PULP Files Comments on Regulation of ESCO Sales Practices

Background
Beginning in 1996, the PSC began to "unbundle" residential natural gas and electric service in order to deregulate the so-called "commodity" portion of service. In the PSC's "vision" the "commodity" would be bought by customers from deregulated pipeless and wireless gas and electric companies, which the PSC labeled "energy services companies" (ESCOs). As we predicted in 1998, the effort to deregulate led to a Race to the Bottom

[T]he contracts often hold customers to a term of a year or more, with automatic renewal unless the customer provides written notice during an annual 15-or 30-day renewal window. Marketers are not certified, and none of their prices are filed with the commission to facilitate public review and comparison. * * * * Customers attracted by promises of lower base charges will be quickly discouraged by the blank check provisions in the fine print * * * * Customers have a growing awareness and experience with rip-offs, scams and unscrupulous "slamming" by new competitors in the telephone industry and may be well aware that in the end they may pay more, not less, to a competitor. Not all customers have the financial means to write off their loss as a bad mistake, or pay another supplier or "provider of last resort" if deposits or customer credit balances in dispute are held by the marketer to satisfy a disputed claim. * * * * Waiting for the "market" or lawsuits to weed out bad-apple marketers and unfair contract clauses is not an adequate remedy for the wronged consumer with limited means who has lost her money.

Many Buffalo area customers were bilked when they paid in advance and an ESCO failed to provide service, requiring them to pay twice. See State Forgot Consumer Protections in Deregulating Gas. In reaction, the Legislature enacted the Energy Consumer Protection Act of 2002, which made ESCO service subject to the Home Energy Fair Practices Act (HEFPA) and which made ESCO customer complaints subject to adjudication by the PSC. Prior to that time the PSC had refused to decide bill and service disputes between ESCO customers and ESCOs.

Even though HEFPA protections have been available to ESCO customers since the 2002 amendments, major problems remain with ESCO service. Many of these problems arise from switching to ESCOs and switching back to the old utilities.

High pressure door to door sales, or ESCO referral programs authorized by the PSC may give consumers the false impression that they are likely to save money. While they will save small amounts on delivery service (due to a tax law flaw and PSC reduction of certain charges) the (truthful) promise of these reductions can be far outweighed by more expensive charges for the commodity portion of service now sold by the ESCO.

Customers who switch to gas or electric service from ESCOs thinking they would save money may discover, to their dismay, they "agreed" to very high prices. Then, the fine print in one-sided contracts foisted upon them may purport to make it very expensive for them to switch providers, due to costly early termination charges, or due to prepayments that are likely to be forfeited if they choose a new ESCO or return to conventional full service from the distribution utility. See Think Twice Before Switching Utilities, and PULP's web page on ESCO Issues.

The PSC has continued its practice of not overseeing the reasonableness of all terms and conditions of ESCO service. Indeed, to our knowledge the PSC has never issued a formal decision in a customer complaint case involving ESCOs, even though PSC Consumer Complaint Statistics show that complaints against ESCOs comprise a disproportionate share of the total complaints.

The CPB/DCA Petition
The news media continue to report numerous incidents involving ESCO customer dissatisfaction. Often, these stories focus on exorbitant ESCO prices, high pressure or deceptive recruitment tactics, and onerous terms and conditions that work to frustrate corrective action by the consumer. For example, prepayment for service and termination charges raise the cost of switching away from an ESCO to more reasonably priced service. See PULP's web page on ESCO Issues.

In December 2007 the Consumer Protection Board (CPB) and the New York City Department of Consumer Affairs (DCA) filed a petition with the PSC to address certain sales practices of ESCOs. According to the Press Release

The PSC has worked with ESCOs to develop a “Statement of Principles for Marketing Retail Energy to Residential and Small Businesses in New York State,” but there is no mandate that ESCOs follow those principles.... [P]ersistent allegations that some ESCOs or their representatives have misrepresented themselves as agents of distribution utilities, have made other false and misleading statements and have engaged in extreme marketing practices continue to surface. Both Agencies have received complaints about ESCOs, ranging from misrepresentation to undisclosed charges, and attempt to either resolve the complaint or refer it directly to the PSC. This type of conduct confuses and harms consumers and also damages the reputation of utilities and reputable ESCOs.

The CPB/DCA Petition filed with the PSC December 17, 2007 states that

[T]he CPB and DCA are concerned that the marketing practices of some ESCOs deny customers the accurate information which is necessary for well-functioning markets, and may result in consumers paying unreasonable rates. * * * * Based on complaints . . . it appears that problems with abusive, misleading and deceptive marketing tactics used by ESCOs in their contacts with residential and small commercial customers are persistent and disruptive. * * * *

In recent years, Staff of the Department of Public Service ("DPS") has worked with ESCOs to develop a "Statement of Principles for Marketing Retail Energy to Residential and Small Business Customers in New York State." * * * * Clearly, an entirely voluntary approach to preventing misleading marketing practices is unworkable.

The CPB/DCA Petition asks the PSC to

• Develop and adopt new marketing standards for ESCOs selling electricity and natural gas services to residential and small commercial consumers;
• Require ESCOs and their representatives to clearly identify themselves upon contacting a consumer;
• Compel ESCOs to clearly explain that they are not associated with the regulated utility; and,
• Give the PSC clearly defined legal authority to sanction ESCOs whose marketing practices are deemed to be detrimental to consumers.
  

PULP Comments: Broaden the Scope of ESCO Issues Under Review
PULP filed comments supporting the CPB/DCA petition, and asking the PSC to broaden the scope of an investigation into ESCO issues beyond door to door sales practices. Such issues could include ESCO practices that discourage further customer choice, such as demands for prepayment, and one-sided arrangements which prevent unhappy customers from switching providers without significant extra costs.

Customers enticed by PSC supported promotions to switch to an ESCO at no cost, or with a teaser rate, often find it very expensive to switch again when they are unhappy with ESCO service. PULP noted that after more than a decade of service the PSC has not issued a body of decisional law regarding reasonableness of ESCO service, despite many customer complaints. Indeed, as noted above, we are not aware of any PSC decisions arising from ESCO customer complaints, even though ESCOs account for 20 - 25% of all initial complaints and there is a steady stream of PSC consumer complaint decisions involving non-ESCO utilities.

PULP urged the Commission to take penalty actions in situations where an ESCO has violated Commission rules or orders, or the Public Service Law. PULP also pointed out that although ESCO matters consume considerable resources of the PSC, the PSC is not requiring ESCOs to support the cost of the agency's regulatory services allocated to ESCO matters.

NFG Issues Tariff Regulating Door to Door Sales of Natural Gas Service
In the aftermath of publicity regarding practices of door to door sellers of natural gas service, NFG issued a tariff that would apply to such sales, effective April 25, 2008. Compliance with a code of conduct would be made a condition of ESCO eligibility to sell gas or electricity in cooperation with the distribution company, whose services are needed by the pipeless and wireless ESCOs to facilitate their sales. See National Fuel Targets Door-to-Door Marketers. It is unclear how violations of the tariff conditions by ESCOs would be sanctioned, if at all, by the PSC, and how consumers would obtain timely remedies if the ESCO violates the conditions. The tariff is subject to PSC review and approval before it takes effect.

NFG Directed by PSC to Eliminate Late Charges on Deferred Payment Agreements

The Public Service Commission (PSC) recently ordered National Fuel Gas Distribution Company (NFG) to drop the 1.5% per month interest fees that it charges its residential customers on deferred payment agreement balances. In a December 2007 rate case order the PSC directed NFG to “eliminate . . . assessment of late payment charges on balances recovered through a residential deferred payment agreement.”

Public Service Law § 37 requires utilities to offer written deferred payment agreements (DPA) to all residential customers who are threatened with service termination. DPAs allow customers to pay outstanding utility charges over a period of time and service will not be terminated if customers stay current with their monthly bills and make incremental payments on their arrears as provided for in the DPA. Section 42.2 of the Public Service Law prohibits any late payment charge on a deferred payment agreement. Under Section 42.1, utilities may assess a late fee if a customer fails to timely pay DPA installments, but they may not charge interest or late fees on the original amount covered by the DPA.

Despite a PSC order issued almost a decade ago, finding that “application of late payment charges to amounts covered by a DPA is prohibited by statute,” NFG continued to assess these charges. In documents submitted to the PSC in the course of its rate case, NFG estimated it would collect over $6.8 million dollars in interest charges on DPA balances in 2008 alone. Much of this would have been collected from low-income consumers.

In its order establishing new rates for NFG’s gas service, the PSC rejected the utility’s argument that late payment fees on DPA balances were lawful, and it ordered NFG to file tariff amendments eliminating these charges and to remove the amount of its projected collections from its 2008 revenue forecasts.

The late payment charge controversy began in 1982, when the PSC promulgated rules to implement the Home Energy Fair Practices Act (“HEFPA”), but failed to specifically preclude late payment charges on DPA balances in the language of its regulations. By 1998 when the PSC initiated a proceeding to resolve the issue, the only utilities that continued to impose these charges on their customers were NFG and New York State Electric & Gas Corp. (NYSEG). NYSEG discontinued the practice after it was sued in 2005 by a customer represented by PULP.

In a generic companion order issued by the PSC on the same day as its decision in the NFG’s rate case, applicable to all electric and natural gas utilities and large water companies in the state, the PSC again held late payment charges may not be assessed on DPA balances. The PSC identified NFG as “the sole major utility to assess [late payment charges] on DPAs. . . .” The PSC concluded, however, that there is no basis for refunds to NFG customers of the unlawful charges, because they were levied pursuant to a filed NFG tariff. Under the “filed rate” doctrine, retroactive changes in tariffs are not possible.

In the generic order, the PSC cites its 1982 case in which HEFPA regulations were adopted to implement the statute, and mentions the position of “a party” who contended then that the Public Service Law did not permit late payment charges to be imposed on DPA balances, and urged the Commission to prohibit this. That “party” was PULP. The PSC finally resolved this issue in 2007, after the matter languished for 25 years, permitting some utilities to collect scores of millions of dollars from customers who could least afford to pay.

By Geraldine Gauthier
Staff Attorney

PULP and Other Consumer Groups File Supreme Court Amicus Briefs in Electricity Market Rate Case

Background
Nearly all the electricity used by New York consumers must be purchased in wholesale markets because many of the state's electric utilities sold most of their power plants in recent years. Previously, local utilities generated much of the power used by their customers, at cost, and purchased from others when it was available at lower cost. Now they must buy electricity at market prices demanded by sellers in poorly regulated wholesale markets under Federal Energy Regulatory Commission (FERC) jurisdiction. A major issue has arise regarding FERC's failure to assure that all contracts for the sale of wholesale electricity are reasonable, as required by the Federal Power Act. See Energy Contracts Spark High-Stakes Supreme Court Case, and U.S. Supreme Court to Decide Electricity Market Rate Refund Case.

The Morgan Stanley Case
On January 14, 2008 PULP filed an amicus brief in a case to be argued in the United States Supreme Court regarding the review by FERC of contract charges for wholesale electricity. FERC assumes that any prices set by sellers are reasonable if they lack "market power." The contracts were formed during a period of rampant market manipulation, were not filed, and were never reviewed by FERC for reasonableness. The issue in the case is whether a Ninth Circuit ruling, which basically required FERC to review contract rates for reasonableness, is in conflict with longstanding Supreme Court decisions in United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956), and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956), together known as the Mobile-Sierra cases. Those cases made it very difficult for sellers to revise upward the prices they previously agreed to charge in contracts.

FERC, represented by the U.S. Solicitor General, agrees with Morgan Stanley Capital Group and other wholesale electricity sellers that the Mobile-Sierra cases make it nearly impossible to revise rates downward. Represented by luminaries of the bar, including three former Solicitors General, energy producers, traders, dealers in financial derivatives, economists and others are asking the Supreme Court to reverse the Ninth Circuit order. They argue that the "sanctity" of contracts is at stake, that the Mobile-Sierra doctrine applies, and that FERC cannot modify contract rates except in extreme circumstances.

PULP's Amicus Brief
PULP's amicus brief points out that the Mobile-Sierra cases both involved situations where the contracts had been filed publicly in advance as required by Section 205(d) of the Federal Power Act. Thus, the contract rates in those cases already had been subject to public scrutiny and review by the regulator for reasonableness before they took effect. Only then did the doctrines favoring repose of contract rates apply.

In contrast, the contract rates in the case now before the Supreme Court are "market-based rates." Under FERC's regime, these contracts were not filed in advance as required by the Federal Power Act, and thus the rates and charges were never subject to public scrutiny or review for reasonableness by FERC before the contract sales began.

PULP urges the Supreme Court to affirm the Ninth Circuit order because unfiled rates and contracts for wholesale electricity have always been subject to subsequent revision by FERC if they are unreasonable, without regard to the Mobile-Sierra doctrine. PULP also rebuts the claim that FERC's determination that a seller lacks market power satisfies the utilities' statutory obligation to file all rates and contracts publicly, in advance. The statute does not give FERC power to grant blanket waiver of the utilities' filing duties. The Supreme Court in MCI v. AT&T in 1994 held that federal regulatory agencies have no power to relax utility filing requirements. The court said filing requirements are utterly central to filed rate regulation schemes similar to that of the Federal Power Act. See May the FERC Rely on Markets to Set Electric Rates?

Public Citizen's Amicus Brief
Public Citizen, the Colorado Office of Consumer Counsel, the New Mexico Attorney General, and the National Consumer Law Center also submitted an amicus brief supporting affirmance of the Ninth Circuit order. It provides an historical perspective on the reasons why the Federal Power Act and the recently repealed Public Utility Holding Company Act were enacted to protect utility customers. A premise of these statutes is that it cannot be assumed -- as FERC now does -- that utilities and energy traders will act in the interest of consumers when they make contracts for the sale and purchase of wholesale electricity. The brief also shows why accepting the extreme position of the sellers would allow all electricity contracts to escape any meaningful review for reasonableness.

Other briefs are available at the ABA website. The case will be argued February 19, 2008.

PSC Requires More Study Before Allowing Major Investment in "Smart Meters"

In 2006 the PSC issued an order requiring the state's electric and natural gas utilities to develop plans for implementation and widespread deployment of "smart meters." See Not so Smart? High Tech Metering May Harm Low Income Electricity Customers, PULP Network, April 16, 2007.

In a decision issued December 19, 2007, the PSC required Con Edison and Orange & Rockland Utilities to file supplemental plans, and required assessment of demonstration projects and cost effectiveness of any plans for broader deployment. The utilities' plans had called for expediture of $712.8 million to deploy smart meters, and projected total benefits of $782.5 million, $224 million of which was calculated to come from changes in customer consumption, i.e., by shifting usage to times of day when prices presumably would be lower.

The Commission said "The $713 million AMI program cost is a significant additional future cost whose potential offsetting benefits are far from clear or certain at this point." As discussed in Not So Smart, calculations about lower market prices from peak shifting by customers with smart meters -- 30% of the projected benefits -- may rely not only upon unproven assumptions regarding the ability of very large numbers of customers to shift their usage in response to spiking prices, but also on rather robust assumptions about the competitiveness of markets, reasonableness of real time prices, and the behavior of sellers in the repetitive auction spot markets. See Cornell Professor Gives Low Marks to NYISO Electricity Markets, PULP Network, December 13, 2007.

In addition, the Commission cautioned Con Edison and O&R against the use of new technologies to accomplish remote termination of service, stating:

Finally, we remind the companies that termination of service for nonpayment is subject to Home Energy Fair Practices Act (HEFPA) regardless of whether that disconnection is performed by physical (on site) or electronic (remote) service shut off. No utility may utilize AMI for remote disconnection of service for nonpayment unless it has taken all of the prerequisite steps required by HEFPA, including the requirement of 16 NYCRR §11.4(a)(7) that customers must be afforded the opportunity to make payment to utility personnel at the time of termination. This process requires a site visit, even where a remote device is utilized.

On the same day, in a similar decision rejecting Central Hudson's plan, the Commission reiterated its concern that all HEFPA procedures must be followed:

A concern relates to the use of AMI to accomplish remote disconnection and reconnection of service. While this capability can provide benefits when disconnection and reconnection are implemented pursuant to customer requests or for system safety, Home Energy Fair Practices Act (HEFPA) regulations incorporate a “last knock” policy requiring that terminations for nonpayment be preceded by a customer’s opportunity to pay the bill to utility personnel at the time of termination, and avoid disconnection. Central Hudson is reminded that termination of service for nonpayment is subject to HEFPA regardless of whether that disconnection is accomplished by physical or electronic (remote) service shut off.

The Commission press release in the Con Edison case underscored the need for pilot projects and further assessment of costs and benefits before full deployment, stating:

This sophisticated combination of meters, and other supporting equipment, is clearly the wave of the future. However, before we approve full-scale AMI implementation, we must determine if the investment is justified and whether the meters to be installed contain features and functions that will provide consumer and system benefits, or can be later modified to add new functionality. Pilots can play a very important role in reducing the number of open questions and obtaining better forecasts of costs and benefits.

The proposed expenditure of nearly three quarters of a billion dollars is a major investment by Con Edison and O&R. If this was not better for shareholders than for consumers we doubt we would see such a plan from a utility. "Smart meters" are in vogue, pushed by the electricity deregulation crowd as the solution to unreasonable prices, and by environmentalists as a way to address energy efficiency goals. These formidable voices cheering for "smart meters" (along with the message implicit in the label that if we have an old meter we are "dumb") resonate well with the interest of utilities wanting to make large new capital investments that could allow them to demand and justify higher future earnings and higher rates.

The PSC was not only smart, it was wise to require more analysis of the costs and benefits, particularly because under the Public Service Law, time of use pricing for residential customers is strictly voluntary, and to date has not attracted many adherents.

PULP Urges NYSERDA to Use RGGI Auction Revenue to Support Low Income Energy Efficiency Programs

RGGI
New York along with nine other northeastern states is creating its own greenhouse gas "cap, auction and trade" system in an effort to reduce carbon dioxide emissions from power plants using fossil fuel. This "Regional Greenhouse Gas Initiative," known as RGGI, was conceived by the states in the absence of any comprehensive national program, carbon tax or national cap and trade system designed to reduce carbon dioxide in the atmosphere.

Sale of CO2 Allowances
Regulations to implement a New York greenhouse gas allowance auction system have been proposed by NYSERDA and the New York State Department of Environmental Conservation, DEC. DEC will require New York utilities emitting carbon dioxide to purchase allowances, and NYSERDA will conduct the auctions.As the amount of allowances is gradually reduced, their cost will increase, and presumably the higher cost of production will induce buyers to purchase from cleaner sources and will induce power producers and sellers to reduce overall emissions in order to avoid or reduce the cost of allowances. Subsequently, after the initial auction, allowances may be bought and sold and traded by non utilities, including energy traders and hedge funds, in largely unregulated secondary markets.

PULP Comments
In December 2007 PULP filed comments on the NYSERDA regulations. The comments point out that the new system is likely to increase the price of all electricity sold in the state, even electricity produced by generators that emit little or no carbon dioxide, such as hydro, nuclear, and wind power plants. This is because the wholesale energy markets are designed to pay all sellers the market clearing price, which is set by fossil fueled power plants.

In addition, there is a possibility that sellers will incorporate prices set in secondary markets for allowances when they make their price demands in in the day-ahead and real time single clearing price spot markets. These secondary markets and the prices of allowances are basically unregulated.

A possible result of the secondary market prices is that even if sellers have allowances purchased in advance from NYSERDA, they may make their price demands for electricity to be sold tomorrow in spot markets as if they are buying allowances today in the secondary markets, at possibly much higher prices. A similar phenomenon has occurred with respect to the pricing of electricity generated with natural gas. Power producers typically make their price demands based on tomorrow's price of natural gas, even if they already have lower cost gas available under a long term contract. Volatile high prices in a secondary market for greenhouse gas allowances may thus enable sellers to ratchet prices much higher than they would be elevated by the price of allowances when they are initially sold by NYSERDA. It is not clear how the contracts for purchase of allowances would be regulated by FERC, but based on FERC's enthusiastic embrace of deregulated wholesale markets, it is probable that FERC would take no action to assure reasonable prices when allowances are bought by sellers with "market based rate" permission and the price is added to wholesale rates.

A possible warning sign is that in Europe greenhouse gas allowances are adding substantially to the cost of electricity. Also, significant results from the cap and trade program, in terms of reduced emissions, seem to be absent so far.

If RGGI has similar results in New York, the cost of electricity could increase substantially. This may be dismissed by cap and trade proponents as only the cost of a few lattes, but it could make a very large difference to low income households who now have difficulty paying today's energy prices and who run out of money for other essentials for their families before the end of the month.

PULP urged NYSERDA to commit 35 - 45 percent of the proceeds of its allowance auctions to increase energy efficiency services for low income households.

NYC Bar Association Energy Committee Recommends New State Energy Planning Board

The Energy Committee of the Association of the Bar of the City of New York has issued a Report on Energy Planning, urging state policy makers to take a more proactive role in planning for future energy needs. The Report has a useful history of the state's prior energy planning, done under a now lapsed statute, and does not urge replication of the former planning structure of the now defunct state energy office. In reality, major stakeholders are always planning. What is lacking today in New York is transparency, coordination, and accountability of energy planners to consumers and to the public at large.

Over the past decade, New York state abandoned formal energy planning in the hope that reliance on deregulation and market forces would meet growing electricity needs at lower cost in an environmentally acceptable manner. Depending on one's perspective, this was either a big mistake or a bad idea. Although some persist in confidence that unregulated markets will meet future needs, when the rubber hits the road and new power plants must be built, the merchant power sector generally has not met the need and it has been necessary for publicly owned utilities (NYPA and LIPA) or the old distribution companies (Con Edison) to address the need:

In metropolitan New York City, merchant power producers have not built new capacity to meet the growing load. For example, in metropolitan New York City, most recently-completed capacity (86 percent or 1,700 MW) was built by the New York Power Authority, Consolidated Edison Company of New York, Inc., or under contract to them. Generators and load serving entities are taking significantly different positions in an investigation of New York City’s generating capacity markets before the FERC about the ability of merchant suppliers to build new energy supply facilities. Some merchant generators consider that the revenue available through the NYISO’s current markets is inadequate to support investment in new generating capacity and that future capacity markets are unpredictable and unreliable.

The Report recognizes weaknesses in the NYISO planning, which only addresses reliability needs and not attainment of affordable prices or environmental goals. When "the market" fails to produce needed facilities, the NYISO "plan" ultimately punts to the old utilities to meet their duty to serve (eschewed by the NYISO and merchant power utilites) by undertaking regulatory backstop solutions to satisfy reliability criteria. This has meant either building their own plants or entering into long term contracts to buy the output from a new plant to be owned by others. Thus, commitments are made for which utility consumers must pay in the future in order to finance new "competitive" plants.

The Report recommends creation of a new Energy Planning Board comprised of state agency heads. Its members would include the PSC Chairman, the Commissioner of the Department of Environmental Conservation, Chairman of the Empire State Development Corporation, Chairman of NYSERDA. The NYISO would have an important advisory role:

The Energy Policy Board would include the chairs of the Commission, the DEC, the New York State Energy Research and Development Authority (“NYSERDA”) and the Empire State Development Corporation. The Board would prepare a biennial statement of State energy policy recommendations, addressing the (1) risks, benefits and uncertainties of energy supply sources, (2) emerging energy trends, (3) energy policies and long-range planning objectives and strategies, (4) administrative and legislative actions needed to implement energy plans and objectives and (5) impact of the energy policy statement’s recommendations on economic development. The energy policy statement would provide the framework for coordinated actions and decisions by State agencies.

The proposed new board could foster coordination of Executive Branch agencies, but it leaves out any role for legislative leaders. In the current vacuum of energy planning, and the continued suctioning of wealth from New York City consumers to merchant power providers who may have an interest in sustaining scarcity there, New York City stepped up to the plate recently and proposed its own, highly proactive, energy plan. Unlike the Energy Committee Report, which seems careful not to trouble proponents of deregulation, the New York City Energy Plan issued earlier this year minces no words:

New Yorkers face rising energy costs and carbon emissions from an ineffective market, aging infrastructure, inefficient buildings, and growing needs. That’s why we must make smart investments in clean power and energy-saving technologies to reduce our electricity and heating bills by billions of dollars, while slashing our greenhouse gas emissions by nearly 27 million metric tons every year.

The ABCNY Energy Committee Report certainly points in the right direction toward a better planning process, and in many respects it is a breath of fresh air. But leaving out major players like legislative leaders, NYPA, LIPA, the City of New York, and distribution utilities who have the duty to serve, and relegating them to a role of commenting on draft plans of the proposed board, may not yet be a full solution to the energy planning needs of the state.

Public Power, Industrial and Residential Consumer Groups Demand FERC Review of Organized Spot Markets

A longtime proponent of competitive markets, the American Public Power Association (APPA) is concerned that organized markets allowed by FERC to set wholesale rates privately with little or no oversight are not functioning to yield the "just and reasonable rates" the Federal Power Act requires to protect consumers. Because APPA members are publicly owned utilities, APPA has a heightened concern about excessive wholesale rates being passed through to their members retail customers and has undertaken a reform initiative.

On December 17, 2007, APPA and forty other organizations, including NASUCA, PULP, Public Citizen, other utility consumer advocates, and groups representing large industrial customers joined in a motion to FERC in a proceeding involving all the organized spot markets to scrutinize whether those markets are properly designed, and whether the market rates they establish are just and reasonable.

FERC had sought public comment on just four organized spot market issues:

• the role of demand response
  
• long-term power contracting
• market monitoring, and
  
• responsiveness of RTOs and ISOs
  

The motion supported the limited FERC initiative, but argued that the limited initiatives are inadequate to address systemic failure of the spot markets to yield reasonable rates, making

• Electricity consumers of all stripes recognize that the problems in the organized markets run much deeper than the current investigation is probing
  
• FERC needs to broaden the scope of its proposed investigation to address the core issue of whether the private spot markets are producing unjust and unreasonable wholesale power prices
• Certain large utilities in RTO regions are earning supra-competitive profits far in excess of returns on investments in other enterprises having corresponding risks
• Rates consumers pay in the functionally deregulated regions where the private spot markets are setting wholesale rates are consistently higher than rates in traditionally regulated areas and are increasing faster
• Price increases in prices in organized spot market areas are only partially due to increases in fuel prices
• Other non-cost-of-service related factors, including the exercise of market power, also play a significant role in higher rates of organized spot markets
• High prices and high rates of return have not attracted new investment and supply in the regions with private spot markets

The pleading asserts that FERC's reliance on privately set rates in organized markets is based on presumed conditions that are "at variance with reality." These unwarranted assumptions include

• the absence of significant market power
• the existence of free entry to and exit from the market by suppliers in response to "price signals"
• the existence of an optimized resource mix to assure inframarginal revenues earned by generators are just and reasonable
• the absence of impediments to long-term contracting, and
• price-responsive demand, short-term substitution alternatives, and demand elasticity

The motion to FERC concludes

If the Commission’s investigation reveals unjust or unreasonable rates, contracts, or practices, it must take action to address them. Chairman Kelliher has pointed out that, in such circumstances, declining or failing to act simply is not an option that is lawfully available to the Commission. He has stated, quite correctly, that “[t]he legal duty of the Commission to prevent unjust and unreasonable rates and undue discrimination or preference in the sale of wholesale power or interstate transmission by jurisdictional sellers is absolute; the Commission does not have the discretion to ignore them.” The Undersigned Parties therefore urge the Commission to investigate this issue, to fulfill its statutory obligation.

Cornell Professor Gives Low Marks to NYISO Electricity Markets

In a September 2007 report prepared for the American Public Power Association (APPA) as part of its electricity market reform initiative, Cornell Professor Timothy Mount identifies numerous weaknesses in the wholesale electricity markets operated by the New York Independent System Operator (NYISO):

An important difference between regulated and deregulated generation is that the revenues received by generators in a regulated market are tied to actual costs. In a deregulated market, a large part of the net revenue earned above the operating costs is fungible and does not necessarily go toward the capital costs of generating capacity in a particular region. In a regulated market, customers know what they are paying for. This is no longer the case in a deregulated market and a sizable portion of the bill a customer pays for generation may, in fact, be transferred to another region or another country or another industry within the structure of a given holding company. Given the complexity and the rapid changes of the structure of many companies that now own power plants, it is extremely difficult to determine exactly where this money goes.

Of particular concern is the lack of the NYISO capacity markets to stimulate merchant power companies to build new power plants:

Hundreds of millions of dollars are being paid through the capacity market to the owners of installed generating capacity to supplement their earnings in the wholesale market. The main accomplishment of these extra payments is to increase the market value of existing generating capacity. There is no obligation placed on generators to build new capacity when and where it is needed. The NERC report on reliability discussed earlier shows that projected capacity margins above the peak loads are falling in all deregulated regions. Delays by investors in their commitment to build new generating capacity are developing into a serious national problem. The overall conclusion is that the current performance of deregulated electricity markets is poor in terms of ensuring that there is enough installed generating capacity to meet projected loads reliably. This is true even though substantial payments have been made to generators through capacity markets to supplement their earnings in the wholesale market.

As a result of the reliance on market forces, the spare capacity needed to maintain reliable service is shrinking:

In the 2004 report, the forecasted reserve margin was always above the 18% needed to meet the reliability standard up to the end of the forecast period in 2013. However, in the 2005 report and the 2006 report, the forecasted reserve margins fall below the 18% standard by 2008.

The reason for the recent drop in the forecasted reserve margins is that there have been delays in the construction of new generating units even though they have been issued construction licenses. The lists of new generating units are essentially the same in the different reports, but the proposed in-service dates are quite different. In 2004, nine generating projects, with a total capacity of 2,038 MW, were under construction. This was two-thirds of the total of 3,120 MW approved. Another 1,605 MW had applications pending. In 2005, the amount of capacity under construction was still 2,038 MW, but none of the other projects had proposed in-service dates. The important implication is that it is no longer realistic in a typical deregulated market to assume that a generating unit will be built after regulators have approved a license for construction. This was typically not the case under regulation. In a deregulated market, merchant generators have no obligation to complete projects if the prospects for recovering capital costs deteriorate during the construction process.

The problem is most acute in the New York City area:

Given the age and low ACF of many existing generating units in NYC, some of these units are scheduled for retirement in the near future. Combining this situation with the current reluctance of investors to build new generating capacity³³, the most important region to consider at this time is the LICAP market in NYC. The basic questions are: 1) how much money is paid to generators in NYC, and 2) is this amount enough to finance the investment needed to maintain generation adequacy? The answers imply that the LICAP market in NYC is an example of how a capacity market can be expensive for customers and still not provide an effective way to maintain generation adequacy. This is true even though the state regulators designed the LICAP market specifically to deal with the issue of generation adequacy.

While claiming to rely on market forces, New York has relied on stop gap measures, and called upon publicly owned utilities and Con Edison to effectuate construction of most of the new power plants built in the past decade:

[T]he larger incumbent firms can exploit the LICAP market given the pattern of ownership of generating capacity in NYC. In spite of the fact that the cost of the LICAP market is very high, investors have not stepped forward to build new generating capacity and in 2006 the regulators had to resort to ad hoc ways to meet reliability standards for 2008 in NYC.

The amount already wasted on capacity payments to existing power plant owners to induce a market response totals billions of dollars, and would have been enough to build the needed new power plants:

Even though steps have been taken to deal with the projected shortfall, this does not change the overall conclusion that the LICAP market has been an expensive and an ineffective way to maintain generation adequacy. In 2005 and 2006, customers paid over $1 billion/year in the LICAP market in NYC and merchant investors were still reluctant to commit to specific in-service dates for new generating units that have already received licenses for construction. This amount of money is enough to finance over 12,000 MW of new peaking capacity at a capital cost of $80/kW/Year (from Table A1 in the Appendix), and this amount of additional capacity would more than double the installed generating capacity in NYC.

At this point, it is likely that New York City or state agencies will need to be more proactive before it is too late and reliability is sacrificed. In 1996, when it envisioned the current system of market reliance, the PSC refused an effort of Enron to reduce the reliability reserve margin, saying reliability is paramount. Last year, the PSC lowered the capacity reserve margin deemed necessary for reliability from 18% to 16.5%. This reduction had the effect of extending the time limit for construction of new plants needed to maintain reliability. The PSC reduction was made on the recommendation of the New York Reliability Council, after a divided vote with several members voting against the reduction.

Electricity Consumer Advocates Seek Supreme Court Review of FERC Market Rate Orders

Several years ago, after manipulation of market-based rates for wholesale electricity was exposed, FERC took action to ban certain manipulative practices used by Enron and others to create artificial scarcity and drive prices up. FERC commenced a proceeding under Section 206 of the Federal Power Act, declaring all market rate tariffs to be unjust and unreasonable, and then proposed to "fix" them by adding certain conditions intended to discourage price manipulation.

A number of consumer advocates intervened in the case, contending that FERC's "fixes" were not sufficient to bring the tariffs into compliance with longstanding Federal Power Act requirements. They contend that the law requires all rates to be filed publicly in advance, before they take effect, and that FERC lacks authority to dispense with the statutory filing requirement by allowing sellers to make secret rate changes and to disclose actual rates only after they have been implemented and charged. Also, they argue that FERC has no objective yardstick by which to measure whether a market rate is just and reasonable. Also, see Consumer Groups Question FERC Market Rates, and Consumer Challenge to FERC "Market-Based Rate" System Proceeds. See also, May the FERC Rely on Markets to Set Electric Rates?.

The Court of Appeals for the District of Columbia affirmed FERC's orders. See FERC Escapes Court Review of its Legal Authority for its Electricity Market Rate Regime. The advocates moved for rehearing. See Consumer Advocates Seek Rehearing of D.C. Circuit Court Decision Allowing FERC to Avoid Consideration of Statutory Filing Requirements. The motion for rehearing was denied.

In late November 2007 the consumer advocates, including PULP, filed a petition for certiorari, asking the Supreme Court to hear the case. In October 2007 the Supreme Court granted review in another case involving remedies for unjust and unreasonable market rates. See U.S. Supreme Court to Decide Electricity Market Rate Refund Case.

FCC Denies Verizon Request for Deregulation in Six Major Areas Including Metropolitan New York

In the early 1990's, the Federal Communications Commission (FCC) attempted to deregulate providers of telecom services under its jurisdiction who were not dominant in the market, i.e., they lacked market power. Under the agency's own deregulatory initiatives, the FCC "detariffed" long distance service providers like MCI, while continuing to regulate the dominant provider, AT&T.

In a court challenge to the agency's claim of power to deregulate providers who lack market power, the Supreme Court held that for better or worse, the statutes written by congress had created a filed rate regulation system that did not give the agency power to modify filing requirements by abolishing them. See MCI v. AT&T. This Supreme Court reminder that only Congress can change statutory rate filing requirements added pressure on Congress to revise the basic laws under which interstate telecom services are provided and regulated.

In 1996, a new regulatory platform was created by Congress when it enacted the Telecommunications Act of 1996. In addition to spelling out criteria and procedures for the FCC to follow before deregulating services, the new law added important new universal service initiatives, such as mandating Lifeline and Linkup services (which previously depended on state initiatives), and providing for broadband access to schools and libraries.

The Telecommunications Act of 1996 requires the FCC to "forbear" from enforcement of statutes and regulations if it determines that the regulation is not needed to protect consumers or to ensure just and reasonable rates and practices by carriers. This reflects the dubious assumption that a competitive market necessarily produces reasonable rates. In an extremely unusual provision, if a telecom company files a "forbearance petition" the 1996 Telecom Act requires the FCC to determine whether forbearance will promote competitive markets and is in the public interest. Unless the Commission responds to petitions for forbearance within one year – a deadline which can be extended by only 90 days – the relief sought by the utility is "deemed granted" by operation of law. Thus, without any action by congress or the regulatory agency, a telecom utility is allowed to trigger its own deregulation and to achieve that if its forbearance petition is not rejected by the FCC within the statutory period .

In 2006, Verizon filed petitions for regulatory forbearance in six large metropolitan areas, including New York, the nation's largest area. With forbearance, Verizon rates under FCC jurisdiction would have been deregulated, and rate increases could take effect without adequate public notice or any opportunity for prior agency review for reasonableness.

Consumer groups, including the National Association of State Utility Consumer Advocates (NASUCA) and PULP, opposed the request for deregulation, filed initial comments objecting to Verizon's request for regulatory forbearance, arguing that the competition tests had not been met, and filed reply comments in response to Verizon's answering papers.

On November 2007, the FCC rejected Verizon's request. According to the FCC Press Release, "The Commission found that the current evidence of competition does not satisfy the
section 10 forbearance standard with respect to any of the forbearance Verizon requests.
Accordingly, the Commission denied the requested relief in all six MSAs." In a subsequent order, the FCC detailed its reasons for rejecting the Verizon request for deregulation.

Lawsuit Involving Death of Velma Fordham Settled by National Fuel

The Public Service Commission (PSC) Penalty Proceeding
In September 2001, the New York PSC issued an order to show cause why National Fuel Gas Distribution Company should not face a penalty arising from the denial of service to a customer, Velma Fordham, who later was discovered dead in her unheated apartment, and found by the Medical Examiner to have died from hypothermia. The potential fines from several alleged violations of the Home Energy Fair Practices Act (HEFPA) were $19 million. NFG denied having violated any HEFPA requirements. PULP intervened in the case and participated in discovery.

Eventually, after Staff filed a scoping statement with detailed allegations outlining its intended proof at hearing, a proposed settlement agreement was reached between DPS Staff and NFG.

Under the agreement, no penalties were imposed. National Fuel agreed only to add $1.5 million to a program designed to aid low income customers, and to fund an audit of its practices regarding the Home Energy Assistance Program.

PULP did not join in the settlement. PULP also objected to a lack of transparency regarding the proposed settlement, because the PSC had required any comments on the settlement proposal to be non public.

The proposed settlement was approved by the PSC in 2004, more than three years after Ms. Fordham's death.

Buffalo Judge Makowski Dismisses the Private Tort Action for Wrongful Death
In 2006, a wrongful death action on behalf of Velma Fordham's estate was dismissed by Buffalo Judge Joseph G. Makowski as having been brought too late. His decision apparently was influenced by testimony of Michael Baden, hired as a forensic expert by National Fuel, who estimated the time of Ms. Fordham's death to have been more than two years prior to commencement of the lawsuit. The lawsuit was brought within two years of the date of death reported by the Erie County Medical Examiner.

The Appellate Division Reinstates the Action, Underscoring The Public Interest in HEFPA Compliance
In an April, 2007 decision, the Appellate Division, Fourth Department reversed Judge Makowski's decision, and reinstated the case. The court said "the testimony of the Chief Medical Examiner undercuts both the credibility of National Fuel's expert (Michael Baden) and the substance of his opinion with respect to the date of death."

More importantly, moving on to discuss the plaintiff's claims, the Appellate Division rendered a major decision regarding the effect of HEFPA violations.

The appellate court found sufficient evidence of negligence on the part of NFG for having violated Ms. Fordham's rights to service under the Home Energy Fair Practices Act (HEFPA), Article 2 of the New York Public Service Law:

The evidence supports plaintiff's allegations that National Fuel was negligent based on the violation of its obligations under the Public Service Law, the corresponding regulations, and its own procedures by denying the application of decedent for continuing service at her new residence (see § 31 [3]; 16 NYCRR 11.3 [a] [5]), and based on its failure to initiate service within five days of decedent's original request for gas service or within a reasonable period thereafter, allowing for delays occasioned by the snow storm (see Public Service Law § 31 [5]; 16 NYCRR 11.3 [a] [4]). The Legislature has recognized that discharging those obligations in the provision of residential gas service "is necessary for the preservation of the health and general welfare and is in the public interest" (Public Service Law § 30; see 16 NYCRR 11.1).

The court rejected National Fuel's defense that Ms. Fordham should have done more to get additional welfare assistance. (Ms. Fordham had obtained an Emergency HEAP payment of $700 which was rejected by National Fuel as insufficient).

Punitive Damages Claim Allowed for HEFPA Violations
The court also reinstated claims for punitive damages, to be determined by a jury, stating:

Here, there is evidence that National Fuel failed to discharge its obligation to decedent under the Public Service Law and its own procedures by failing to respond in a timely manner to her original request for gas service. In addition, National Fuel's CBR erroneously treated decedent as a new customer rather than a continuing customer and led her to believe that the activation of her gas service was contingent upon her satisfaction of a 1997 judgment or qualification for direct payment by DSS. Those errors were given the apparent endorsement of a supervisor . . . . The alleged conduct of National Fuel implicates public health and safety concerns . . . as well as the policies permitting awards for punitive damages. Such awards "are intended as punishment for gross misbehavior for the good of the public and have been referred to as a sort of hybrid between a display of ethical indignation and the imposition of a criminal fine . . . . Punitive damages are allowed on the ground of public policy and not because the plaintiff has suffered any monetary damages for which [s]he is entitled to reimbursement . . . . The damages may be considered expressive of the community attitude towards one who wilfully and wantonly causes hurt or injury to another. . . . dismissal of plaintiff's claim for punitive damages is premature, and the issue whether the actions of National Fuel warrant the imposition of punitive damages should be determined at trial.

Reversal of Judge Makowski's Sealing Order
Finally, in a sharp rebuke to Buffalo trial court judge Joseph G. Makowski, the Appellate Division reversed his sua sponte order sealing all the records of the case from public disclosure, including his own decision dismissing the case, stating:

Plaintiff contends that the court erred in sua sponte directing that its decision and the moving papers upon which it is based be filed under seal. Here, the court made no finding of good cause, as required by the regulation.... Further, apart from the regulation, "[t]he right of access to . . . court records is also firmly grounded in common-law principles" . . . . Courts should be reluctant to seal court records even when all of the parties to the litigation have requested such sealing . . . and we perceive no legitimate basis for sealing any part of the record here . . . . To the contrary, this action raises serious issues of legitimate public concern, and "[t]he public interest in openness is particularly important on matters of public concern, even if the issues arise in the context of a private dispute" . . . . We therefore conclude that the sealing directive should be vacated.

Previously, Judge Makowski,without notice, made an ex parte order purporting to gag the Attorney General's office and PULP from discussing or disclosing papers filed in the PSC penalty case. Makowski at the request of NFG issued subpoenaes in a pre litigation discovery order, in anticipation of the wrongful death action that had not yet been filed. The Attorney General submitted to jurisdiction of the court and then later made a motion to relax Makowski's gag order, because the bulk of the papers filed at the PSC did not involve the subpoenaed papers which Makowsi had sealed in the judicial discovery proceeding. Judge Makowski did not timely decide the Attorney General's motion. When some of the papers sealed by Makowski were included in NFG's multi-volume filings at the PSC in response to the PSC Order to Show Cause, NFG argued that their entire response could not be made public and could not be provided to PULP. A PSC Administrative Law Judge eventually ruled that nearly all the papers filed by NFG in the PSC case, excepting for a few autopsy photographs, are publicly available documents under the Freedom of Information Law.

Confidential Settlement of the Wrongful Death Action
According to a 10-k report filed by NFG with the SEC on November 29, 2007, the wrongful death and punitive damages claims were scheduled for trial beginning in October, 2007, but then, more than six years after Velma Fordham's death, a settlement was reached.

The amount of the settlement is not known. According to a Buffalo News article, the terms of the settlement apparently are being kept confidential by agreement of parties to the litigation.

Importance of the Case
Despite National Fuel's steadfast insistence it did no wrong, the death of Velma Fordham, and the Appellate Division decision recognizing claims for damages, including punitive damages, arising from utility denial of HEFPA rights is significant judicial recognition of the potential life and death consequences of a lack of utility service. The Appellate Division decision constitutes a fitting postscript to this extremely sad matter involving the loss of a life, one which stands in contrast to lax PSC administrative enforcement of HEFPA and a lack of effective administrative sanctions for HEFPA violations. In the end, it was necessary for private litigants and their counsel to vindicate consumer rights under HEFPA.

For more papers in the case, see PULP's webpage on the death of Velma Fordham.

PULP Replies to National Grid's "Grand Plan" Defense

National Grid has been demanding that applicants for utility service pay 100% of bills for old, closed accounts, or $1,000 if the amount owed exceeds $1,000, if, during the prior period of service the customer had defaulted on a deferred payment agreement (DPA). See New Barrier to Utility Service: National Grid's "One Grand Demand".

The "Grand Plan" results in denial or lengthy delays in service and considerable hardship. The absence of safe utility service can be a matter of life or death, as illustrated by a recent, tragic Pennsylvania case. See Mom Sought Help Before Fatal Fire.

Applicants denied utility service due to the "Grand Plan" rule are challenging it in a Petition Seeking Interim Relief and a Declaratory Ruling and Other Relief to the Public Service Commission filed October 16, 2007. See PSC Asked to Investigate Grid's "Grand Plan".

Petitioners argue that Section 31 of the Public Service Law requires National Grid to offer a DPA with a down payment of no more than half the balance due or the amount of three months'
service, whichever is less. Also, they argue that under Section 37, all payment agreements must be fair and equitable and based on the customer's financial situation.

All of the individuals who filed affidavits in support of the petition, from whom utility service ahd been withheld under the challenged rule, have now received service without paying the "One Grand Demand." National Grid continues to apply the rule to other persons who have not joined in the case.

Discovery in the case indicates that the "Grand Plan" was adopted by National Grid in 2004 without public notice and without filing revised tariffs. As a result, the rules were not subject to objection by consumer groups and there was no PSC order approving the new conditions for service before they were implemented.
On November 20, 2007, National Grid filed its response to the amended petition.

On November 30, 2007 PULP filed its reply for the petitioners.

For more information, see PULP's web page on the National Grid "Grand Plan."

Governor Spitzer Nominates NYISO Executive for PSC Post

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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