consumer Power Advocates; New York State Public Service Commission; and the New York Association of Public Power -- argued that

a trial-type evidentiary hearing is required to investigate, e.g., allegations of economic withholding,[ ] and the need for and effectiveness of market mitigation measures and the cost support for such measures.[ ] A trial-type evidentiary hearing is also favored by these parties because “the issues . . . are extremely complex and controversial and involve significant disagreements over several material facts, such as . . . economic withholding . . . the ability of competition to produce just and reasonable prices, and what price level is necessary to meet New York’s standard for the adequacy of electric facilities.

In a July 6, 2007 Order Establishing Paper Hearing and Referring Certain Matters for Investigation, FERC rejected the request for a full evidentiary hearing with cross examination that might have more fully aired the issues concerning sellers' behavior in the NYISO markets, and accepted the proposal of the Independent Power Producers and the NYISO for a "paper hearing."

In typical FERC fashion, noting that a Justice Department investigation of the alleged 2006 market manipulation was now underway, (see Justice Department Investigating NY Energy Markets, PULP Network, June 13, 2007), FERC belatedly referred the issue of possible market manipulation in 2006 to its enforcement division.

(FERC's "enforcement" of anti manipulation laws seems mainly concentrated on violations of bankrupt entities like Enron and Ameranth, self-reported violations, or where other agencies have stepped in to investigate public allegations of market manipulation allowed by FERC's lax enforcement of the federal utility consumer protection laws).

On October 4, 2007, the NYISO made a compliance filing arguing, as did the beneficiaries of California market manipulation in the Ninth Circuit cases, that refunds for the benefit of consumers would upset the expectations of sellers and the reputation of the NYISO markets:

Although there may be a need to change market rules, that need should be balanced with the need for market certainty. Bids and offers in the voluntary ICAP auctions were made with a certain set of expectations, which cannot be altered after the fact. Ordering refunds and changing market outcomes after the fact may have a deleterious influence on perceptions of market credibility and regulatory uncertainty.

Thus, the NYISO opposes a meaningful consumer remedy -- refund of excessive charges -- on the ground that it might harm the public perception of its markets. The Federal Power Act, however, was intended by Congress to protect consumers, not those who benefit from market manipulation.

Wholesale electricity sellers with "market-based rates" and the NYISO have departed from the statutory scheme. They should not be heard to complain about "market certainty" and "contract sanctity" and the "filed rate doctrine" when their rate schedules were never properly filed. The Federal Power Act requires all rates to be just and reasonable, and subject to review by FERC before they are charged. Unfiled rates, such as those demanded and charged in the ICAP auctions, when challenged, should be subject to subsequent plenary review by FERC and the judiciary for reasonableness. Sellers who do not file their rates in advance, and who choose to participate in flawed NYISO markets, do so at their peril.

The failure of the NYISO, the PSC, FERC, and the courts to police wholesale market rates for electricity and capacity may be one reason why electricity rates in the states that restructured their electricity industry to rely more on federal wholesale markets are now higher. See Competitively Priced Electricity Costs More, Studies Show, NY Times, Nov. 6, 2007. See also, New York Restructuring: It Was About Price, PULP Network, October 4, 2007

PULP Winter Extra Newsletter Highlights New York's Low-Income Home Energy Assistance Program

PULP has issued its annual online PULP News "Winter Extra" covering details of the New York Home Energy Assistance Program (HEAP). Last year, the program provided "Regular HEAP" benefits to 844,530 low income households and "Emergency HEAP" benefits to 163,007 households experiencing home energy crises.

The program opened November 1, 2007 and will close in the spring when funds are exhausted.The HEAP program in New York operates only to the extent federal funds are available, i.e., the state does not supplement it directly.

The federal funding level for the 2007 - 2008 LIHEAP program has not been resolved, even though the federal fiscal year began October 1. On an interim basis, the program has been continued at last year's level of $2.16 Billion. President Bush proposes cutting the program by 18%, to $1.78 Billion, while congress has proposed modest increases.

If federal LIHEAP funding had kept pace with funding since 1981, the program would be funded today at a $4.2 Billion level. When the Energy Policy Act of 2005 was enacted, LIHEAP was authorized at a $5.1 Billion level, in recognition that energy costs are rising faster than general inflation. These rising energy costs are particularly harmful to low income households, whose incomes have not risen along with general inflation rates. See The Increasing Burden of Energy Costs on Low-income Consumers, American Gas Association, September 26, 2007

It is likely that eventual appropriations for 2007 - 2008 will be in the range of half the amount authorized, and the program will only serve a fraction of the eligible households. Due to the inadequate federal appropriations, the New York HEAP program closes when funds are exhausted. Some states appropriate state funds to supplement HEAP but New York has not, with the exception of the winter of 2005 - 2006 when a conditional appropriation was made.