National Grid Proposes Applying Additional $ to its Low Income Program for its New York City Natural Gas Customers

In its most recent rate case, National Grid agreed to expand its low income rates for its gas customers in Brooklyn served by KEDNY. Residential non-heating customers now receive a $2.50 monthly discount in the minimum charge and heating customers are offered a $9.50 discount. There is also a seasonal winter discount which provides an additional 45% savings off of the second rate block for heating customers. The rate plan set a 60,000 customer enrollment target.

Because it took about a year to ramp up to the 60,000 level (the company currently now has over 61,000 customers enrolled), more than $2.5 million accumulated in KEDNY’s Low Income Discount Program Balancing Account. The New York State Public Service Commission (“PSC”) December 21, 2007 decision authorizing the rate package noted that should the Balancing Account have a positive balance at the end of 2009, then National Grid or any other party could propose how the funds should be used. In a Petition filed with the PSC on June 22nd, the company proposed to enhance its current low income program by continuing to enroll customers beyond the 60,000 target. National Grid believes that with the fund balance, the program could support up to 70,000 low income customers for the remaining years of the rate plan.

The next step in this process is for the PSC to put National Grid’s proposal out for comment.

PULP agrees that this would be the best use of the funds. That said, the 60,000 customer enrollment target may have been set artificially low, especially with the economic crisis that followed the implementation of the rate plan. When National Grid/KEDNY applies for its next rate case, a more thorough examination of the number of eligible customers should be completed.

Lou Manuta

100 Million Americans Are on the Wrong Side of the Digital Divide

Only 65% of Americans have broadband at home, even though it’s available to 95%. The estimated 100 million Americans who lack broadband at home say they cannot afford it, they don’t know how to use it, believe it is irrelevant to their lives, or can’t get it. These were the findings of the Pew Center on the States report entitled Bringing America Up To Speed: States’ Role in Expanding Broadband, which was released on June 21st.

The report acknowledges that the 65% figure masks large disparities among subscribers based on several factors, including income. The researchers found:

“The group of people without broadband at home – an estimated 100 million Americans – tends to be less educated, lower wage-earning and older than those who use the service. Of adults who are high school graduates, 46 percent use broadband at home, compared with 82 percent of those who attended or graduated from college. Usage falls along similar income lines: Approximately 40 percent of households with earnings of less than $20,000 annually are broadband users, while 87 percent of households with incomes exceeding $50,000 use broadband at home. Non-adopters also more frequently belong to minority or disabled populations or live in rural areas. In fact, individuals with disabilities make up 39 percent of non-adopters nationally.”

Several states and cities have implemented creative programs to address these issues. The report cited to the NYC Connected Learning Project, which received $22 million in federal stimulus funding to distribute 18,000 computers and to provide bilingual training and a one-year, free home broadband subscription to low income sixth graders and their families. The group expects the program to reach 40,000 individuals throughout the City and has numerous collateral benefits, including exposure to broadband by parents, older generations in the home, and extended family and friends. In fact, City officials estimate that 12,000 households will continue their subscriptions beyond the year of free service.

PULP agrees that the activities in the states should be considered proving grounds for potential nationwide implementation programs to bring broadband to those who currently go without. We continue to advocate for the creation of a both a federal and state Lifeline-like program to make broadband access more affordable, which would require all customers to contribute a small amount, either directly through a line item charge or indirectly through slightly increased rates, to ensure all can afford access to this ever increasingly vital connection .

Lou Manuta

Assembly Resists Proposal to Shift Hydropower Benefits from Residential Customers

The New York State Assembly is resisting a push, in the last days of the legislative session, to approve a landmark change in the Public Authorities Law that for generations has assured that the benefit of much of the low cost Niagara River hydropower goes to "rural and domestic" customers. See N.Y. Senate passes cheap power for business, Assembly opposes benefit cuts to upstate homes, Journal News, June 23, 2010; Albany split on low-cost energy program, Rochester Democrat & Chronicle, June 23, 2010. The Assembly bill, instead of transferring hydro benefits from residential to business customers would give customers an option to keep their hydro benefits or trade it for long lasting energy efficiency measures.

The proponents of changing the law to reallocate hydropower benefits from residential to business customers do not adequately take into account the impact on residential customers, the higher electric bills they will face, and the adverse impact on the economy and jobs when very large numbers of customers have less to spend in the regional economy due to their increased bills for electricity.

The residential hydropower became even more coveted by business groups with the advent of the flawed NYISO deregulated power markets which failed to lower prices as promised. Rather than working to reform the deregulated power markets, New York's large business groups are still giving lip service to deregulation while seeking subsidy through low cost hydropower benefits under the "Power for Jobs" slogan. According to the state Power Authority:

Power for Jobs has helped hundreds of companies make the transition to the newly deregulated electricity marketplace in New York State.

With low cost power subsidies to alleviate the high wholesale market prices, New York's business groups have not been as vocal as those in other areas who are seeking reform of the deregulated power markets. Also, relatively low cost power once available from nuclear plants sold off by the Power Authority - previously available to end users on a cost of service basis - is now far more expensive because now it must be purchased from Entergy and Constellation at deregulated market rates. This shifted the value of low cost energy from consumers to merchant power producers, who are now showing increased profits:

Constellation reported margins separately for merchant generation, which increased in 2009 to $1,976 million from $1,919 million in 2008 (a $57 million increase), equal to $37.70 and $42.96 per mwh of wholesale generation in 2008 and 2009.20 Constellation attributes a significant part of the increase in the margin to “[h]igher energy prices for the output of our generating assets in the PJM and New York regions based on prices established at the end of 2007.”

2009 Financial Performance of Owners of Unregulated Generation: High Profits Earned in Restructured Wholesale Electricity Markets During the Recession, American Public Power Association, May 2010.

The proposed shift of longstanding residential hydropower benefits is opposed by consumer groups. See AARP, Consumers Union, and PULP Oppose Reallocation of Cheap Niagara Hydropower from Residential Customers, PULP Network, June 15, 2010. See also, Raiding Niagara, PULP Network, June 2, 2010.

Updates
Buffalo News Editorial, Save Upstate's Power, Speaker Silver should put Assembly in accord with Senate and governor, Aug. 4, 2010, asserting that the existing allocation of residential hydropower is "minuscule" and "frittered away."

Brian Amaral, Cuomo Pushes Low Cost Power Bill, Watertown Daily News, Feb. 3, 2011. "The new program would be twice the size of its predecessor, at 910 megawatts. It does so by taking 455 megawatts that are used to reduce electricity bills for residential energy bills upstate. The Buffalo News puts the discount at $2 to $4 a month for a household."

Maryland PSC Rejects Utility's $835 Million "Smart Meter" Plan

The Maryland Public Service Commission yesterday rejected a request of Baltimore Gas & Electric (BGE) to replace, at utility customer expense, all of its gas and electric meters with new "smart" meters. If approved, the BGE request would have cost utility customers more than $850 million.

In its 54 page order, the Maryland Commission rejected the entreaties of the utility and the agency's staff to risk large amounts of customer money on speculative investment, stating:

Although we share BGE’s (and others’) hopes, and even enthusiasm, for the long-run potential and importance of the infrastructure upgrades known colloquially as the “smart grid,” we find the business case for this Proposal untenable. The Proposal asks BGE’s ratepayers to take significant financial and technological risks and adapt to categorical changes in rate design, all in exchange for savings that are largely indirect, highly contingent and a long way off. We are not persuaded that this bargain is cost-effective or serves the public interest, at least not in its current form.

The Maryland Commission noted how the proposal was shifting risk to consumers:

BGE’s Proposal is not solely a request for approval of the deployment of AMI. It also is a request to establish a customer surcharge for advance recovery of the costs of the Proposal, thereby shifting all financial risk to BGE customers. The Company seeks approval to recover those costs through a “tracker” surcharge that would begin appearing on BGE bills for both gas and electric customers almost immediately upon the Commission’s approval of the Proposal, but before any of the infrastructure is installed or any benefits are realized. In addition to recovering the Proposal’s capital and operating costs through the tracker mechanism, the Company proposes that the surcharge be used, among other things, to collect a return on the Company’s net investment under the Proposal, as well as to collect Company “incentives” tied to anticipated wholesale capacity revenue, wholesale energy revenue, and wholesale capacity price mitigation resulting from anticipated changes in its customers’ energy use.... The tracker virtually guarantees that the Company will recover from its ratepayers the prudently incurred costs associated with the Proposal, a profit for its investors, and a portion of certain projected benefits, if they are realized. In other words, with the proposed tracker in place, the Proposal is a “no-lose proposition” for the Company and its investors. In its filings with this Commission, BGE repeatedly has stated that cost recovery via a tracker mechanism is an “essential” element of the Proposal, and that it will withdraw the Proposal if the tracker is not approved.

The staff of the Maryland Commission recommended approval of the plan with minor modifications.

The Maryland Office of People’s Counsel and AARP opposed the proposal on behalf of consumers. They conducted discovery and sponsored expert witnesses who scrutinized the policy and economic underpinnings of the BGE request, and testified against it at hearings.

Expert witnesses on behalf of consumers included Barbara Alexander, former New Hampshire Public Utility Commissioner Nancy Brockway, and Rick Hornby from Synapse Energy Economics.

This is a major defeat for the utility scheme for costly and unproven "smart meter" deployment, and a major victory for consumers in prevailing over the "greenwashing" rhetoric of "smart metering" that too often substitutes for thought and common sense. The case reveals the necessity to go beyond "smart grid" slogans and rhetoric, and base decisions on evidence and sound economics. It illustrates the importance of adequately funded, truly independent utility consumer advocates willing and able to challenge the latest trendy fad pushed by the utility industry at customer expense.

Finally, the case illustrates why state utility regulators, who often are political appointees and not themselves experts, must go beyond rubber-stamping the recommendations of their own agency's senior staff advisors, who often come from the utility sector -- or who may be looking at the "revolving door" to follow up a career in state regulation with a second career working (again) for utilities as their lawyers or consultants.

Update
See the Comments and Reply Comments of NASUCA to U.S. Department of Energy requests for information regarding "Smart Grid" initiatives. In their Reply Comments, NASUCA stated:

"First, the consumers are the ultimate owners of their energy consumption data. The establishment of privacy protections for personal energy information is critical, and the issue must be resolved in favor of the highest degree of consumer protection.

Second, consumers should have the choice to participate in any advanced metering program or in any dynamic pricing schedule that may involve data sharing arrangements.

Third, there are unique differences among electric consumers that must be considered for any Smart Grid deployment.

Fourth, investments made in Smart Grid technologies must be supported by a detailed cost-benefit analysis and subject to evidentiary proceedings and prudence review before costs are passed on to utility consumers."

Rent Stabilized Tenants Oppose Coop Plan to Replace Con Edison with Submetered Electric Service

On March 4, 2010, Bay City Metering Company, Inc., an unregulated provider of utility services to owners selling submetered electric service to tenants, filed an application with the New York State Public Service Commission to replace individual directed metered Con Edison electric service with submetered service at a New York City residential cooperative at 61 Jane Street. Public Service Commission regulations generally prohibit residential submetering, but allow it on a case by case basis.

According to the application, coop shareholders could save money by purchasing electricity in a different bulk rate classification instead of receiving service at the rate applicable to residential customers. Physically, Con Edison meters now measuring service to apartments would be replaced by the owner's meters:

The existing metering system consisting of electro-mechanical meters located throughout the building in meter banks and this system will be retained with the existing meters being removed and returned to the Con Edison Company and new meters of the same type and manufacturer as the Con Edison Company currently installs will be installed in the existing meter sockets within the building.

Bay City's application was revised, and revised a second time. A notice was placed in the State Register inviting public comment on the application.

On May 24, 2010, rent stabilized tenants residing in the building moved to intervene in the case and filed comments opposing the plan that would require them to purchase electric service from their landlord. The comments argue that

• Con Edison has a statutory and common law duty to continue to serve its customers.
• The usual rationale for submetering, energy efficiency, is inapplicable because residents are already direct metered for all their usage by Con Edison.
  
• Residents would be "slammed" into taking service from the owner without their informed consent.
• Savings from submetering are exaggerated, and if there are savings there is no assurance that any savings would be passed through to tenants.
  
• Residents would lose service options they now have from Con Edison, such as time of use rates, green energy, and choice of ESCO providers.
• Residents who have chosen ESCO service will have to halt it and may be exposed to early termination fees.
• Tenants would receive service from owners of the apartment in which they reside, and would not be customers of the entity seeking permission to submeter.
• The PSC would unconstitutionally abridge contracts of the residents with Con Edison if it requires a conversion to submetered service.
  

The tenants are represented by PULP. For more information, see PULP's webpage on submetering.

TracFone Lifeline Phones Sold on Craigslist

NASUCA, the National Association of State Utility Consumer Advocates, of which PULP is a member, distributed a consumer alert on June 16th to inform customers that some TracFone SafeLink Lifeline telephones have been placed for sale on Craigslist. The ads are extremely problematic because the SafeLink phones are to be only used by Lifeline-eligible low-income customers, the reduced cost of the phones and service is made possible by all telephone users contributing to the federal Universal Service Fund (“USF”), and there is no way to know whether a second purchaser of a phone from Craislist is eligible for Lifeline.

TracFone offers its SafeLink New York customers a free telephone and 68 minutes a month for incoming and outgoing usage. There is a premium when additional minutes are added . As PULP has reported, TracFone is now the largest Lifeline provider in New York State, with approximately 400,000 customers. This translates to about $4 million a month in revenue for the company – just for New York – from the federal USF. By comparison, Virgin Mobile’s Assurance Wireless product offers Lifeline customers in NY a free phone and 200 minutes a month, with the same reimbursement dollars from the federal USF .

According to NASUCA,

The unauthorized sale of TracFone’s SafeLink equipment and minutes through Craigslist means services may be transferred to ineligible consumers that should raise red flags for federal and state regulators. Telephone consumers need to be assured that TracFone’s products are only being utilized by low-income consumers authorized and eligible to receive federal Lifeline benefits.

When contacted by NASUCA, Rick Brecher, counsel for TracFone, stated that "TracFone is aware of the attempts to sell SafeLink phones on Craigslist and eBay. The company is working with the FCC, state commissions, and with Craigslist and eBay to stop this. Phones are terminated when it is learned that they have been listed for sale, and at our insistence, they are delisted from the sites. Please be assured that TracFone takes these situations very seriously and is doing all it can to stop this practice."

It is unclear how any company could keep track of all the listings on Craigslist and eBay regarding the re-sale of their product. While Craigslist and eBay could be asked to “keep an eye out” for sales of the SafeLink phones, there is no requirement for them to do so and, if they agree, they could be held liable if the phones continue to be sold. On top of this, regular TracFone phones (which look just like SafeLink phones) that are sold on either site would not be subject to these restrictions because there are no eligibility requirements to use them and the phone and usage are not subsidized through the federal USF. It is therefore asking a lot of Craigslist and eBay to police the sale of SafeLink phones on their own.

Today, less than half of the eligible Lifeline customers in New York subscribe to the service, even taking into account the SafeLink and Assurance customers. What impact will increased vigilance on the re-sale of Lifeline phones have on Lifeline enrollment? We do not want to scare people away from enjoying the service if they are eligible, but people who are not eligible should not be able to bypass eligibility requirements because they pick up the phone on Craigslist. Too many millions of dollars are at stake and too many people who need Lifeline are going without.

Lou Manuta

DOJ Asks Court to Approve Proposed Settlement of KeySpan Antitrust Case Despite Consumer, Utility, and Government Opposition

Despite broad consumer, utility, and government opposition, the United States Department of Justice (DOJ) Antitrust Division filed papers in the Southern District of New York federal court last week in further support of its proposal to settle an antitrust case against KeySpan for inflating prices in the NYISO market for electric capacity. Under the Tunney Act, DOJ cannot simply settle an antitrust case with the alleged violator of the law. Rather, it must offer an opportunity for public scrutiny of and comment on the proposed agreement, and respond to public comments, and convince a federal judge to approve the deal in an open process.

The background of the KeySpan antitrust case is discussed here and here. Basically, KeySpan withheld capacity from the NYISO market, by offering to sell it at the maximum allowable price per Megawatt, as a strategy to drive up the price paid to all suppliers under the NYISO auction rules. KeySpan "insured" itself against sales lost due to the high price per Megawatt by entering into a financial derivative contract with Morgan Stanley which paid off handsomely for KeySpan when the price per Megawatt exceeded a threshold level. KeySpan's share of profits was only part of the higher prices paid by consumers, because all capacity providers received the same inflated price. In 2006 alone, the amount of price inflation was estimated to be $157 million, and KeySpan's share of profits due to inflated prices was variously estimated to be from $44 million to $68 million. DOJ in its response to public objections said that it estimated KeySpan's gain from the swap strategy was $49 million. In addition to these gains from the derivative contract, the price of all the capacity sold by Keyspan was inflated.

The Justice Department tentatively agreed with KeySpan to settle the case with no admission of wrongdoing by KeySpan and payment by KeySpan of $12 million to the United States Treasury. After receiving critical comments, DOJ stated:

the United States remains of the view that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and that its entry would therefore be in the public interest. Plaintiff's chosen remedy in this case deprives KeySpan of ill-gotten gains, effectively deters the harmful behavior, and establishes the United States's willingness to seek disgorgement in appropriate cases.

DOJ indicated it will now ask federal judge Hon. William H. Pauley III for an order approving the proposed settlement.

The public comments question the claim of the government that the proposed settlement would actually deprive KeySpan of enough of its "ill-gotten gains" or that it would deter future harmful behavior or provide an equitable remedy.

AARP
AARP led the consumer opposition in its comments opposing the proposed settlement. As summarized by DOJ in its Response:

AARP asserted that the settlement is not in the public interest because of the “lack of any monetary remedy or other discernible benefit for injured consumers, and the absence of a credible deterrent.” It claimed that there is an inadequate factual foundation to determine the appropriateness of the amount of the remedy and its deterrent effect. It further noted that the decree contains no admission of guilt by KeySpan and no “public shaming.” AARP requested that the proposed Final Judgment be amended to require an acknowledgment of wrongdoing, identification of total “inflated prices” for capacity, identification of the derivative contracts at issue, and disgorgement of all profits. In the alternative, AARP argued that the record should be augmented to show the total profit “achieved by all sellers in the NYISO capacity market,” an estimate of the “total damage and economic harm” to consumers in the entire state of New York, the revenues KeySpan received under the Swap, and the rationale for accepting less than full disgorgement and for not providing any remedy to benefit injured customers.

Con Edison
Con Edison in its comments did not question adequacy of the amount of the proposed partial disgorgement, but urged that the $12 million be distributed equitably for the benefit of consumers. Con Edison argued that the settlement should provide relief to the customers who were overcharged due to the KeySpan gambit that successfully raised NYISO prices.

The settlement is not in the public interest because it does not provide relief to the individuals that have been harmed by KeySpan's actions under the KeySpan Swap Agreement. . . . While the DOJ commendably condemned KeySpan's anticompetitive actions, which artificially raised New York City capacity prices, and sought an equitable remedy disgorging profits, its proposed remedy is inadequate in that it provides for KeySpan to pay the $12 million to the U.S. Treasury rather than to the individuals who ultimately were harmed.

Unless these funds are paid to the consumers who were injured, the effects of the violation stated in the CIS are not cured and the proposed consent judgment is inadequate. Without providing relief to these parties, the settlement fails to satisfy the public interest standard. . . . Finally, it is not a bar to providing relief to consumers that the precise amount of harm to them has not been calculated. KeySpan's conduct may have caused much greater injury than the $12 million it has agreed to disgorge. Equity does not allow a party to take advantage of imprecision that a wrongdoer is responsible for creating.

Con Edison asked the court to "find that the proposed consent judgment is not in the public interest until and unless any monetary payments disgorged by KeySpan are used to provide relief to New York City's electricity consumers."

Under Con Edison's retail rate tariffs, the cost of wholesale electric capacity purchased in NYISO markets is normally flowed through to retail customers, and Con Edison makes monthly rate adjustments to reflect changing wholesale costs. A refund could easily be flowed through to benefit customers with credits in the same manner as the overcharges were flowed through. Or it could be administered through the NYISO.

New York City Economic Development Corporation (NYCEDC)
NYCEDC in its comments pointed out the disparity between the amount of the proposed disgorgement and estimates of what KeySpan gained in its gambit:

More than ten years ago, when the New York State energy markets were deregulated by the NYSPSC, the City power plants were divested in an effort to reduce the potential for market power abuse. However, as the Complaint herein describes, the in-City capacity market is an oligopoly, with three dominant generation suppliers known as the divested generation owners ("DGOs"). This was true during the operative period of the illegal conduct alleged by the Department of Justice ("DOJ") Antitrust Division here, and it remains true today. KeySpan was a pivotal bidder, i.e., at least a portion of its capacity was needed to permit the market to clear. Moreover, it was the largest generation supplier in the City, with some 2400 megawatts of capacity. . . .

The City and NYCEDC are in accord with the view expressed by NYSPSC that the proposed $12 million disgorgement is inadequate given the scale of the unjust enrichment to KeySpan here. We also believe that a credit for the disgorgement amount could readily be provided to the victims of the conduct here through credits provided through the NYISO wholesale market.

NYCEDC pointed out the anomaly of KeySpan giving up only $12 million of at least $44.3 million in profits from the challenged derivative agreement and questioned the deterrence effect:

Regarding the gain attributable to the conduct challenged here by DOJ as violative of the Sherman Act, at least a portion of the benefits were disclosed by the company itself: KeySpan stated its gain attributable to the Morgan Stanley agreement was $44.3 million in the period from May through September of 2006. . . . Given the workings of the market clearing process, the overall adverse impact on City energy consumers flowing from the practices described in the Complaint was of course far larger. . . . the City energy and capacity markets remain highly concentrated and bear the classic indicia of an oligopoly market: few significant suppliers, high barriers to entry, and accompanying high prices. Conduct similar to that outlined in the Complaint here may well occur in the future as it has in the recent past.

New York Public Service Commission (NYPSC)
The NYPSC filed comments questioning both adequacy of the amount of the proposed disgorgement and the failure to provide any remedy for the consumers who ultimately paid for the overcharges. The NYPSC estimated KeySpan's share of excessive market rates due to the withholding/derivative strategy to be $68 million, being the difference between a competitive price and the inflated price achieved. Thus, ceding just a $12 million portion of the total profits to the government would not be a deterrent at all, and rather, could be seen as just another "cost of doing business." And, it could be added, that slight "cost of doing business" would only be incurred if a price inflation strategy was detected and pursued.

New York Consumer Protection Board
The CPB filed brief comments supporting the position of the NYPSC.

Pennsylvania Public Utilities Commission (PaPUC)
The PaPUC lobbed in a softball comment, praising DOJ for acting after the Federal Energy Regulatory Commission utterly failed to address or correct the NYISO market abuse. PaPUC's comment highlights the national importance of the case, because even though the particular rules have changed in the NYISO capacity market, analogous opportunities for price inflation may abound in other auction markets for electric energy, capacity, or other services characterized by similar oligopolistic pricing opportunities and behavior:

Moreover, it is not clear that the facts in this case are limited in time and place; while the tariff rules in question in this case apply to a specific geographic location and time period, the general method employed by the defendant to avoid competition (i.e., the purchase of a financial interest in the operations of a competitor through a third party) is not so limited.

PaPUC acknowledges that "we cannot state whether the equitable and financial penalties in the [proposed] Final Judgment result in the full remedy of injury to the public from execution of the scheme."

DOJ's Response
Despite the broad consumer, utility, and regulator opposition to the proposed deal to close the case, the DOJ Antitrust Division adhered to its position in its Response to the public comments:

Had the case proceeded to trial, the United States would have sought disgorgement of the approximately $49 million in net revenues that KeySpan received under the Swap... contending that these net revenues reflected the value that KeySpan received from trading the uncertainty of competing for the certainty of the [economic withholding] strategy. . . . The $12 million disgorgement amount is the product of settlement and accounts for litigation risk and costs. . . . The United States contends that the Swap removed any incentive for KeySpan to bid competitively, locking it into bidding its cap instead of evaluating competitive choices, each of which could have resulted in different market clearing prices for capacity. . . . While we cannot quantify with certainty KeySpan’s bid levels or the outcome of the market clearing price that would have resulted but for the Swap, depriving KeySpan of $12 million in Swap revenues would have reduced the value to KeySpan of engaging in the anticompetitive Swap strategy, thereby shifting the results of KeySpan’s cost benefit analysis toward competitive strategies rather than entering into the Swap. . . .

DOJ's argument lacks force.

How is bad conduct deterred if, by DOJ's own calculation, KeySpan reaped $49 million from its gambit and after being caught, admits no wrongdoing and keeps $37 million of it? How does that calculation encourage one to bid competitively and forego the temptation to earn possibly $49 million and at worst $37 million if caught?

DOJ also questioned the NYPSC estimate that KeySpan earned $68 million due to the strategy. In an interesting analysis that should trouble anyone relying on NYISO market prices, DOJ rejected the higher number on the theory that the measure of price inflation was not the difference between the high inflated price achieved by KeySpan and a competitive price, but the difference between the inflated price and the NYISO market price that would have been set but for the KeySpan gambit. That price, DOJ recognized, is not competitive:

The United States believes that, absent the KeySpan Swap, KeySpan and the other pivotal suppliers would have engaged in tiered bidding upon the entry of new generation capacity in 2006. . . . In other words, in the but-for world, tiered bidding strategies at prices lower than the cap would have been compelling for KeySpan and the other pivotal suppliers because they offered significant upside, and these suppliers would have been able to structure their tiered bids to limit their downside risk relative to bidding their caps. As a result, market prices likely would have cleared at a level below the cap but above competitive levels.

Stripped of the jargon, the players in the oligopolistic NYISO electricity markets may elevate prices through autonomous tiered ("hockey-stick") bids that do not require conspiracy or agreements to raise prices that would violate antitrust laws. Thus, DOJ's measure of the amount KeySpan reaped through its illicit agreement is the difference between the price obtained and the "normal" but still uncompetitive price that would have otherwise prevailed in the flawed NYISO marketplace. See Study Finds High Profits for New York's Electric Power Generators, PULP Network, June 08, 2009.

DOJ argues in support of the partial disgorgement that it is based on the government's assessment of the risk of litigation, i.e., KeySpan could win the case if it went to trial. The issue presented, whether an electricity market player violates antitrust law by withholding supply to raise prices coupled with a derivative contract that pays off when the price is elevated, needs to be decided.

If KeySpan's gambit was unlawful, all of its ill-gotten gains should be disgorged for the benefit of the consumers who were injured. DOJ argued that refunds for the benefit of consumers might run afoul of the "filed rate doctrine." However, neither the swap contract between Keyspan and Morgan Stanley nor the rates demanded by Keyspan in the private NYISO capacity auction were publicly filed with FERC in advance as required by Section 205 of the Federal Power Act, and so the "filed rate doctrine" does not apply at all. Unfiled contracts can be revised even after they have been performed. See Joshua Z. Rokach, FERC’s Jurisdiction Under Section 205 of the Federal Power Act, 15 ENERGY L. J. 83, 89 (1994).

If KeySpan's gambit was lawful, it should not have to pay a penny to the government. In that event, FERC would need to reconsider its laissez faire approach to market-based rates and scrutinize rates and contracts to ensure they are just and reasonable in order to protect consumers, which is the primary purpose of the Federal Power Act.

Under the proposed settlement, nothing is decided and market players are given the green light to engage in analogous schemes involving anomalous bidding in electricity markets coupled with financial derivative contracts that pay off when the market price is successfully skewed.

Updates
Mason, Monts III, and Edwards-Ford, Certain financial hedge arrangements can violate Sherman Act, International Law Office, July 15, 2010.

Matthew L. Wald, Critics Assail U.S. Plan to Settle With KeySpan, N.Y. Times, July 21, 2010.

The New York PSC's motion to file an amicus brief in response to the DOJ reply to public comments was granted in August, 2010. The court scheduled a conference of the parties to be held in October. PSC correspondence indicates DOJ opposes its presence in the case as either a party or amicus. The Court issued an order October 4, 2010 indicating its questions at the October 12 conference would include these topics: (1) The factual basis for the Government's calculation of Keyspan's earnings under the swap agreement; (2) The use of disgorgement as a remedy in an antitrust action; and(3) The Government's consideration of alternatives to the proposed final judgment.

Memorandum and Order, Feb. 2, 2011. U.S. District Court Judge William H. Pauley III, approved the settlement on the terms agreed to by the Government, rejecting the arguments of objectors.

Matthew L. Wald, KeySpan Price-Fixing Penalty Approved - Some Call It Low, N.Y. Times Feb. 2, 2011. "Although price-fixing by an electricity company may have cost New York customers nearly $300 million, the federal government can close the books on the case by collecting a penalty of just $12 million, a judge ruled on Wednesday."

Michael Giberson, United States v. KeySpan Corporation antitrust Case Settles for Paltry $12 Million, Knowledge Problem, Feb. 2, 2011. "$12 million seems like a too-modest remedy."

AARP, Consumers Union, and PULP Oppose Reallocation of Cheap Niagara Hydropower from Residential Customers

AARP, Consumers Union, and PULP have joined in a statement opposing legislative reallocation of the portion of low cost hydropower now targeted by law for the benefit of residential and rural customers. Business groups are proposing to shift the benefit in order to subsidize selected businesses in the name of job creation, i.e., "Power for Jobs."

Reallocating the benefit of residential hydro power would raise electric bills significantly for large numbers of consumers, making matters worse for them and would harm local economies. As stated by a representative of NYSEG/RG&E to a legislative commission on hydropower:

In addition, and just as important, a loss of this power to residential customers in the NYSEG and RG&E service areas would significantly increase rates, severely impacting customers at a time when the upstate economy continues to struggle. Absent the Niagara Project allocation, residential electricity rates would increase 7.2% to 8.7% for NYSEG customers and 10.8% to 14.2% for RG&E, depending on the type of service a customer has chosen. If St. Lawrence allocations, which are covered by the same contracts that cover the allocation of Niagara Project power, were also lost, the rate increase climbs to between 12% and 14.5% for NYSEG customers and 19.6% to 25.7% for RG&E customers. These dramatic increases at a time when the upstate economy continues to struggle would cause a true hardship for our customers.
**** Suggesting that these savings are meaningless to a residential customer and that the residential customer allocation would be better spent on economic development programs is irresponsible. The commission should resist an arbitrary shifting of this allocation to programs that may not add significantly to the regional economy. It cannot be assumed that the transfer of low-cost power from residential customers to a business creates an automatic, substantial win for the economy.

See Raiding Niagara, PULP Network, June 2, 2010. The consumer groups are supporting an Assembly alternative that would provide customers an opportunity to trade their low cost hydro benefits for energy efficiency assistance, and thus have an opportunity to choose whether to forego the benefit of their low cost hydro power.

PULP's Funding and Future Still in Jeopardy

With the legislative session nearing an end, and the expected adoption of a budget for the 2010-11 state fiscal year, which began April 1, 2010, essential funding necessary for PULP's continued operation is still in jeopardy. See AARP Urges State Senate to Save PULP. PULP has exhausted its funds and cannot pay its staff or other bills now, and will cease operations without continued funding in the forthcoming state budget.

Oceangate Tenants Reply to Owner's Defense of Submetering

We have previously discussed the halt of electricity submetering at the Oceangate apartment complex in Coney Island. See Oceangate Submetering on Hold Pending PSC Review of Tenant Petition for Stay and Impact Assessment, PULP Network, February 20, 2010. The association of Oceangate tenants, the North Bay Tenants Association, filed a Petition asking the PSC to halt implementation of submetering due, among other things, to lack of due process when the order allowing submetering was being considered, the submetering of electric heat, and the need to conduct a review under SEQRA of potential displacement effects due to a likely mismatch between new charges for electric service and insufficient adjustments to rent or utility allowances.

The owner, a Starret Corporation affiliate, filed its Response May 14, 2010.

The Northbay Tenants Association filed its Reply June 10,2010. The tenants argue that submetering should not be imposed because:

• No assessment of the impact of submetering electricity for heatupon 542 low-income tenant households at Oceangate has ever been completed or even initiated;
  
• Commission experience and precedent necessitates an assessment and mitigation of financial harm to tenants before submetering of electricity for heat is permitted, and Respondent did not submit information to the Commission sufficient for it to make such an assessment;
  
• The owner failed to satisfactorily submit necessary information;
• The owner failed to satisfy requirements of PSC and HUD regulations designed to protect tenants;
  
• The prior order was issued by the PSC without timely and adequate notice to tenants of any opportunity to participate in the proceeding, in violation of lawful procedure and of the tenants' rights to due process of law required before issuance of an order affecting their homes, their leases, and their property.

The North Bay Tenants' Association is represented by PULP.

Colorado Governor Vetoes VoIP Deregulation Bill

On June 7th, the Governor of Colorado, Bill Ritter, Jr. , sent a veto message regarding House Bill 10-1281 which would have permanently exempted Voice over Internet Protocol ("VoIP") providers from regulation by the Colorado Public Utilities Commission ("PUC"), including the voice telephone services offered by the cable companies. Citing activity at the FCC regarding the proper regulatory treatment of VoIP, Ritter stated that it would be "unwise" to be "presumptively barring the State from regulating VoIP at this time." PULP couldn't agree more.

The Governor added:

As this progression from landlines to VoIP occurs, Colorado cannot be left without the power to regulate such an important technology. Should the need arise, regardless of movement at the federal level, the PUC must have the latitude and authority to regulate the price, quality of service, and availability of VoIP in order to prevent significant harm to the consumers of this State.

There are bills similar to the Colorado bill all over the country, mostly endorsed by the incumbent landline telephone carriers who are looking to expand their VoIP offerings and thus escape state regulation. The end result of such an approach would be that the state commission would have no authority over the providers and their customers would not be protected with telephone service quality standards, consumer protections, and affordability requirements. We're well on that way here in New York with VoIP providers and wireless companies taking away half of the incumbent's access lines. So, even in New York, our state Commission no longer exercises jurisdiction over half the market it was created to protect. In contrast, Maine is considering action to protect users of telephone service receiving it through the alternative VoIP technology.

What New York needs is not a VoIP deregulation bill, but a VoIP explicit regulation bill, one where it plainly states that VoIP is covered by the same rules and regulations as companies like Verizon. We should not be put in a position where customer protections are gradually eliminated due to a technological change or the only thing protecting telephony consumers is the possibility of the governor waiving his veto pen.

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FCC Begins Exloring Lifeline for Broadband

On June 8th, the FCC announced that its Wireline Competition Bureau will be hosting a roundtable discussion to enable interested parties to discuss the design of pilot programs that would provide subsidies for broadband access to low income consumers, a program similar to the Lifeline discount program for telephone users . The pilot concept comes from the recent FCC actions in proposing a National Broadband Plan and affordability is a key component to achieve universal broadband access.

In order to develop a pilot, the FCC is looking for input on several topics, including: (1) Pilot program goals and potential obstacles to achieving those goals; (2) Criteria for, and selection of, carriers to participate in pilot programs; (3) Criteria for, and selection of, consumers to participate in pilot programs; (4) Scope and duration of pilot programs; and (5) Metrics to measure accomplishment of goals.

PULP has been invited to participate in the roundtable discussion and is working on specific talking points, some which will be based on last year's application for a federal broadband grant to help make broadband more affordable,which has not been funded. Unless people can afford monthly charges for the service, it won't matter how much money is spent to bring broadband "access" to the doorstep.

Lou Manuta

Verizon Asks PSC for Permission to Stop Delivering White Pages

The June 2nd New York State Register included a posting from the New York State Public Service Commission ("PSC") seeking comments on Verizon's request for a waiver of the requirement to distribute residential white pages directories to all of its customers. The company claimed that the current requirements are no longer necessary and granting its request would be environmentally sound.

Under section 602.10(b) of the PSC's regulations, all local exchange carriers in the state are required to distribute a residential white pages directory to all customers within the service area covered by the directory. In support of its Petition, Verizon argued that "[t]echnological advances, such as Internet directories and the directories in wireless and wireline devices, have made customers much less reliant on, and interested in, printed residential white page directories." While it would still distribute business white pages, government blue pages, and the yellow pages, if its request is granted, it would only continue to distribute the residential white pages to customers that request one. The company cited to a Gallup study which showed that the percentage of households using stand-alone residential white pages dropped from 25% in 2005 to only 11% in 2008.

Verizon went on to add that other states - including Florida, Ohio, and Florida - have already determined that it is permissible to only provide residential white pages upon request.

PULP certainly understands the basis for Verizon's request. The paper involved with the printing of the residential white pages, not to mention the costs to print and distribute, may no longer make sense when, if the company is correct, only a small percentage of customers actually use the white pages and there are other means available for customers to retrieve telephone numbers. However, in many upstate communities, the white and yellow pages are combined, so a "phone book" would continue to be distributed to all customers, which may lessen the claimed cost savings and environmental benefits.

That said, not all of Verizon's customers can afford Internet access to use its online database and may not have a wireless phone available to look up telephone numbers without additional cost. At the very least, Verizon should continue to automatically distribute the white pages directories to their Lifeline customers who are much less likely to have internet service. This is an easily recognizable group for Verizon to locate and these people should not have to ask for a white pages directory. Rather, it should continue to be provided without any action on the part of the Lifeline customer.

Also, while Verizon has pledged to "make residential white page directory listings available to customers upon request in printed form, on CD-ROM, or on-line at no charge," the company does charge a significant amount of money for calls to directory assistance. Under the current tariff (at page 498), Verizon charges $1.50 for each directory assistance call, in which up to two telephone numbers can be requested. PULP believes that in the absence of a residential white pages directory, Verizon should be required to offer five free directory assistance calls a month to each residential customer, which would equal 10 telephone number requests per customer each month. If Verizon is correct and the availability of a white pages directory will not be missed by 89% of the public and most people receive telephone numbers from the Verizon webpage, then conditioning the approval of its request on this requirement should have no measureable financial impact on the company.

A better result: Dismiss Verizon's petition altogether and launch a generic proceeding to examine all of the state's service quality, consumer protection, and universal service requirements with an eye towards streamlining these mandates, but have the resulting regulations apply to all telephone providers in the state, including wireless and the voice services provided by the cable companies. The piece meal approach advocated by Verizon - its directories request was submitted on the heels of its petition to eliminate the timeliness of repair metricsexcept for "at risk" customers , which followed the company's requested changes to the disconnect notice requirements -- is the least efficient means of accomplishing these goals.

Comments on Verizon's white pages proposal are due by July 17th.

Lou Manuta

The Topsy Turvy World of Lifeline Enrollment in New York

As PULP has reported on numerous times in recent years, telephone Lifeline enrollment for reduced price telephone Lifeline service in New York State with the landline providers has dropped by more than 50% since its peak in 1996 . However, according to the latest postings from the Universal Service Administrative Company ("USAC"), the FCC's designated administrator of the federal Universal Service Funds, while Verizon's Lifeline enrollment totals have been on a roller coaster for the past year, TracFone's numbers are reaching ever higher.

Among its many quarterly reports to the FCC, USAC includes a table (Table LI01) showing the amount of money paid to Lifeline providers in a given quarter. These figures can be divided by three to calculate the monthly amount and then divided by 10 to determine the number of customers served (the federal reimbursement rate for New York State is $10 a month per Lifeline customer). Thus, a seven million dollar figure for a particular quarter would translate to approximately 233,333 Lifeline customers.

For the first two quarters of 2009, USAC reported that Verizon's Lifeline enrollment grew from nearly 235,000 to about 239,000, while TracFone did not have any Lifeline customers to report. Then, in the third quarter of 2009, Verizon counted about 246,000 Lifeline customers and TracFone began with 21,414. Through the current quarter (second quarter of 2010), Verizon has gone from 255,000 to 269,000 and back to 240,500. Meanwhile, TracFone's subscribership exploded: 181,000 to 329,000 to 403,000 during the same time period. According to USAC's projections, the third quarter of this year will yield nearly 236,000 Verizon Lifeline customers and over 399,000 TracFone Lifeline customers. That's right: since the beginning of the year, TracFone has been the largest Lifeline provider in New York and has gone from 21,414 Lifeline customers to 399,000, which translates to nearly $4 million a month in revenue just from New York. They are followed by Verizon, and then much further back, Virgin Mobile (operating as Assurance Wireless), Frontier Telephone of Rochester, Citizens Telecommunications, XChange Telecom, and AT&T.

While TracFone's success is unprecedented, it comes at a steep price to its customers. The company does offer a free handset and free minutes, but only 68 minutes a month for both incoming and outgoing calls. Once a customer exceeds that amount, they will need to purchase additional minutes at a premium. Meanwhile, Virgin Mobile offers a free handset and 200 minutes a month - all with the same $10 monthly reimbursement from USAC that TracFone receives.

These results reveal incredible growth in wireless Lifeline service and some variability in Verizon's Lifeline customer count. The state's Office of Temporary and Disability Assistance reported in March (at Table 16) that there are over 1.4 million Food Stamps households in New York (one of the primary eligibility criteria for Lifeline) and we now have a little over 700,000 Lifeline subscribers across the state, including all landline and wireless Lifeline providers. While this is certainly a great improvement, it is a mixed blessing. Virtually all of the subscribership growth is in an area outside the state Public Service Commission's ("PSC") current regulation of terms and conditions, meaning that no enforceable service quality or consumer protections apply to protect either TracFone or Virgin Mobile's customers. This giant step forward may end up leaving thousands of our most at-risk people behind. When will the PSC act to boost Lifeline enrollment to include more persons living in poverty or take the step to exert jurisdiction over terms and conditions of wireless service, which can be accomplished under state law by conducting a hearing and deciding that doing so is in the public interest? When more Lifeline customers are wireless customers than landline customers, the time for this hearing may have finally arrived.

Raiding Niagara

The New York Public Authorities Law Section 1005 generally requires, with some exceptions, that hydro power be used for the benefit of the state's "rural and domestic customers." This makes the power from the Niagara and St. Lawrence hydro plants available at the very low cost of production without any markup. Over the years, large business groups have sought to increase the portion of hydro benefits they receive by raiding the longstanding residential allocation, in the name of job creation. They are now asking for changes in the law to take all the residential allocation. This would allow the Power Authority (and the Governor, who must approve all hydro contracts) to "pick winners" in the competitive business world by giving selected companies very low cost public power. See, e.g., Higher electric bills for homes suggested as way to grow jobs, Journal News - 03-10-2007.

The drumbeat for taking power from residential customers increased at the legislature in recent years when businesses faced the economic downturn coupled with the cost of high and spiking electric prices. Since 1999, those prices have been increasingly influenced by deregulated and flawed wholesale electricity spot markets run by the NYISO. The latest hydropower raid seeks to go beyond other existing economic development programs for businesses. These include secret discount "negotiated" utility rates, which can be obtained through the PSC, even if the utility does not agree in "negotiations", as has occurred with large industrial customers like Nucor and Corning.

Ironically, New York big business groups once clamored for deregulation of wholesale electric prices to avoid retail prices set by state regulation. The power generation function of the investor owned utilities was transferred to merchant power companies who are under federal rate jurisdiction, and they are now de facto deregulated by FERC. Instead of fighting harder for reform of the wholesale electricity markets run by the NYISO, New York's large business users of electricity now seek to take cheap hydropower away from residential customers, thus diluting the high cost of electricity driven by the flawed NYISO markets.

According to the New York State Power Authority:

Power for Jobs has helped hundreds of companies make the transition to the newly deregulated electricity marketplace in New York State.

The "transition to the newly deregulated marketplace" mentioned above tacitly acknowledges that it is not working. (If the "transition" to deregulation had lowered electric rates, big business would not need state relief from the marketplace). Cheap hydropower is seen as a palliative for New York businesses who face some of the highest electricity costs in the nation, despite the relative abundance in New York State of low cost hydro and nuclear power. (New York state has the nation's third largest output of hydropower, and several large nuclear plants). Since the advent of wholesale electricity deregulation in 1999, programs for allocation of NYPA power to businesses have grown. See New York Power Authority Report to the Governor and Legislative Leaders on NYPA Power Programs for Economic Development, (prepared pursuant to Section 9 of Chapter 217 of the Laws of 2009), December, 2009.

The increased clamor to take cheap hydropower from residential customers appears to be in response to the deregulation experiment begun by the Pataki administration. New York's largest industrial and large business customers, already benefiting from Power Authority programs which offset and dilute some of the high and spiking deregulated market prices, are much quieter about the failure of New York's deregulation than their counterparts in the New England ISO and the PJM RTO regions. In contrast, business groups in those areas are more vigorous than New York's in urging FERC to reform deregulated wholesale electricity markets.

Brushed aside in the "Power for Jobs" sloganeering s a sure consequence of reallocating the residential hydro power: it will raise electric bills substantially for large numbers of residential consumers, making matters worse for them. As stated by a representative of NYSEG/RG&E to a legislative commission on hydropower appointed by Governor Pataki:

In addition, and just as important, a loss of this power to residential customers in the NYSEG and RG&E service areas would significantly increase rates, severely impacting customers at a time when the upstate economy continues to struggle. Absent the Niagara Project allocation, residential electricity rates would increase 7.2% to 8.7% for NYSEG customers and 10.8% to 14.2% for RG&E, depending on the type of service a customer has chosen. If St. Lawrence allocations, which are covered by the same contracts that cover the allocation of Niagara Project power, were also lost, the rate increase climbs to between 12% and 14.5% for NYSEG customers and 19.6% to 25.7% for RG&E customers. These dramatic increases at a time when the upstate economy continues to struggle would cause a true hardship for our customers.

****

Suggesting that these savings are meaningless to a residential customer and that the residential customer allocation would be better spent on economic development programs is irresponsible. The commission should resist an arbitrary shifting of this allocation to programs that may not add significantly to the regional economy. It cannot be assumed that the transfer of low-cost power from residential customers to a business creates an automatic, substantial win for the economy.

Consumer spending may be the engine for renewed economic growth after a recession. Raising consumer utility bills, however, deflates the consumer economy. With high unemployment and even less money in consumers' pockets to spend in the regional economy, economic recovery may be slowed if hydro benefits are diverted away from residential customers.

NYSEG filed a report several years ago with the state hydro commission appointed by then-Governor Pataki indicating that the putative benefit to the economy from using residential hydro for businesses in the name of creating jobs would be far outweighed by the damage to the region's economy by raising prices for massive numbers of residential customers and reducing their collective purchasing power. This report found that shifting $51.7 million of hydro benefits away from residential customers would actually have a serious and much greater negative economic impact that outweighs the putative benefits of shifting the cheap power to business customers. Because the money saved would not be spent -and respent- by residential customers in the local economy, there would be

• a net reduction in Gross Regional Product of $97 million,
  
• a wage loss of $40 million,
  
• a loss of 1,186 jobs, and
  
• a population loss of 2,326.

See EMCG Report on Selected Socioeconomic Impacts that Eliminating Power from the Niagara Power Project Would have on the Service Territories of New York State Electric and Gas Corp and Rochester Gas and Electric - 12-1-2005 - 5-18-2010.

Now, proponents of hydro power reallocation to business propose taking nearly all of the residential allocation, currently valued at $100 million or more. They dismiss the cost of the shift of this very broad based benefit to a select few businesses, and the dampening effect that adding a billion dollars to residential electric bills over a decade would likely have on consumer spending and the local economy.

Business proponents of the shift scoff at the relatively small monthly amounts their proposal would add to residential electric bills, (and they may be underestimating the bill impacts, contrary to NYSEG and RG&E's estimations). But whatever the amount, every dollar added to consumers' bills by diversion of hydro benefits to business customers cuts the amount of income households can spend in the local economy. Dollars saved by low cost residential hydro power help meet household needs. Many residential customers lack significant savings and are living today from check to check, often running out of money for food and other essentials in the days preceding their next paycheck, social security, or pension check, and living in hardship. Indeed, in 2009, the investor owned utilities interrupted service as a collection measure to more than 330,000 New York utility customers who could not afford to pay their bills. Adding to the energy burdens of residential customers would only make matters worse.

Justifications for changing the longstanding law mandating residential benefits are based on very speculative job creation claims. This, of course, requires government to pick the winners of low cost hydro subsidies - normally anathema to the ideas of "free market" business competition and "level playing fields" usually touted by the same business groups now clamoring for more low cost public hydro power. The business groups support new legislation to gradually convert the residential hydro benefit for upstate customers into a cash credit on the utility bill that would diminish over five years from $100 million to just $30 million.

The actual value of the cheap Niagara residential hydro power varies in relation to the cost of other power obtained in the marketplace from private suppliers. Governor Paterson estimated that it was worth $82 million in 2009. The utilities who receive the cheap power under contracts with the Power Authority and pass the benefit on to residential customers have said it is worth much more over time. The value is the difference between the cost of the hydro power - which is less than one cent per kilowatt hour - and what the utilities would have to pay to replace it with power bought in the wholesale electric market at market-based rates set at the NYISO by the most expensive producer whose bid is accepted. Over the past year, due to the recession and the drop in the price of natural gas, and mild weather, electricity market prices have come down somewhat, narrowing the spread between the cheap hydro and the market price of other power. Estimates based on this recent narrower spread may significantly understate the real long term wealth shift from residential to business customers that would be accomplished over time if the legislative proposals are approved.

Proponents of giving residential hydropower to selected companies argue that it will create new jobs. Such claims should be taken with a grain of salt, as the record of many publicly subsidized economic development programs is at best spotty. Even if some jobs are created with more power subsidies to certain businesses, the the total resource cost of creating those jobs must include the offsetting damage to the regional economy from raising monthly bills for large numbers of residential customers and decreasing their discretionary incomes. Rather than make the hard case to justify investment of general tax dollars to subsidize businesses to grow jobs and build the economy, New York's large businesses appear to be aiming at a "softer" target: reallocation of residential hydropower benefits.

There is a long history involving private acquisition and domination of the public water power assets in New York. In 1907 New York Governor Charles Evans Hughes (later Chief Justice of the United States) declared that water power in New York state "should be preserved and held for the benefit of the people and should not be surrendered to private interests."

In 1914, Theodore Roosevelt warned in his autobiography against water power barons seeking a monopoly on natural resources:

the work of the [Corporations] Bureau showed that ten great interests and their allies held nearly sixty per cent of the developed water power of the United States. Says [Corporations Bureau] Commissioner Smith: "Perhaps the most important thing in the whole work was its clear demonstration of the fact that the only effective place to control water power in the public interest is at the power sites; that as to powers now owned by the public it is absolutely essential that the public shall retain title....

In the 1920's Governor Alfred E. Smith called for hydropower development by a state authority. Smith expressed concern over privatization of hydropower:

During the presidential campaign of 1928, Al Smith insisted that private control of hydropower sites reduced public control of power rates, weakened regulatory authority over electric utilities, and exposed the public to unnamed future hazards. Given these dangers, he argued, there was "nothing socialistic or revolutionary" about regulating utilities or developing public power.

Canada took steps to undo privatization of its Niagara hydro power early in the last century. Karl Froschauer, Ontario's Niagara Falls, 1887-1929: Reversing the Privatization of Hydro, (2005).

In 1931, when Franklin D. Roosevelt was Governor, the state Legislature created the Power Authority of the State of New York (PASNY). A driving purpose of its creation was to develop the International Rapids section of the St. Lawrence near Massena, NY, in cooperation with Canada. The St. Lawrence FDR Project began in 1954, when PASNY was headed by Robert Moses, after a 1950 treaty with Canada and 1953 federal legislation authorized the project.

The 1950 treaty also cleared the way for redevelopment of the Niagara Falls hydro project. At that time, Niagara Mohawk Power Corporation owned the "Schoellkopf" station at Niagara, built in three segments between 1903 and 1924, which by 1950 was capable of producing only 360 MW of power. "The original redevelopment plans called for construction of a new power plant with more than 1300 MW of installed capacity." Alex Radin, Public Power, Private Life, p. 159 (APPA 2003). A struggle ensued over whether the new facility would be publicly or privately owned.

On June 7, 1956, in "the most spectacular accident in the history of electric service. . .[a] series of giant rockfalls sent two-thirds of Niagara Mohawk Power Corporation's large Schoellkopf hydroelectric plant crashing into the Niagara River Gorge a half mile below Niagara Falls."Radin, supra. At that point, it was determined that PASNY would redevelop the site at Lewiston, downstream from the ruined Schoellkopf site, and Niagara Mohawk would receive the "replacement power" output from the amount of water it had been using at the ruined plant, equal to 445 MW because the higher head of the new plant could make better use of the water than the Schoellkopf units had. Half of the output was reserved, by federal statute, as "preference" power for municipally owned utilities and rural electric cooperatives.

Even if New York state law were amended to shift residential hydro benefits to businesses, the federal Niagara Redevelopment Act seemingly requires at least half the output of the Niagara Redevelopment Project to be allocated to residential customers. FERC mentioned this requirement in its 2007 Order granting NYPA's application for relicensing of the Niagara Project:

Niagara Redevelopment Act section 836... authorizes and directs the Commission to issue a license to the Power Authority for the construction and operation of a project with the electric generation capacity to use all of the United States’ share of the Niagara River water available for power generation. It requires the Commission to include among the license conditions, in addition to those deemed necessary and required under the terms of the FPA, provisions to:

• Assure that at least 50 percent of the project power is available primarily for the benefit of consumers, particularly domestic and rural consumers, and to make such power available at the lowest rates reasonably possible to encourage the widest possible use, and to give preference to public bodies and nonprofit cooperatives within economic transmission distance.

In a 1985 court decision, however, the mid-level Court of Appeals for the Second Circuit decided that the above language indicating that the majority of power should go to residential customers does not really mean what it appears to say. It relied on legislative history to conclude that the words of the statute that seemingly guarantee benefits to residential customers are empty: "The term "domestic and rural consumers" expresses a Congressional expectation, not a mandate, and the word "primarily" does not mean "exclusively". Residential customers were not represented in that litigation, and the case did not culminate in any definitive decision of the Supreme Court on the meaning of the statute.

In allowing flexible allocation of hydro benefits seemingly at odds with the plain language of the statue, the court decision at page 107 backstopped its decision by pointing out that in any event, as a "practical matter", very substantial hydro power benefits were then being received by residential customers:

Finally, we note that FERC's rejection of PASNY's "end-use" contention has not as a practical matter injured domestic and rural consumers. Although MEUA's members presently sell only 42% of their preference power allocation to such consumers, the 58% remaining being supplied to commercial and industrial users, the private utilities are bound by contract to resell 600 MW of their non-withdrawable power at retail at a fixed percentage above cost to domestic consumers.

Now, it is proposed to drastically reduce or nearly eliminate the residential benefit, by removing the residential ("domestic") allocation requirement from New York state law. This might not resolve the federal issue, i.e., the requirements of the Niagara Redevelopment Act.

New York's share of the water power of Niagara and the St. Lawrence is purposed under existing laws to provide direct benefits to residential consumers. It still belongs to the people of the state and could be viewed as part of the "commons" which should not be appropriated for the benefit of a few businesses:

They hang the man and flog the woman
That steals the goose from off the Common
But let the greater villain loose
That steals the Common from the goose

The law demands that we atone
When we take things we do not own
But leaves the lords and ladies fine
Who take things that are yours and mine

English Nursery Rhyme c. 1760.

Updates
"The New York Power Authority will conduct a public hearing this week in Syracuse to solicit opinions on continuing the sale of cheap state-owned hydropower for use by Upstate residential customers....Some economic development advocates say the electricity — valued at about $82 million below market in 2009 — could be better used to subsidize business growth. Paterson and Senate leaders this year backed a plan to use some of the power for economic development, but the plan was blocked in the Assembly. NYPA is proposing to extend its current contracts with the utilities through 2011, subject to revocation with 30 days notice." New York Power Authority holds hearing in Syracuse on sale of hydropower to utilities, Post Standard, Nov. 3, 2010.

NYPA Holding Hearings on Reduced Hydropower Allocation for Residential Customers, PULP Network, Sept 1, 2009.

David Robinson, Recharge New York is new take on power share, Buffalo News, Feb. 3, 2011. "

Brian Amaral, Cuomo pushes low-cost power bill, Watertown Daily Times, Feb. 3, 2011.

Brian Amaral, Low-cost power bill OK'd by Senate, Cuomo optimistic: Assembly less certain; farmers get boost, Watertown Daily Times, March 9, 2011. "The new program would be twice the size of its predecessor, at 910 megawatts. It does so by taking 455 megawatts that are used to reduce electricity bills for residential energy bills upstate.... The legislation would cushion the residential blow by providing a $100 million annual discount — the same figure as in 2010 — for residential patrons until 2014, when it would be cut to $70 million. In 2015, it would be cut to $50 million. By 2016, the figure would be cut to $30 million, where it would remain."

Jimmy Vielkind, Power Plan Revived in Budget, Times Union, March 30, 2011.

"Now called Recharge New York, the program will be administered by the New York Power Authority and will automatically renew benefits for more than 500 businesses and nonprofits -- including SCA Tissue, Finch Paper, Albany Molecular Research and the Albany Institute of History and Art -- that participated in the old Power for Jobs program.

That program expired in 2010. Then-Gov. David Paterson and members of the state Senate favored an expanded program, which would have made 910 megawatts of subsidized power available, up from 577 megawatts. (A megawatt is enough power to supply up to 1,000 homes.)

That larger amount would be directed entirely to businesses. Previously, residential customers of three upstate utilities -- NYSEG, National Grid and RG&E -- also benefited from an allotment of subsidized power.

Cuomo submitted a bill similar to Paterson's, which eliminated the residential benefit.

Cuomo's measure passed the Senate and will be included in budget legislation expected to pass this week.

The new program will continue the monthly rebate for these residential customers -- an average of $3.30 per month -- for three years, and then offer a $30 million subsidy.