Saturday, January 30, 2010

PSC Sued By Landlord Over Stay of Electric Submetering at Manhattan Apartment Buildings

According to the Manhattan Real Estate Blog, Urban American has sued the PSC to overturn the PSC's September 17, 2009 Order which stayed implementation of submetering at four Manhattan housing projects run by Urban American.
Major multi-family owner Urban American is suing the state Public Service Commission over electric billing in thousands of units of mostly rent-stabilized apartments in Manhattan.

The New Jersey-based company filed a lawsuit Jan. 15 in State Supreme Court in Albany to overturn a ruling by the commission that blocked the company from individually billing tenants in four Manhattan apartment complexes for electric usage, known as submetering. Currently the electrical charges are folded into the rent bill based generally on the apartment size, not on actual usage.
See also Landlord sues state over electric billing, The Real Deal, Jan 29, 2010.

For background on the Manhattan submetering stay cases:
Urban America Charging Eastwood/Roosevelt Landings Residents Up To $1000 In Monthly Submetered Electric Bills - Can That Be Right?, Roosevelt Islander, February 6, 2009

Submetering Slowed at Roosevelt Island - Temporary Stay of Submetering Conversion at Roosevelt Island and Three Other Locations, PULP Network, Feb. 12, 2009;

PSC Continues Stay of Submetering at Four Former Mitchell-Lama Projects, PULP Network, July 10, 2009

PSC Stops Submetering at Four Buildings, Sets Conditions to Address Tenant Concerns, PULP Network, September 17, 2009
Other Pending PSC Cases:
Tenants in several other projects have petitioned the PSC to stop submetering due to
  • failure to conduct an environmental impact analysis of segmented actions required by the State Environmental Quality Review Act (SEQRA),
  • failure to gain informed tenant consent to submetering and lease changes,
  • unfair economic consequences causing tenant hardship and displacement,
  • saddling tenants with high operating costs of inefficient landlord-owned structures, fixtures, appliances and controls,
  • deeming electric charges to be rent and threatening eviction for nonpayment of disputed charges,
  • noncompliance with initial PSC orders allowing submetering,
  • overcharges, and
  • circumvention of the Home Energy Fair Practices Act (HEFPA).Submetering Update, PULP Network, February 22, 2008
See, for example:
Oceangate Tenants Ask PSC and DHCR to Halt Submetering and Conduct Environmental Impact Assessment Under SEQRA, PULP Network, January 28, 2010

Riverview II Tenants Rebut Owner's Opposition to Request to Stay Submetering, PULP Network, November 03, 2009

Hazel Towers Tenants Association Seeks Review of PSC Submetering Decision, PULP Network, October 30, 2009

Yonkers Riverview II Tenants Again Ask PSC to Halt Submetering, PULP Network, October 14, 2009

Town House West Tenants Association Files Supplemental Complaint Against Stellar Management's New, Unfiled Conditions of Submetered Electric Service, PULP Network, September 02, 2009

Town House West Tenants Association Interlocutory Appeal of Secretary's Referral of Stay Application to Office of Consumer Services, PULP Network, August 7, 2009

Tiffany Mews Tenants Ask PSC to Halt Submetering with No Proper Order and No Filed Tariff or Contracts Approved by the PSC, PULP Network, July 31, 2009

Parker Towers Tenants Still Waiting for PSC Action on Petition to Halt Submetering, PULP Network
, PULP Network, July 23, 2009

Bronx Riverview Tenants Ask PSC to Halt Submetering, PULP Network, July 21, 2009

Town House West Tenants Ask PSC to Halt Submetering, PULP Network, July 21, 2009

Submetering Challenged at Claremont Gardens in Ossining, PULP Network, May 15, 2009

Submetered Yonkers Tenants Show How PSC Order Allowed Landlord to Shift Electric Bills to Low Income Tenants, PULP Network, May 6, 2009

Hazel Towers Tenants Ask PSC to Act on Submetering Complaints, PULP Network, May 6, 2009

Parker Towers Residents Petition PSC to Vacate Prior Submetering Order, PULP Network, April 22, 2009.

Yonkers Tenants Ask PSC to Halt Submetering at Riverview Towers, PULP Network, April 9, 2009

For further information:
Landlord Discloses Submetering Company "AMPS" Conducted Unauthorized Time of Use Pricing Experiments on Tiffany Mews Tenants, PULP Network, November 12, 2009

Ontario Electricity Board Bans Landlord "Smart" Submetering of Electricity Without Energy Audits, Transparency, and Specific, Informed Tenant Consent, PULP Network, October 02, 2009

Submetering Summit, PULP Network, May 22, 2009

N.Y. Times Perpetuates Myth Supporting Unjust New York PSC-DHCR-NYSERDA Submetering Regime, PULP Network, August 28, 2009

Lax PSC Enforcement of Submetering Orders Allows Landlords to Overcharge for Electricity Sold to Tenants and to Circumvent HEFPA Protections, PULP Network, November 6, 2008

Residential Submetering Update, PULP Network, February 22, 2008

PULP's website page on residential electric submetering.

Friday, January 29, 2010

Utility Regulatory Assessments: The Time Has Come to Include VoIP and Wireless

The state budget crunch now facing New York has led Governor Paterson to propose draconian measures that would cut important services and programs for the poor. For example, he has proposed delaying welfare grant increases (which had been delayed for 19 years) in order to save $18 million.

Meanwhile, tax and assessment anomalies and loopholes in the utility industry abound. See New York City Closes ESCO Electric Service Sales Tax Loophole; Will Other Localities and New York State be Next?, PULP Network, January 22, 2010. A common characteristic is the uneven treatment of competitive service providers, with traditional providers shouldering the major tax and assessment responsibilities while newer providers escape them.

In addition to the ESCO sales tax loophole discussed last week, which is costing the state $158 million a year, uneven treatment of wireless and VoIP (cable) phone services is another expensive loophole. In a white paper on utility regulatory assessments, to be posted soon, PULP estimates that closing the telecom provider loopholes and setting assessments at the same level as gas and electric service would net approximately $76 to $167 million more revenue, depending on whether 1% or 2% assessment levels were adopted. Energy utilities are currently assessed, on a temporary basis, at 2%.

Equalization of the assessments would further the goal of fair competition and avoid uneconomic bypass and favoritism toward some market participants. Simultaneously, the PSC could be required to exercise "terms and conditions" jurisdiction over these providers to protect consumers.

Thursday, January 28, 2010

Oceangate Tenants Ask PSC and DHCR to Halt Submetering and Conduct Environmental Impact Assessment Under SEQRA

The North Bay Tenants Association (NBTA) filed a Petition with the PSC on January 28, 2009 asking the PSC to halt implementation of electricity submetering at Oceangate, a 542 unit high rise Mitchell Lama housing project in Coney Island owned by a Starrett Corp. affiliate.

The Petition asks the PSC to conduct an environmental impact assessment of the submetering action upon the residents of Oceangate under the New York State Environmental Quality Review Act (SEQRA), before any submetering charges are imposed on tenants. A prior PSC Order, issued in 2007, waived the general prohibition against submetering, but the actual implementation has not yet occurred. The premises are heated with baseboard electric resistance heaters.

The PSC gave the owner (a Starrett Corp. affiliate) a waiver of the general rule prohibiting residential submetering in its 2007 Order. The Order was issued without the PSC having known or assessed
  • the past cost of electricity at Oceangate
  • the forecast cost of the portion of electricity bills to be shifted to tenants
  • the use of baseboard electric heat without adequate thermostatic controls
  • whether the structure, fixtures, and appliances of Oceangate are energy efficient,
  • the amount of any offsetting adjustment to rents (which have not been set yet by DHCR),
  • the amount of any adjustment to housing subsidy allowances received by some but not all of the tenants (which have not yet been set),
  • the long term effects on tenants,
  • the long term effects on the owner's incentive to upgrade energy efficiency of the premises.
The NBTA Petition to the PSC argues that the conversion to electricity submetering is an "action" covered by SEQRA affecting the human population at Oceangate of more than 1,000 persons, which may have displacement effects when the tenants costs are increased due to submetering. The owner is simultaneously seeking a rent increase from DHCR based on the assumption that the owner pays all electricity costs. Any adjustment of rents after submetering is implemented is undecided. In numerous other projects where the PSC has allowed submetering, rent adjustments and subsidy readjustments have not offset new charges for electricity, creating new financial burdens even for tenants who do their best to conserve, resulting in eviction proceedings of those unable to afford the higher combined costs for rent and electricity. These include at least two other projects owned by Starrett. See Submetering Challenged at Claremont Gardens in Ossining, PULP Network, May 15, 2009; Bronx Riverview Tenants Ask PSC to Halt Submetering, PULP Network, July 21, 2009

In a letter to Brian Lawlor, the Acting Commissioner of the New York State Division of Housing and Community Renewal (DHCR), NBTA asked DHCR not to go any further with its review process of a November, 2009 application by Starrett which asks DHCR to "confirm" submetering at Oceangate. Starrett is also asking DHCRto waive HUD requirements relating to submetering in Section 236 housing projects like Oceangate. DHCR has not yet noticed the Starrett request for a change in the DHCR rules applicable to Oceangate in the State Register. for public comment under the State Administrative Procedure Act.

One of the claimed justifications for submetering is environmental. The tenants argue in their Petition that it should not go forward until the impact on their community has been ascertained under SEQRA. In Chinese Staff & Workers Association v. City of New York, 68 N.Y.2d 359 (1986) the New York Court of Appeals held that displacement of low-income persons as a result of a proposed project is an impact requiring assessment under the SEQRA procedures. The tenants have also asked the PSC to assess the long term environmental effects of shifting financial responsibility for landlord-owned and controlled structures, fixtures, appliances and controls to tenants who lack the power, ability, and funds to make the premises more energy efficient in the future.

SEQRA covers segmented actions like submetering, where multiple agencies are involved, and where a project proceeds in steps that may take several years, without a prior assessment of the impacts. The Petition asks the PSC to vacate or stay its prior order and assert "lead agency" responsibility for conducting the SEQRA assessment.

The Petition also seeks reopening of the case and a stay because
  • The PSC Order did not provide adequate notice inviting tenants to comment to the PSC before it acted on the owner's request to waive the general prohibition against submetering,
  • The Order allows the owner to treat charges for electric service the same as rent, and evict for alleged nonpayment in court summary proceedings, rather than follow the procedures of the Home Energy Fair Practices Act (HEFPA), such as deferred payment agreements for customers with arrears, and the PSC complaint determination procedure.
  • The PSC Order allows Starrett to circumvent utility consumer complaint protections guaranteed to residential utility customers by requiring formal written complaints that are decided by a landlord-selected arbitrator instead of the PSC. This clashes with the HEFPA complaint procedure. See Under HEFPA, the New York PSC Must Decide Complaints of Submetered Customers, March 24, 2009.
For further information, visit PULP's web page on residential submetering.

Governor Paterson Proposes Elimination of HEAP Weatherization Funding and HEAP Advisory Group

The WAP Program
According to an HHS Report, low-income households in the Northeast pay approximately 22% of their annual income for home energy, while non low-income households pay about 5%. The federal Low Income Home Energy Assistance Act (LIHEAA) provides aid to help states address the needs of low income energy consumers who are often hit the worst by rising energy costs when prices jump or weather is severe. The "block grant" style assistance program created by the law, known as LIHEAP, is designed primarily to address the current home energy needs of low income households.

Low income households tend to live in the oldest and least energy efficient housing stock. Often a weatherization project can results in 20% energy saving, and can make a huge difference for low-income households. Low-income households, however, typically lack the cash or credit to invest in the cost-effective energy efficiency measures that result in lower future bills.

The federal Department of Energy (DOE) Weatherization Assistance Program (WAP) provides funds to states to weatherize homes, reduce household energy usage and greenhouse gas emissions, lower household energy costs, ease energy burdens. It allows households to keep more of their pay for purposes other than energy, stimulates jobs, and provides job training. WAP has been described as this country's longest running, and perhaps most successful energy efficiency program. See Bush Proposes Elimination of Low Income Home Weatherization Program, PULP Network, February 11, 2008.

Federal and State Policy Encourages Supplementing WAP with HEAP Funds
In recognition that states may want to do more than pay unaffordable energy bills, and more than the federal WAP funds allow, Congress encouraged states to use up to 25% of their LIHEAP block grant for weatherization measures, to supplement the federal weatherization program.
Resolving the tension between using a limited sum of federal funds to resolve home energy crises with bill payments, and using funds to reduced future bills and future emergencies, section 97.5 of the New York Social Services Law was amended to require that
No less that fifteen percent of the [LIHEAP] funds available to New York state . . . shall be used for low-cost residential weatherization or other energy-related home repair for low-income households . . . .
No less than ten percent of the [LIHEAP] funds shall be allocated to the divisino of housing and community renewal for its weatherization assistance program and shall be expended as provided in the annual New York state weatherization plan.
In 2010, New York expects to receive $475 million in federal funding for HEAP, so about $47.5 million of that is targeted for the DHCR weatherization program under existing law.
The WAP funds go mainly to community based weatherization programs, and they provide jobs and job training to many lower income workers who do the work on the homes of eligible households. Some of the HEAP weatherization funding is allocated to the State Office for the Aging, and some to counties for emergency furnace repair and replacement.

The Governor's Proposal to Cut HEAP Weatherization Funds
Governor Paterson, in his Executive Budget submitted to the Legislature is proposing to eliminate all the HEAP funding for weatherization in state fiscal year 2010 - 2011, which begins April 1, 2010.
In recognition of the large amount of ARRA funds received by New York State for weatherization, the SFY 2010-11 appropriation language would authorize a temporary waiver of the requirement to set-aside 15 percent of all federal HEAP funds for weatherization along with a waiver of the requirement that no less than 10 percent of all of federal HEAP funds be sub-allocated to the Division of Housing and Community Renewal.
As a result, the value and effects of the new federal ARRA stimulus funding will be reduced by cuts in the HEAP weatherization funding, if the Governor's proposal is adopted in the state budget process.

There has been a chronic tendency in New York's HEAP program to use the federal HEAP funds in a way that simply supplants expenditures in pre-existing state/local programs designed to resolve energy emergencies. To the extent that happens, federal funds intended by Congress to benefit the poor really reduce the state's need to spend funds from general tax revenues. Last year, the State used an infusion of supplemental HEAP funds, intended to offset high energy prices, to do just that:
some of the supplemental HEAP funds are being used to supplant pre-existing state and local obligations to assist the poor that would be borne by the general public in the absence of HEAP. Funds intended by Congress to be targeted to relieve the high home energy burdens of the poor this winter are, in effect, being used to reduce the budgets of state and local governments, and thus to benefit the general body of taxpayers.
Needy Households Must Stop Paying Energy Providers to Obtain Supplemental HEAP Benefits, PULP Network, June 5, 2009.

HEAP Plan Revision and Legislative Action Required to Implement Governor's Proposal
To implement the Governor's proposal, a new or revised HEAP plan taking out the 15% set aside for weatherization would need to be submitted to HHS for approval, after public participation and comment. The Governor has simultaneously proposed to abolish the HEAP Advisory Council, and this may limit exposure of the proposal to public scrutiny, comment and criticism from Advisory Council members who are familiar with the program.

Legislative action would be needed to change the 15% weatherization set aside requirement now in the Social Services Law. It remains to be seen if the Legislature will agree with the Governor to make the change in Section 97 -- which may have been needed and adopted precisely to prevent Governors from doing what Governor Paterson now proposes.

Wednesday, January 27, 2010

NYSBA Task Force on Global Warming Recommendations Pose Risks to Lower Income Consumers

A New York State Bar Association (NYSBA) Task Force on Global Warming has proposed measures that may be harmful to lower income consumers utility consumers. According to an article in the January 23, 2009 New York Law Journal by the Task Force Chair, Michael B. Gerrard, the Task Force recommends changes in the law to restore the power of the PSC to mandate residential time of use pricing, to subsidize "smart meters," to increase expenditures on renewable energy with funds raised from utility bill surcharges, and to raise the price of RGGI greenhouse gas allowances in New York's "cap and trade" system.

Mandatory Time of Use Pricing
To foster time of use pricing, the Task Force urges legislative changes to
3. Authorize the Public Service Commission (PSC) to require time-of use pricing: Charging higher electricity rates during times of peak demands would tend to spread the peak, allowing more use of low-GHG sources. The Legislature should amend the statute that arguably prohibits the PSC from imposing time-of use pricing.

4. Provide incentives for installation of smart meters: Electric meters that allow time-differentiated charges also encourage low-GHG sources.
The environmental premise of peak-shifting is questionable. It does not reduce overall emissions, and could increase them. During peak times, incremental usage requires more natural gas-fired power plants to run. In off-peak hours, electricity produced by burning coal, which emits far more greenhouse gases than natural gas, may meet the electricity needs of peak-shifting insomniacs who change their habits to take advantage of cheap energy in the middle of the night, and run their dishwashers, washing machines, and air conditioners at 3 AM in the morning.

The New York Legislature revoked the PSC's power to require mandatory residential time of use pricing in the 1980's, and for good reason. See New York Residential Real Time Pricing Experiments Must be Voluntary, PULP Network, August 27, 2007.

Time of use pricing has been offered by utilities for many years, but has been chosen by very few residential customers. Many customers cannot handle the price volatility or lifestyle changes required to shift their electricity usage to nonpeak hours. For example, it may be very harmful to elderly and disabled and homebound persons, particularly those with respiratory ailments that are mitigated by air conditioning. See Not so Smart? High Tech Metering May Harm Low Income Electricity Customers, PULP Network, April 16, 2007.

The Task Force piled onto the utility/NRDC bandwagon for massive deployment of residential "smart meters" even though they may not be cost effective and have been questioned by major consumer groups. See See AARP Opposes PEPCO Plan for Spending on "Smart Meters", PULP Network, June 19, 2009; Rebecca Smith, Smart Meter, Dumb Idea?, Wall Street Journal, April 27, 2009; Consumer Uprising Against California Smart Meter Program, PULP Network, October 28, 2009; Will "Smart" Meters Pass The Test of Time?, PULP Network, Nov. 24, 2009; Niagara Mohawk dba National Grid Seeks Continued Secrecy on Cost of Its "Smart Grid" Proposals, PULP Network, November 25, 2009

The billions of dollars needed to replace existing meters with smart meters could be better used to reduce emissions, for example, by reducing energy consumption through weatherization of structures or upgrading of energy consuming motors and appliances.

The State Bar Association Task Force on Global Warming also endorsed massive conversion of apartments rented with utilities included to electric submetering, which forces tenants to buy electricity from their landlords instead of it being included in rent or obtained from a regulated utility company. The New York submetering regime created by the PSC is a dog's breakfast. It harms tenants and should not be expanded. See PULP's webpage on submetering.

The added cost of renewables and increased price of RGGI allowances is not quantified. But with many Yorkers now losing utility service because they cannot afford it, it must be recognized that the green solutions must be accompanied by a new emphasis on universal, affordable utility service.

TracFone Is Now New York’s Largest Telephone Lifeline Provider

According to data compiled by the Universal Service Administrative Company ("USAC"), the FCC's administrator of universal service funds and programs, the SafeLink service offered by TracFone Wireless now has more Lifeline discount telephone service customers in New York State than Verizon, even though it didn't begin offering the service and receiving reimbursement until April 2009.

Carriers that wish to offer Lifeline must be designated as an "Eligible Telecommunications Carrier" ("ETC") to receive reimbursement from the federal Universal Service Fund ("USF") for providing the discounted service. Traditional landline local exchange carriers apply to their state utility commissions and agree to certain requirements in exchange for being permitted to draw from the federal USF and any state fund to offset the bill reduction assistance for low-income customers.

In New York, the state universal service fund is called the Targeted Accessibility Fund ("TAF"), which is supported by a percentage of each provider's intrastate revenues. This contribution factor is currently hovering at just above 1%. The federal USF is supported as a "tax" on interstate and international calling and is paid directly by end users. The federal USF percentage is now over 14%, the largest portion of which is used to reduce charges in high cost areas. When a wireless provider seeks ETC status, it must go to the FCC for designation. Currently, no wireless provider has sought authorization for supplemental Lifeline assistance reimbursement from TAF in New York State.

On the federal side, there are three levels, or tiers, of Lifeline support from the USF (a fourth tier exists for additional savings for service on tribal lands). Tier I covers the $6.50 subscriber line charge, Tier II provides $1.75 in support where the state has its own Lifeline program (such as NY), and Tier III provides an additional $1.75 in support, where permitted. Most ETCs designated by the New York State Public Service Commission ("PSC") receive the full $10 in federal support, plus additional assistance through TAF. However, because not all ETCs in NY receive full Tier III support, according to an FCC report (see Table 2.3 on page 2-9), as of March 31, 2008, the average federal USF support was about $9.59 per month .

When USAC published its latest complete monthly data, covering December 2009, Verizon received $2,609,216 in federal support. When divided by the $9.59 average reimbursement per subscriber, this works out to be about 272,077 Lifeline customers in December in NY. Meanwhile, in that same month, TracFone received $3,509,806, which is consistent with about 365,986 Lifeline customers. These same USAC spreadsheets indicate that among all landline providers, there were approximately 298,854 Lifeline customers in NY last year, which is very close to the 309,000 estimated by the PSC for 2008. When taken as a whole, there were about 644,000 Lifeline customers in NY at the end of 2009, including those who subscribe to TracFone's service. Keep in mind that as recently as April 2009, TracFone's Lifeline reimbursements were at a level consistent with only about 22,600 Lifeline customers in NY. Thus, in less than one year, TracFone appears to have increased its Lifeline assistance reimbursement (and customers) more than ten-fold.

The highest total of Lifeline customers in New York State was achieved in 1996, with over 750,000 customers.

TracFone is a wireless reseller and is not subject to the state's consumer protections or service quality requirements. It provides 68 minutes a month with its service (including a free phone), which includes both incoming and outgoing calls. Additional minutes cost about $20 for an extra 60 minutes. These rates do not seem to have hindered its ability to add subscribers at lightning speed.

While 644,000 Lifeline customers across the state is a significant improvement, the latest figures from the state Office for Temporary and Disability Assistance show(at Table 16) that there are over 1.3 million households which receive Food Stamps, one of the primary eligibility criteria for Lifeline. The universe of eligible households for Lifeline is likely even higher (some families may receive Medicaid, for example, and not Food Stamps), so the 1.3 million is, thus, a conservative estimate. Using these figures which understate the number of eligible households, New York is still less than half way to reaching all eligible Lifeline families. With the entry of Virgin Mobile's Assurance Wireless Lifeline offering (and their free phone and 200 minutes a month), there appears to be some competition heating up for offering Lifeline in NY. This is encouraging news for New York's low income population, as the Lifeline program has languished in recent years .

Lou Manuta

Saturday, January 23, 2010

FERC ALJ Finds Amaranth Trader Manipulated Natural Gas Markets

FERC Administrative Law Judge Carmen Cintron issued a decision January 22, 2010 finding that Amaranth gas trader Brian Hunter manipulated the settlement prices in the NYMEX natural gas futures markets in 2006. The judge noted with approval a U.S. Senate report describing of the role of now defunct Amaranth hedge fund, for whom Hunter was a major trader:
Amaranth dominated trading in the U. S. financial market in 2006. It frequently held 40 percent or more of the open interest in natural gas futures in a particular contract month. Its massive trading “moved prices and increased price volatility.” Staff Report, Excessive Speculation in the Natural Gas Market (2007) supra note 37, at 114, 119. The conclusions in this decision supported by the record in this case are consistent with the findings in the Senate Report.
See Did Hedge Fund Attempt to Corner the Natural Gas Market for March 2007?, PULP Network, September 27, 2006.

The ALJ's decision contains an interesting description of the NYMEX markets.
In 2006, the pit was a busy, loud, crowded place, with people standing elbow to elbow, shoving each other, and even fist fighting on occasion.... The traders were in close proximity with emotions running high as trades were made.... Traders had to pay attention to the dynamics of the pit in real time in order to be successful. This meant they had to read each other’s faces and listen to the pit volume. They also had to monitor aggressive trading.... Additionally, they watched the order flow (trading orders coming from the phone clerks manning the phone banks in the perimeter of the pit).

Illustration from The Pit, by Frank Norris, 1903.

The ALJ found that Hunter had manipulated the daily settlement prices for NYMEX natural gas futures markets by making high volume trades strategically during key moments when the daily NYMEX settlement price was being established. The settlement price is the price to which many contracts are indexed. According to the ALJ's decision, Hunter made trades designed to move the NYMEX settlement price while simultaneously taking positions in other markets that would benefit from the manipulated prices.

The ALJ rejected Hunter's claim that speculation in the futures markets did not affect the price of physical natural gas sales. She found that NYMEX futures prices do affect the price of natural gas set in many contracts which are indexed to the NYMEX price, and "found that Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts."

The natural gas prices also affect wholesale electricity prices, because many sellers of electricity in the spot markets incorporate the NYMEX market price of gas into their price demands.

It is encouraging that the wheels are turning at FERC, albeit slowly, to uncover and punish natural gas market manipulation of four years ago by Amaranth, now a bankrupt entity, as it did with Enron, long after it went bankrupt. But the problems in the poorly regulated wholesale natural gas and electricity markets coupled with blurred market oversight are probably larger than the gross manipulation of "rogue traders" who are pilloried only after egregious damage and harm to consumers is flagrant and obvious.

Friday, January 22, 2010

New York City Closes ESCO Electric Service Sales Tax Loophole; Will Other Localities and New York State be Next?

Background - The ESCO Loophole
In general, state and local sales taxes apply to electric and natural gas service. The state Tax Law provides that residential energy sources and services exempt from the 4% New York State sales and use tax, but local sales taxes on utility services - including residential service - have been adopted by numerous local governments and school districts.

The state sales tax rate on utility service for nonresidential customers is 4%. Local sales taxes vary, and cal apply to both residential and nonresidential service. For example, they are 2% in Franklin County, 4½% in New York City, and 7¾% in the Lackawanna School District. The local governments and school districts charging sales tax on utility service, and their tax rates, are listed in New York State Department of Taxation and Finance Publication 718-R.

Due to an anomaly, there is a loophole in the taxation of "delivery service" provided by traditional utilities when a customer buys the "commodity service" from an ESCO. The ESCO customer pays sales taxes on the "commodity" portion of service provided by the ESCO, as he would when he buys it from the traditional utility, but sales taxes drop off the "delivery service" provided by the traditional utility. This constitutes uneven taxation of the same service and distorts the marketplace by favoring ESCO providers and their customers. See ESCO Tax Subsidies: A Hidden Cost of the New York PSC's "Retail Access" Scheme, PULP Network, January 12, 2009.

New York City Eliminates the Tax Break on Utility Delivery Service to ESCO Customers
In a January 20, 2010 Sales Tax Memo TBS-M-10(1), summarizing last year's changes to the Tax Law, the New York State Department of Taxation and Finance announced that effective August 1, 2009, “receipts from the sale of the services of transporting, transmitting, distributing, or delivering gas or electricity are subject to the 4½% New York City local sales tax, even if purchased from someone other than the vendor of the gas or electricity.”

What this means is that New York City has finally closed a needless loophole in the sales tax law that was, in effect, reducing utility bills of customers of Energy Service Companies (“ESCOs”) at the expense of local taxpayers.

The reform also reduces a significant source of distortion in utility service markets in New York City. Large customers may be switching to ESCO commodity service not because it is less expensive or more efficiently provided, but because they can avoid paying utility sales taxes on utility delivery services to the state, local governments, and local school districts. Indeed, ESCO service could be more expensive than comparable service from the utility, but because of the tax break on utility delivery service, the bottom line of the bills will be lower. The tax breaks have been a selling point for the ESCOs. See ESCO Advertises 9.75% Tax Savings on Delivery Service, PULP Network, June 18, 2009

To implement these changes, the state Legislature amended Tax Law section 1210 to permit cities with over one million residents (i.e., New York City) to “omit the exemption” of ESCO customers from paying any delivery sales taxes.

New York City also amended its Administrative Code by adding language to Title 11 (Taxation and Finance), section 2001 indicating that a new section
makes inapplicable section eleven hundred five-C of the tax law, and imposes tax on receipts from every sale, other than sales for resale, of gas service or electric service of whatever nature, including the transportation, transmission or distribution of gas or electricity, even if sold separately....
Next Steps
According to the 2009 New York State Division of the Budget (“DOB”) Annual Tax Expenditure Report, p. 149, the foregone state tax revenue due to the ESCO loophole was $6 million per year in 2002, but jumped to $128 million per year in 2008 and was projected to reach $154 million in 2009.

This foregone state tax revenue has been rising at a rate of more than $20 million in recent years. And these figures do not include the foregone tax revenue of localities and school districts that tax utility services. The local sales tax break for ESCO customers outside of New York City is still in effect. The counties, cities, and school districts that now must exempt ESCO customers from paying sales tax on the delivery of electricity and gas should seek comparable legislation to close the loophole favoring ESCO customers, as New York City did.

There is no valid reason to allow continued arbitrage of tax breaks by ESCOs, financial middlemen who do not produce or distribute electricity. This tax break can reward a less efficient ESCO “competitor” which could charge more for the identical service and is used as a come-on by ESCOs rather than offering superior value. The tax breaks may also account for the widespread switchover of large industrial and commercial customers to ESCO commodity service and a consequent loss of contribution by them to help meet the budgetary needs of the state, local governments, and local school districts.

Now is the time for the Legislature to follow the steps it took for NYC and to eliminate the state sales tax break and also close the ESCO loophole for all counties, cities, and school districts that tax utility services. With potential cuts to education and many other vital services proposed in the Governor’s Executive Budget looming, it is time for ESCO customers to pay the same taxes on utility delivery service as all other customers do.

Thursday, January 21, 2010

Assurance Wireless (Virgin Mobile) Offers Wireless Lifeline in New York

Yet another wireless provider has launched a Lifeline reduced price phone service for low-income customers in New York. Virgin Mobile, which received its authorization to offer Lifeline in New York last fall , is calling its service “Assurance Wireless.” The company joins Sprint , Verizon Wireless (for upstate NY only) , and TracFone as wireless Lifeline providers in the state. All 40 incumbent landline local exchange carriers are authorized to offer Lifeline, in addition to 16 competitive local exchange carriers.

Like TracFone, Virgin Mobile is a reseller and does not have any of its own facilities. And, like TracFone, Virgin Mobile is not charging for either the use of a handset or for a bucket of free minutes every month. Neither company charges an activation fee. That’s where the comparison ends. TracFone only offers 68 minutes a month of service (including incoming and outgoing calls) and charges 20 cents a minute thereafter. Once the monthly allotment of minutes has expired, calls can not be made to the TracFone business office, and the customer would be precluded from seeking Lifeline service from another provider to make or receive calls for the remainder of the month.

The Assurance Wireless service from Virgin Mobile includes 200 minutes a month and will accept applicants who live in Section 8 housing or participate in the National School Lunch Program in addition to the roster of public benefit programs used by all other Lifeline providers. Since all Lifeline providers receive reimbursement from the federal Universal Service Fund (“USF”), it is unclear how Virgin Mobile can offer such a significantly higher number of minutes each month – three times more – than TracFone.

The addition of another Lifeline provider in New York is a welcome event. As PULP has reported on numerous occasions, the number of Lifeline subscribers in the state has dropped from over 750,000 in 1996 to about 300,000 in 2009 , despite a significant increase in the number of eligible customers due to the recession. This drop not only costs eligible families at least $15 more a month than they should be paying for their telephone service, but results in New York State sending significantly more money into the federal USF than it receives in return. PULP is looking into ways to reverse the hemorrhaging of Lifeline subscribership and expand enrollment to make phone service more affordable.

Lou Manuta

Friday, January 15, 2010

Activist Supreme Court Reaches Out to Limit Consumer Objections to Wholesale Power Rates

Yesterday the Supreme Court reversed a decision of the Court of Appeals for the District of Columbia Circuit that had allowed states and consumers to challenge a deal establishing new rules for expensive electric capacity auctions in New England. We previously wrote about the case: FERC Asks Supreme Court to Limit Maine's Challenge to Wholesale Utility Rates in NRG Power Marketing Case, PULP Network November 02, 2009.

In its opinion in NRG Power Marketing v. State of Maine Public Utility Commission, the Supreme Court extended its 2008 ruling in the Morgan Stanley case where it limited review of inter-utility wholesale power contracts by presuming them to be reasonable.

The new case involves a deal brokered at FERC over the rules of the New England ISO for operating its forward capacity market auctions, the results of which then establish prices paid to owners of power plants for their availability, whether or not it is used. The D.C. Circuit has explained in its opinions that "In a “capacity” market – as opposed to a wholesale electricity market – “the [transmission provider] compensates the generator for the option of buying a specified quantity of power irrespective of whether it ultimately buys the electricity.”

The deal was not agreed to by all the parties in the case, as it will raise rates paid by consumers, and administrative litigation followed at FERC over whether the settlement would establish new ISO market rules and rates that are just and reasonable. FERC approved the settlement, presuming it to be reasonable under the "Mobile-Sierra" standard that makes it very difficult for objectors like the Maine Public Utility Commission to overcome.

The Circuit Court rejected FERC's standard of review in its opinion, saying "we agree with the petitioners that the Commission has unlawfully deprived non-settling parties of their rights under the Federal Power Act."

NRG Power Marketing appealed to the Supreme Court seeking to reverse the Circuit Court decision. Their position was supported amicus briefs from by power marketers, pro deregulation economists, and Morgan Stanley and the Swaps and Derivatives Association.

Maine argued for affirmance.

Public Citizen and AARP in their amicus brief stated:
the positions taken by FERC and the petitioners in this case are, if anything, even more dam-aging to the protection of the public than FERC’s embrace of “market-based rates.” The expansion of the Mobile-Sierra doctrine that FERC and petition-ers advocate would effectively nullify the consumer protection goals of the FPA by imposing a virtually insurmountable obstacle to challenging wholesale electricity contracts that result in unjust and unreasonable rates paid by consumers.
At oral argument, Connecticut Attorney General Blumenthal made the point that the cases are quite different:
what's involved here are tariff rates. And the D.C. Circuit's ruling in our view was correct, and its reasoning was correct, insofar as Mobile-Sierra binds contracting parties, as Justice Scalia has just articulated and Morgan Stanley reiterated. It [Mobile - Sierra] involved parties trying to escape an improvident bargain.

What we have here is an auction system that sets rules of general applicability.
The Supreme Court, however, applied the same deferential review standard (Mobile-Sierra) to the contested ISO market rules tariff that it had approved for wholesale power contracts in last year's ruling, and reversed the Circuit Court's judgment.

In its opinion, the Supreme Court did not resolve the issue of the difference between the partial settlement for ISO rates and bilateral contracts:
The objectors to the settlement appearing before us maintain that the rates at issue in this case -- the auction rates and the transition payments -- are prescriptions of general applicability rather than "contractually negotiated rates," hence Mobile-Sierra is inapplicable.**** Whether the rates at issue qualify as "contract rates," and, if not, whether FERC had discretion to treat them analogously are questions raised before, but not ruled upon by, the Court of Appeals. They remain open for that court's consideration on remand.
Thus, if the D.C. Circuit decides that the New England ISO settlement agreement was not a "contract rate," the Supreme Court's decision that there is a higher burden for those who would challenge a wholesale contract was completely unnecessary, dealt with a hypothetical situation, and was an advisory opinion without the benefit of a real case or controversy where objectors to a real wholesale electricity contract could have framed the issue.

The Supreme Court's decision is likely to haunt states and consumer advocates in the future.

For example, in some areas, retail utilities buy large amounts of wholesale power from their wholesale affiliates, which are rubber stamped by FERC, which has jurisdiction over them. (Indeed, review is so lax, FERC does not even require such contracts to be filed so that they can be rubber stamped). See "Nonregulated" Sellers of Electricity Become "Market-Regulated" Under New FERC Rule, PULP Network, June 26, 2007.

Generally, state regulators cannot disallow costs for wholesale power purchases under FERC jurisdiction. FERC's market rate system has made it difficult for potential objectors to see or protest proposed contracts. Now, if they or consumer advocates or state attorney generals object at FERC to the terms of wholesale contracts, they will run into the obstacles placed in their way by the latest Supreme Court opinion -- which came about in a case having nothing to do with a wholesale power contract.

Congress has power to fix what has been broken, and undo the damage to consumers done by deregulation ideology embraced by FERC and allowed by the Supreme Court. See Lynn Hargis, Supreme Court Stands Consumer Utility Protection Law on Its Head; Congress Must Act, Public Citizen, January 14, 2010.

Report: Verizon to Double FiOS Early Termination Fee

According to a posting in DSL Reports, Verizon will be raising the early termination fee (“ETF”) for its FiOS television and broadband Internet service to $360 on January 17th. This amount will be double the $179 ETF in place in 2009 for a two year contract, and nearly two and a half times the $149 ETF in effect back in 2007.

The report went on to state that the ETF will be pro-rated, decreasing slightly for every month under the contract. FiOS customers apparently can avoid the ETF if they sign up for residential voice service as well. However, users will be forced to pay this ETF if they move to a non-Verizon area. As noted by DSL Reports, “That's a tricky proposition in markets like Manhattan, where a user could technically move a few blocks and wind up in an area that hasn't been wired with FiOS yet. Verizon has promised to wire all of NYC by 2014, but the NYC franchise agreement does allow some wiggle room – and you can probably expect Verizon lawyers to wiggle once the most lucrative neighborhoods have been wired.”

This increase comes on the heels of growing pressure from Congress and the FCC to reduce or eliminate ETFs for wireless services. Senator Amy Klobuchar (D-MN) has introduced a bill to set limits on ETFs. It would also require wireless providers to pro-rate ETFs and clearly notify customers about the fee, not only at the time of purchase, but for the duration of their contracts.

At the same time, the FCC has an open proceeding examining the appropriateness of ETFs in a wireless context. But even as this momentum is leaning against the application of ETFs for wireless services, is looking to double the ETF on its fiber optics service. It is time to cast a critical eye on ETFs in areas other than wireless.

Lou Manuta

Tuesday, January 12, 2010

PSC Creates New Office of Consumer Policy

Effective earlier this month, the New York State Public Service Commission ("PSC") created the Office of Consumer Policy and named Douglas Elfner to be its Acting Director.

According to the PSC, the Office of Consumer Policy will focus on consumer policy matters, including those issues raised in rate cases and proceedings, such as low income programs, service quality, Smart Grid, and other policy-related developments. It will also be responsible for outreach and education, metering, submetering, and consumer advocacy.

Outreach for the Lifeline discount telephone service will be under the new Office and Lifeline policy issues will be shared with the Office of Telecommunications.

Consumer complaints against utilities will continue to be handled through the PSC Office of Consumer Services.

Elfner has a strong background in economics, experience in utility regulation issues, and awareness of consumer concerns. He
  • received a Ph.D. in Economics from the University of Michigan, and has a Bachelors Degree with honors and distinction in Economics and Mathematics from the University of Delaware
  • was Assistant Professor of Economics at the University of Vermont, where he taught courses in econometrics and micro economics
  • worked for AT&T where he was an Economist in its Market Analysis and Forecasting organization
  • worked for the New York State Consumer Protection Board (CPB) for 20 years, and was CPB's Director of Utility Intervention for eight years, until 2008 when he joined the PSC.
Prior to the new position with the PSC Office of Consumer Policy, Elfner worked in the PSC Office of Consumer Services and in 2009 worked on New York State's new Energy Plan.

Lou Manuta

Auburn N.Y. Municipal Water User Opposes City's Motion to End Litigation Over Constitutionality of Termination and Denial Practices

In October 2008 a tenant user of municipal water utility service provided by the City of Auburn, N.Y. commenced a lawsuit in U.S. District Court challenging constitutionality of the City's utility water service practices. The tenant is represented by PULP.

The house the Plaintiff lived in was in foreclosure and the absentee owner had stopped paying Auburn for water and sewer service. Auburn shut water service off due to the owner's unpaid bills, without mailed notice to the tenant as the occupant, and the posted notice of termination gave no notice of an opportunity for a hearing.

When the tenant requested water service after it was shut off due to the owner's nonpayment, the City of Auburn, N.Y., acting under its policies, demanded that the tenant pay for all the owner's indebtedness for prior unpaid bills in the owner's name as a condition of receiving utility water service.

The Plaintiff attempted but could not afford to pay the owner's bills. Although she paid more than the cost of water service provided to her after the time she first requested service in May 2008, the City applied the payments to the owner's past bills, and repeatedly shut service off.

The Plaintiff experienced several water service shutoffs in the Spring and Summer of 2008 that eventually threatened loss of her housing in September 2008, when Auburn shut off water service and then posted a notice the next day that ordered the Plaintiff to vacate the premises immediately because the house was unfit for human habitation -- due to the absence of water service.

The City did not turn water on in response to PULP's request on behalf of the tenant for service pending a hearing at which she could show that she was entitled to service. See Municipal Water Companies Exempt from HEFPA Must Still Provide Due Process and Equal Protection to Tenant Users, PULP Network October 3, 2008.

Only after a federal action was commenced in October 2009 and a motion for a preliminary injunction was filed and an emergency court order was requested did Auburn turn the water on and retract the evacuation notice and thus moot the need for a ruling on the motion for preliminary relief. See Auburn Restores Water Service After PULP Files Federal Lawsuit and Seeks Preliminary Injunction for Tenant in Property Subject to Foreclosure, PULP Network, October 16, 2008.

In November 2009, after completing discovery, the Plaintiff filed a motion for partial summary judgment, including a brief in support of a request for a ruling that the City of Auburn violated her rights to procedural and substantive due process of law and to equal protection of the law. See Auburn Tenant Seeks Judgment that Water Termination was Unconstitutional, December 04, 2009.

On December 24, 2009 the City of Auburn countered by filing a cross motion for summary judgment seeking to dismiss the case.

On January 11, 2010, PULP filed a brief on behalf of the Plaintiff in opposition to the City of Auburn's motion. The brief addresses the City of Auburn's defense, which claims tenants have no interest under New York law in water service that is protected by due process and that its policies and practices regarding termination and denial of service to tenant water users were constitutional.

Monday, January 11, 2010

NYSERDA Proposes to Revise Allocation of $301.6 Million RGGI Proceeds

NYSERDA is proposing to revise its plans for spending $301.6 million of the projected $446.4 million proceeds from the sale of greenhouse gas allowances the RGGI program through the period ending March 31, 2012.

The proposed new spending plan is based on a more conservative estimate of future RGGI auction revenue than the original plan adopted in April 2009, which had assumed receipt of $607 million through March 31, 2012, of which $525 million was proposed to be spent on various programs.

According to the revised plan, after five quarterly RGGI auctions of greenhouse gas allowances, NYSERDA had received $181 million and was holding it as of December 31, 2009.

The proposed plan
"incorporates a provision for using a nominal amount of money for programs NYSERDA is obligated to fund pursuant to a consent decree that resolves the legal challenge to the State’s Regional Greenhouse Gas Initiative program filed in January 2009 by Indeck Corinth, L.P."
The plaintiffs sued to challenge the RGGI program on the ground that it was created by the Governor and state agencies without any legislative authority, which they contend was needed to require power producers to buy carbon allowances and to guide expenditure of the money received from the state agency auction. See Court Seeks Comment on Proposal to Use Con Ed Customer Money and RGGI Funds to Settle Lawsuit Claiming RGGI "Cap and Trade" Scheme is Illegal, PULP Network, Jan. 11, 2010.

The "nominal amount of money" from the RGGI funds which NYSERDA proposes in the revised plan to be spent in order satisfy the plaintiffs in the court case challenging legality of RGGI is $7,658,707.

The RGGI program adds to electricity costs paid by all consumers, exacerbating the hardship to lower income households. The RGGI auction revenue only partly offsets the amount of electric rate increases it causes. See See "Cap and Trade" Market System for CO2 Reduction Likely to Raise New York Electricity Prices, PULP Network, May 20, 2009; CO2 Cap and Trade Programs Inflate Electric Rates in Restructured States, PULP Network, March 13, 2009.

There is no mention in the revised NYSERDA plan of any specific allocation to benefit low-income residential customers. Other NYSERDA energy efficiency programs that ostensibly benefit residential and low-income customers
An informal advisory group will be meeting at the PSC Board Room in Albany on Wednesday, January 13, 2010 beginning at 9:45 A.M., to discuss NYSERDA's revised plans for spending the RGGI revenue. The NYSERDA website indicates the meeting will be webcast.

Friday, January 08, 2010

FCC: Verizon Service Quality Worse than Other Regional Bells

In a report released by the FCC at the end of December 2009 entitled “Quality of Service of Incumbent Local Exchange Carriers,” Verizon ranked poorly across all of its territories. The report covered the service quality of Verizon (including Verizon GTE, Verizon North, and Verizon South), AT&T (including AT&T Ameritech, AT&T BellSouth, AT&T Pacific, AT&T SNET, and AT&T Southwestern), Qwest, and Embarq from 2003 through 2008. The data did not break out the quality of service by state.

In the category of the average number of residential and business complaints per million access lines, Verizon North and South’s (reported together) numbers grew from 190.7 complaints in 2003 to 386.5 complaints in 2008. AT&T’s BellSouth territory had the next highest numbers: 128.0 and 133.7. In the category measuring the percentage of residential customers dissatisfied with residential repairs, Verizon North and South’s numbers grew from 20.8% in 2003 to 27.5% in 2008. AT&T’s SNET territory had the next highest numbers: 11.9% and 14.0%. In the category measuring the average number of hours out-of-service repairs required, Verizon North and South’s numbers grew from 34.5 hours in 2003 to 42.3 hours in 2008. AT&T’s SNET territory had the next highest numbers: 26.7 and 34.9. Verizon did, however, perform as well or better than its peers in some categories, including initial trouble reports per thousand access lines, installation commitments met, and switch downtime. In nearly all instances, Verizon’s service quality has trended downward during the years covered by the FCC’s report.

Residents of New York should not be surprised by these figures as Verizon-NY has suffered significant service quality performance problems in recent years. See: Verizon Service Quality Performance Lags, Verizon’s Big Push For FiOS Bodes Poorly for Little Guy, and PULP's White Paper - Answering the Call - Does Verizon-New York’s Service Quality Performance Justify Annual Rate Increases?. In fact, in the most recent quarter measured by the New York State Public Service Commission, merely 15.5% of Verizon’s customers who lost service had it restored within 24 hours. It is required to correct 80% of out-of-service issues within 24 hours.

Lou Manuta

Two New York Groups Receive Stimulus Funding for Broadband Projects; PULP Awaits the Fate of its Proposal

As part of the American Recovery and Reinvestment Act of 2009 , the federal government allocated $7.2 billion to the Department of Commerce's National Telecommunications and Information Administration ("NTIA"), and the Department of Agriculture's Rural Development Utilities Program to map broadband infrastructure in the United States, develop a plan for broadband deployment, and issue loans and grants to fund broadband access and availability. The first set of grants was announced last month and will continue to be issued through February. Among the projects awarded in this first round were two to expand broadband deployment in New York State totaling over $45 million. PULP's proposal for a grant to make broadband access affordable to low income customers is still pending.

Two companies, ION and the Development Authority of the North Country, will develop a regional broadband network to connect more than 100 community institutions throughout the North Country, Mohawk Valley, Finger Lakes Region, and Western New York and will enable last-mile connections to 250,000 households and 38,000 businesses. They will receive $39.7 million. In addition, Slic Network Solutions, which is owned by the rural Independent local telephone company Nicholville Telephone, will receive $5.4 million in federal funds to build a fiber optic network in rural Franklin County to deliver broadband voice and television services to remote rural areas in that part of the state.

The $45.1 million going to New York is nearly one-quarter of the $183 million awarded nationwide for broadband projects to date.

There are numerous examples of federal money leaving New York and going to other states See, e.g., All NY Phone Customers Lose Big $$ Due to PSC Lifeline Policies, so it is positive news that some broadband stimulus money will be returning to New York. However, just because broadband infrastructure will continue to be extended to every corner of the state does not mean that everyone can afford it. A goal of nationwide, ubiquitous broadband requires more than the availability of the physical hardware; the access has to be affordable if the success is to be sustainable.

PULP submitted its application to NTIA in August 2009 for stimulus funding to increase opportunities of low and fixed income New York consumers to afford and maintain broadband service . PULP proposed a stopgap solution - in the absence of any effective national or state broadband affordability program - to stimulate better utilization of existing utility low income rate discounts, so that those now on budgets seemingly too tight to afford broadband could create enough headroom to subscribe. Large numbers of New York households are currently eligible for utility rate discounts for telephone and energy services, but only a small proportion of those eligible are reached by the utilities. In addition to working to expand participation in the existing utility discount programs, PULP also proposed to develop a model for achieving affordable broadband service and model consumer protections to help prevent households from losing the service.

The remainder of the $4.7 billion set aside for broadband will be awarded over the next several weeks. However, more than $28 billion has been requested and the success of any pending proposal, including PULP's, is unclear at this time.

Lou Manuta

Court Seeks Comment on Proposal to Use Con Ed Customer Money and RGGI Funds to Settle Lawsuit Claiming RGGI "Cap and Trade" Scheme is Illegal

As we previously reported, the RGGI "cap and trade" program run by New York State agencies without enabling legislation was challenged in court by a power generator with a fixed long term contract that could not be adjusted to add the new cost of buying RGGI carbon allowances. See Millions of RGGI "Cap and Trade" Auction Proceeds Unspent Due to Legal Challenge, PULP Network, June 22, 2009.

The complaint in the lawsuit questions legality of the new duty of owners of fossil fueled power plants to buy RGGI allowances that was imposed administratively, without any legislative enabling authority. The plaintiffs allege the money from the sale of RGGI carbon allowances will unlawfully "be disbursed by NYSERDA at its unfettered discretion, with no authorization or appropriation by the New York Legislature."

Now there is a proposal to settle the dispute over whether the RGGI "cap and trade" program is legal by paying off the plaintiffs with free allowances.

This is an unseemly bargain.

Either the costly RGGI scheme is legal and the plaintiffs should not get a dime's worth of free allowances, or the scheme is unlawful and RGGI proponents should be required to seek legislative authority to regularize it and direct the allocation of the hundreds of millions of dollars it generates.

According to a DEC Press release,
Although not mandated by law to do so, the state is soliciting public comment on the settlement document. Public comments will be collected by the Attorney General's office, reviewed, and summarized for the court as part of the court approval process. If public comments reveal issues that necessitate revision of the settlement, the parties will discuss revising the Consent Decree accordingly. We expect that the 30-day comment period will commence on 12/30/09, the day that the proposed settlement is published in the Environmental Notice Bulletin

Proposed Settlement
of the Challenge to Legality of RGGI with Con Ed Ratepayer and Questioned RGGI Revenues
The case will be settled later this month if a proposed Consent Decreee is approved by Judge Thomas J. McNamara of Supreme Court, Albany County. The proposed settlement

  • Makes a $7.7 million payoff to the power producers, laundered through Con Edison, by having Con Edison buy RGGI allowances reserved for them by DEC, and then giving the allowances free to the plaintiffs,
  • It maintains the appearance that state is not giving away the allowances free,
  • It maintains the appearance that RGGI money from the questioned scheme is not directly used to pay for the allowances given to the plaintiffs as consideration for their dropping the case,
  • Con Edison collects the $7.7 million cost it incurs for the giveaway allowances from its customers,
  • NYSERDA gives an equivalent grant of RGGI funds to Con Edison, which ostensibly will benefit Con Ed customers in the future and offset the higher rates they must pay to underwrite the deal. The additional NYSERDA grant of RGGI money would be spent by Con Edison on trendy-sounding, unspecified "smart grid" projects that apparently are not otherwise being done now and are not cost effective enough to warrant investment in them today without subsidy
  • As a result, a portion of the funds whose legality is questioned is used to settle the case.
According to the press release issued by the state agencies, the proposed settlement will not add to the costs being passed through to customers to pay the higher energy prices caused by adding the cost of RGGI allowances, and public comment is invited on the terms of the settlement:
The settlement is designed to be ratepayer neutral. For every dollar spent by Con Edison to purchase allowances, NYSERDA will match those dollars for investments by Con Edison in Smart Grid technologies and/or other system infrastructure improvements. These investments of approximately $2.6 million per year from 2009 through 2011 will offset any costs to customers.
Although not mandated by law to do so, the state is soliciting public comment on the settlement document. Public comments will be collected by the Attorney General's office, reviewed, and summarized for the court as part of the court approval process. If public comments reveal issues that necessitate revision of the settlement, the parties will discuss revising the Consent Decree accordingly. We expect that the 30-day comment period will commence on 12/30/09, the day that the proposed settlement is published in the Environmental Notice Bulletin
Statement on the Settlement of the Regional Greenhouse Gas Initiative Lawsuit
Joint Statement by New York State Energy Research and Development Authority President and CEO Francis J. Murray, New York State Department of Environmental Conservation Commissioner Pete Grannis, and New York State Public Service Commission Chairman Garry Brown
, Media Newswire, Nov. 28, 2009.

Con Edison's Role
The role of Con Edison in laundering the payoff to the power producers is outlined in more detail in the notice of the proposed consent decree that would stop the court challenge to legality of RGGI. It indicates that the PSC will allow Con Edison to pass through to its customers -- through higher rates -- its cost of the payoff (buying RGGI allowances for the power producers), which is estimated at $2.6 million per year through 2014, or $7.7 million:
The parties to the Consent Decree include Governor Paterson, DEC, NYSERDA, PSC and Indeck, as well as Con Edison, BNYCP, Selkirk, and the Department of Public Service (DPS). Under the Consent Decree, Con Edison has agreed to pay the cost of the additional allowances that Indeck and Selkirk will need through the end of their LTCs in or before 2015 to cover their emissions over and above the pro rata allocation of allowances by DEC from the LTC set-aside under the DEC Rule. Con Edison also has agreed to cover the cost of such shortfall in necessary allowances that BNYCP is likely to experience through 2016, when DEC projects that the number of allowances in the LTC set-aside account will be sufficient to cover BNYCP’s allowance needs. DEC has committed in the Consent Decree to maintain the LTC set-aside account under the DEC Rule at 1.5 million allowances annually through 2016. The PSC has agreed to consider approval of a tariff amendment allowing Con Edison to pass through the costs of purchasing allowances to its ratepayers. Based on currently available information, the parties estimate the cost of these allowances will be approximately $2.6 million/year. To offset these costs, NYSERDA has agreed in the Consent Decree to use a portion of the RGGI proceeds to fund energy efficiency programs in Con Edison’s rate territory, which such funds will be commensurate with the costs associated with Con Edison’s payment of allowance costs to Indeck, BNYCP and Selkirk.
In other words, the proposed settlement contemplates Con Ed buying RGGI allowances, giving them to the plaintiffs, using money from Con Ed customers to reimburse its estimated $7.7 million cost of buying allowances for the plaintiffs, and using RGGI money from NYSERDA for unspecified new Con Ed investments that are claimed to vaguely benefit its customers.

Basically, a small amount from the hundreds of millions of dollars of proceeds of the alleged illegal RGGI scheme would be used to end the litigation by paying off the plaintiffs.

It is claimed that the added cost passed through to customers with higher Con Ed rates would be offset by a new grant to Con Ed from NYSERDA in an amount equivalent to the rate increase. However, it is not clear that Con Ed would otherwise need such a grant, what it is for, and whether the projects it would fund benefit customers or are cost effective. See AARP Opposes PEPCO Plan for Spending on "Smart Meters", PULP Network, June 19, 2009; Rebecca Smith, Smart Meter, Dumb Idea?, Wall Street Journal, April 27, 2009; Consumer Uprising Against California Smart Meter Program, PULP Network, October 28, 2009; Will "Smart" Meters Pass The Test of Time?, PULP Network, Nov. 24, 2009; Niagara Mohawk dba National Grid Seeks Continued Secrecy on Cost of Its "Smart Grid" Proposals, PULP Network, November 25, 2009

"Cap and Trade"
The "cap and trade" schemes to reduce carbon emissions, such as the RGGI program, are a favorite of deregulation advocates who tout "market solutions" to concerns about global warming. While some environmental groups - and former Vice President Gore - have now embraced "cap and trade" as a "second best" alternative, support for carbon allowance trading schemes is far from universal. Some critics in the environmental, scientific and economics professions point out that it may be very costly and ineffective.
"Cap-and-trade is a pretty lousy idea," says Paul Falkowski, Ph.D., director of Rutgers University's Energy Institute. "It doesn't reduce emissions in the near term, and we have to reduce, not just keep emissions steady. If we put a cap on and start trading, we'll slowly get off a carbon diet, but it's not going to be a steep curve, and it's going to be painful."

Falkowski, who researches the carbon cycle — the uptake and release of carbon — in the oceans, is one of many scientists who view cap-and-trade, the creation of a market for carbon-based substances, as an impractical solution to climate change.

Karina Schäfer, Ph.D., a Rutgers ecosystem ecologist, is similarly skeptical about a carbon market: "Cap-and-trade will be the next bubble. We've seen how unstable the financial and housing markets are - we've watched them increase and crash. Do we want to have the earth's climate rely on those instruments?"

"I favor a simple carbon tax," said Falkowski. "It costs ‘x' amount of money to put ‘x' amount of carbon in the atmosphere, and everybody pays that cost. We know the sources of oil everywhere in the world and how much oil is put on the market every day-futures trading is based on it. We know most of sources of coal and every major supplier of natural gas. We can tax the suppliers."

New Jersey scientists oppose cap-and-trade, support carbon tax,, Dec. 24, 2009.

Advocates of cap and trade schemes have not yet convinced federal or New York legislators to adopt them.

Perhaps this is a reason why Governor Pataki used state agencies and NYSERDA to implement the RGGI scheme in New York without enabling legislation, unlike all the other states that joined in the RGGI program, whose legislatures approved it, and, importantly, gave direction on how to use the large stream of new revenue it created.

In New York, there is no legislative control over how NYSERDA uses RGGI money. After the lawsuit was brought, NYSERDA did not spend the money. See Millions of RGGI "Cap and Trade" Auction Proceeds Unspent Due to Legal Challenge, PULP Network, June 22, 2009. Although some of it ($90 million) was swept into the general budget last year, the bulk of it remains to be spent by NYSERDA, and more money flows in regularly with each auction of RGGI allowances required to be purchased by DEC.

RGGI Impacts on Prices Paid by Customers
Another problem with cap and trade programs that they add more cost burdens to consumers. Wholesale power producers who must buy the allowances (i.e., those who burn natural gas, oil or coal) add the cost to their prices. That is what brought on the lawsuit, because some producers had long term contracts that did not allow for upward adjustment to take account of the new cost of RGGI allowances. Retail utilities like Con Edison buy wholesale power at the higher prices and pass that through to consumers.

The true cost of the RGGI program is usually understated, because the cost estimates are based on what power producers pay for the first purchase of carbon allowances at state agency auctions.

Because fossil fueled power plants typically set clearing prices in NYISO spot markets, and those markets set the same price for all sellers, the price for power produced by all, including non fossil providers -- nuclear, water, wind -- is also increased. The revenue from the increase in their prices due to the effect of adding RGGI allowance costs to the price set by fossil fuel providers is a windfall to the non fossil producers. As stated in the complaint in Indeck Corinth, L.P. v. Paterson
As a result of the operation of a market process conducted by the New York Independent System Operator (“NYISO”), this increased cost will be reflected in the price received by virtually all generators, allowing them an opportunity to recover the cost of allowances. Indeed, generators who do not need allowances (e.g., nuclear or hydro-electric generators), and generators located outside of the RGGI area who are not bound by RGGI but who bid to serve the New York market, simply as a function of the NYISO market process, will see their revenues and gross profits rise by an amount equal to the cost of the allowances, even though they will not bear that cost.
Also, cost estimates for RGGI do not take into account the reality that sellers will use the price for allowances set in secondary allowance markets when that price is higher than the allowances they bought at the state auction, allowing them to take of "scarcity pricing" and "opportunity costs" to raise their prices further (or more darkly, benefitting from market gaming in the de facto deregulated secondary allowance markets). See "Cap and Trade" Market System for CO2 Reduction Likely to Raise New York Electricity Prices, PULP Network, May 20, 2009; CO2 Cap and Trade Programs Inflate Electric Rates in Restructured States, PULP Network, March 13, 2009.

Finally, because the RGGI program only involves ten states, the higher costs imposed on New York power producers may actually encourage more importation of "dirtier" energy from neighboring areas where producers do not pay for carbon allowances, such as Pennsylvania, which did not join RGGI.

Uses of "Cap and Trade Revenue"
One of the hot legislative issues in Congress now as it considers climate change legislation is what to do with the revenue received in a "cap and trade" system when the government auctions off carbon allowances. Because of the adverse rate impacts, low income consumer advocates urge that "cap and trade" program revenues be used to reduce the electric bills of low income people by bolstering the LIHEAP program and funding low income weatherization grant programs. The Center on Budget and Policy Priorities has embraced "cap and trade" when it is coupled with measures to protect consumers. See Testimony of Robert Greenstein on the potential use of revenues from allowance sales to reduce low income customer energy burdens.

Governor Martin O'Malley of Maryland, in his 2009 state of the state message, noted that Maryland is using some of its RGGI allowance sale revenue to help reduce rates low income consumers pay for their electricity:
Maryland participated in two RGGI auctions last year and because of these efforts we are able to invest $34.3 million in programs to promote cleaner energy sources, energy efficiency and conservation, and provide rate relief for low and moderate income households-all of which will go a long way to fight climate change and lower our electricity bills.
When RGGI was first getting off the ground, PULP urged NYSERDA to target a very substantial part of the revenue it receives from RGGI allowances to benefit low income customers, whose energy cost burdens are worsened by the RGGI program. See PULP Urges NYSERDA to Use RGGI Auction Revenue to Support Low Income Energy Efficiency Programs, PULP Network, January 7, 2008.

PULP's recommendation was rebuffed, and the money is to be allocated by NYSERDA with no clear legislative guidelines for its use.

In December 2009, the New York legislature swept some of the RGGI money held by NYSERDA into the general fund, as part of a deficit reduction plan, but the legislature still has never authorized the state agencies to create and run the RGGI cap and trade scheme. If the legislature had authorized RGGI, there would have been no need now to propose paying off the power producers who challenge it.

Meanwhile, the cost of the RGGI program adds to the burdens of New York's electricity consumers, especially the poor and those who live on fixed incomes. See Wages of 30% of New Yorkers Do Not Cover Minimum Needs, June 13, 2008. More than 300,000 utility customers in New York lost service last year because they could not afford their bills. See PSC Reports on Devastating Termination Statistics, PULP Network, April 09, 2009. In the first 11 months of 2009, Con Edison shut off service to 105,338 customers for nonpayment of their high and spiking bills. Adding hundreds of millions of dollars of new financial burdens for electricity consumers with the RGGI program, without addressing the impact on the poor, was an insult.

The proposed consent decree, if approved by the court, would allow the RGGI program to go forward without adequate legislative control of its cost, without legislative oversight of the disposition of large amounts of revenue, and without judicial review of its legality.

During the comment period on the proposed Consent Decree, which runs until January 29, 2010 the agreement may be examined on the DEC’s website (, on NYSERDA’s website (, and on the NYOAG’s website (