New York Formulating Plans to Use $78 Million Disgorged by Energy Trader for the Benefit of Electricity Consumers

On March, 2012, the Federal Energy Regulatory Commission (FERC) announced a $245 million settlement of its enforcement staff's investigation of Constellation Energy Commodities Group, (CECG), for alleged manipulation of wholesale electricity markets.  CECG was an electricity trader and participant in the wholesale electricity market operated by the New York Independent System Operator (NYISO).  CECG was investigated for making uneconomic transactions in order to create artificial price movements in the NYISO markets.  This movement generated large profits on financial derivative contracts, which paid CECG based on changes in the NYISO spot market prices. 

To settle the investigation, CECG agreed to pay a $135 million penalty to the government and also to disgorge $110 million of its profits from the trading gambit, $104 million of which is to be used for the benefit of electric consumers. New York's share is $78 million. 

There is no indication in the FERC order approving the settlement of how much CECG may have profited from the alleged manipulation. CECG admitted no wrongdoing, claiming it was only engaging in legitimate hedging transactions within the law.  Although the case was settled with no actual finding of market manipulation, the FERC Chairman issued a statement indicating his belief in correctness of FERC enforcement staff's conclusions regarding market manipulation:

As a final point, I note that since the issuance of the Commission’s order, a senior Constellation official has stated publicly that the company’s practices at issue here were “lawful portfolio risk management transactions.” In my opinion, clearly that is not the case. The Stipulation and Consent Agreement sets forth a detailed description of the transactions that I believe Constellation knowingly and willfully engaged in that form the basis of Enforcement Staff’s conclusion that Constellation engaged in market manipulation, fraud, and misrepresentation. I urge anyone who has any question as to Constellation’s actions in this case to read that Stipulation and Consent Agreement." 

Under the FERC Order approving the agreement between FERC enforcement staff and CECG, a FERC Administrative Law Judge will entertain recommendations from certain state agencies on how to allocate disgorged funds.   

There are disputes over which agencies are "eligible" to make recommendations to FERC:

AARP opposed a petition of a New York power generator seeking to be included in the group of agencies eligible to make recommendations to the FERC ALJ regarding distribution of the $78 million for the benefit of New York's electric customers.  

The New York PSC, the Attorney General, and the DOS opposed motions of the Long Island Power Authority (LIPA) and small New York municipally owned utilities to participate in apportionment of the fund by FERC. LIPA filed a response in support of its motion.

A ruling from the FERC ALJ on which entities are eligible to make recommendations regarding allocation of the funds has not yet been issued.  The ALJ has indicated she will look favorably upon consensus recommendations from the agencies deemed eligible to make therm, which would avoid the need for FERC to decide contested allocation proposals.

Meanwhile, New York's large industrial and commercial customers (represented by their association, Multiple Intervenors) petitioned the NY PSC on April 10 asking the PSC to seek control of 100% of the CECG settlement fund for NewYork, and, if specific harm from the Constellation trading gambits cannot be readily measured (as is likely), they ask the PSC to use all the $78 million as refunds, based on customer elcetricity usage. MI further said they will oppose any use of the money other than for refunds.

AARP opposed the MI petition.  AARP pointed out that spreading the benefit fund over all consumers based on their usage would likely result in a one time credit that would be insignificant for most residential customers.  Also, the proposal of MI would steer the majority of the funds to the largest users.  As customers taking service at spot market based rates, MI's members may have been incidental beneficiaries of the alleged market manipulation, if spot market prices were lowered by CECG to make profits on derivatives.  Derivatives are often purchased by utilities to hedge small customers against the risk of NYISO spot market volatility, and any artificially inflated costs of the derivatives could have been passed through to small customers.

Consumer groups, including AARP, Consumers Union, and NYPIRG are urging the Governor, the Attorney General, and other officials to use some of the $78 million settlement funds to assist New York consumers at risk of electric service termination, to augment energy efficiency programs, and to provide support for consumer advocacy in state and federal utility regulation proceedings. See Times Union, A Consumer Energy 'Seat' Wanted, Power settlement Spurs Advocates to Push for an Independent Voice, May 31, 2012. 

New York State provides very little support for utility consumer advocacy. Typically, independent utility consumer advocate offices have the independent capability to challenge commission decisions in court, are separate, or operate quasi-autonomously within an office such as the attorney general's office, and their leadership is not appointed by the same entity that appoints the utility regulatory commission.  In contrast to most other states, New York has no independent or quasi-independent state office providing residential consumer advocacy in the lengthy and complex regulatory proceedings that affect prices, terms, and conditions of utility service.  Last year, the two person staff of the vestigial Consumer Protection Board's utility intervention unit (which prior to its abolition had shrunk to about one tenth its prior size) was transferred to the Department of State, an Executive agency.  

Resources currently available to PULP -- an independent nonprofit organization -- are insufficient to support the analysis, expertise, and advocacy required to participate fully in all the major NYISO, state, and federal regulatory proceedings which affect the rates, terms and conditions of electric service.

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