U.S. Supreme Court to Decide Electricity Market Rate Refund Case

On September 24, 2007 the Supreme Court granted a writ of certiorari to review a December 2006 decision of the Court of Appeals for the Ninth Circuit in Morgan Stanley Capital Group v. Snohomish County. The Ninth Circuit held that FERC must consider reasonableness of long term electricity contracts made at a time when the market prices were manipulated.

FERC refused to review the Snohomish contracts for reasonableness and possible refunds based on its interpretation of the "Mobile-Sierra" doctrine established in two prior Supreme Court decisions. The effect of the Mobile and Sierra cases was to limit FERC's power to revise contract rates for wholesale electricity. The issue in the Sierra case was whether the contract rate had become too low, and the seller could not be relieved of its obligations unless the impact of holding the seller to its deal would harm the "public interest."

The contract rates in the Snohomish case, in contrast, were excessive, not too low. Further, the sellers had received market-based rate "authorizations" from FERC. FERC relieves sellers with such authorizations from the statutory duty to file their rates, rate schedules and contracts affecting rates in advance, and only requires abbreviated post hoc quarterly summaries of sales.

FERC's "market-based rate tariffs contain no rates or rate schedules or formula from which the price can be calculated, and allow prices to be what the seller and buyer agree, in private, with no public filing of the rates or contracts before they take effect. This agency waiver of advance filing requirements is not authorized by the language of the Federal Power Act, and was simply made up by FERC. See May the FERC Rely on Markets to Set Electric Rates.

In MCI v AT&T, in the context of analogous deregulatory initiatives by the FCC, the Supreme Court heldthat a federal regulatory agency cannot create alternative systems that ignore a filed rate regulation system created by statute. In other pending litigation, consumer groups have raised the issue whether FERC can dispense with the statutory requirement of advance public filing of wholesale electricity rates and contracts simply because FERC believes the sellers lack market power. See FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime , and Consumer Groups Question FERC Market Rates.

When buyers sought relief from unreasonable wholesale market rates for electricityduring the California crisis, FERC threw consumers to the lions, allowing sellers protection under the "filed rate doctrine" that allows only prospective modification of previously established rates (thus thwarting any refunds for prior overcharges) and the "public interest" standard that militates against revision of contract rates. Perversely, the Federal Power Act -- statute designed to protect consumers by subjecting all rates and contracts to public scrutiny, agency review and public accountability -- was turned by FERC's interpretations into one that insulates excessive utility charges from any public or agency scrutiny.

In a 2004 decision in Lockyer ex. rel California v. FERC creating refund remedies for consumers injured by excessive market rates, the Ninth Circuit uncritically accepted a doctrine of the D.C. Circuit Court of Appeals which said that FERC can allow market rates to be charged when the agency deems that sellers lack market power (the ability to drive prices up) . The D.C. Circuit, however, had avoided grappling with the inconsistency of unfiled market prices and longstanding core statutory rate filing requirements. The Ninth Circuit nonetheless allowed refunds for the benefit in Lockyer on a theory that if FERC's initial assessment of sellers' market power turned out to be wrong wrong, and if sellers did not make quarterly reports, FERC could require refunds of excessive charges.

In Snohomish, the Ninth Circuit elaborated on its Lockyer doctrine:

Market-based rate authority provides a meaningful opportunity for prior review and approval of rates under the FPA, an essential prerequisite to the Mobile-Sierra mode of rate review, only insofar as FERC implements and uses an effective oversight mechanism after the market-based rate authorization is initially granted. Only then can FERC meet its statutory duty to ensure that all rates are “just and reasonable.”

In effect, the Ninth Circuit said FERC could invent a new system of market rates, and the court invent a remedy when the market rates are discovered to be unreasonable. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

Sellers sought review of the Lockyer decision in the Supreme Court. California argued in its conditional cross-petition that if the case was accepted for review, the Supreme Court should hold that the market rates were subject to plenary review for reasonableness (as opposed to prospective revision barring relief for prior overcharges) because the rates had never been filed as required by the Federal Power Act Section 205. The Supreme Court denied review in the Lockyer case in June 2007, and so the rate filing issue raised by California was not decided in that case.

Sellers in the Snohomish case that will now be heard by the Supreme Court essentially claim that their contracts should not be revised under the Mobile-Sierra doctrine. Examination of the Mobile and Sierra cases, however, shows that the contracts there had been properly filed before they took effect, had been subject to public scrutiny, protest and intervention by interested parties, and had already been reviewable for reasonableness by the regulatory agency.

The Supreme Court's decision in Mobile emphasizes the importance of the public advance filing requirement, a factor not present in Snohomish:

"This contract was filed with the Federal Power Commission as an amendment to the general supply contracts between Mobile and United, and, with the approval of the Commission, became a part of United's filed schedules of rates and contracts."
* * *
In June 1953 United, without the consent of Mobile, filed new schedules with the Commission which purported to increase the rate on gas for resale to Ideal to 14.5 cents per MCF, a rate more closely approximating that for other gas furnished to Mobile by United. Claiming that United could not thus unilaterally change the contract rate, Mobile petitioned the Commission to reject United's filing.
* * *
The Act 3 requires natural gas companies to file all rates and contracts with the Commission (4)(c)) and authorizes the Commission to modify any rate or contract which it determines to be "unjust, unreasonable, unduly discriminatory, or preferential" (5(a)). Changes in previously filed rates or contracts must be filed with the Commission at least 30 days before they are to go into effect ( 4 (d)***
* * *
In construing the Act, we should bear in mind that it evinces no purpose to abrogate private rate contracts as such. To the contrary, by requiring contracts to be filed with the Commission, the Act expressly recognizes that rates to particular customers may be set by individual contracts.
* * *
Recognizing the need these circumstances create for individualized arrangements between natural gas companies and distributors, the Natural Gas Act permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts, which to that end must be filed with the Commission and made public.
* * *
The provision of the Natural Gas Act directly in issue here is 4 (d), which provides that "no change shall be made by any natural-gas company in any such [filed] rate . . . or contract . . . except after thirty days' notice to the Commission," which notice is to be given by filing new schedules showing the changes and the time they are to go into effect.
* * *
These sections are simply parts of a single statutory scheme under which all rates are established initially by the natural gas companies, by contract or otherwise, and all rates are subject to being modified by the Commission upon a finding that they are unlawful.
* * *
The basic duties are the filing requirements: 4 (c) requires schedules showing all rates and contracts in force to be filed with the Commission and 4 (d) requires all changes in such schedules likewise to be filed. In addition, 4 (d) imposes the further requirement that the changes be filed at least thirty days before they are to go into effect. It may readily be seen that these requirements are no more than are necessary to implement 4 (e) and 5 (a): the filing requirements are obviously necessary to permit the Commission to exercise its review functions, and the requirement of 30-days' advance notice of changes is essential to afford the Commission a reasonable period in which to determine whether to exercise its suspension powers under 4 (e).

In the Sierra case, which involved the Federal Power Act, the Supreme Court again emphasized that the contract at issue "was duly filed with the Federal Power Commission."

The Morgan Stanley cert petition and associations of energy sellers urged the Supreme Court to undo the remedy for consumers fashioned by the Ninth Circuit by applying the "public interest" standard of review rather than a "just and reasonable" standard, but did not come to grips with a major distinction: the contracts at issue in their case had never been publicly filed at FERC and thus had never been subject to its review for reasonableness and possible revision before taking effect. In contrast, the more stringent standard for contract review developed in the Mobile-Sierra cases came into play only after advance public filing and after the agency had reviewed them for reasonableness.

The Ninth Circuit was right to require FERC to consider refund remedies for excessive charges. Otherwise, it would be possible for unreasonable and illegal rates to burden customers with no remedy from the agency whose mission includes the duty to see that no unreasonable charges are imposed to the eventual detriment of consumers.

The Ninth Circuit's decision could be affirmed by the Supreme Court on an additional or alternative ground more firmly anchored in the language of the governing statute. The deference normally accorded to a wholesale electricity contract arises only after the contract has been filed publicly in advance, subject to public scrutiny, intervention and protest, and FERC review to determine if rates are just and reasonable. Because the Snohomish contract sellers had market rate authorizations, their actual rates, charges and contracts were not publicly filed in advance. Thus, as in any case where the seller has not filed rates in accordance with the law, FERC has power to review them for reasonableness when the excessive charges became apparent and buyers objected, from the date the contract began.

FERC and the sellers have maintained that a screening for market power and a post hoc reporting requirement is sufficient to justify waiver of the statutory public rate filing requirements. The Supreme Court, however, in MCI v. AT&T, rejected such administrative deregulation by the FCC without congressional action to modify the agency's governing statute:

our estimations, and the Commission's estimations, of desirable policy cannot alter the meaning of the [statute]. For better or worse, the Act establishes a rate regulation, filed tariff system ..., and the Commission's desire "to `increase competition' cannot provide [it] authority to alter the well-established statutory filed rate requirements".... As we observed in the context of a dispute over the filed rate doctrine more than 80 years ago, "such considerations address themselves to Congress, not to the courts ....

We do not mean to suggest that the tariff-filing requirement is so inviolate that the Commission's existing modification authority does not reach it at all. Certainly the Commission can modify the form, contents, and location of required filings, and can defer filing or perhaps even waive it altogether in limited circumstances. But what we have here goes well beyond that. It is effectively the introduction of a whole new regime of regulation (or of free-market competition), which may well be a better regime, but is not the one that Congress established.

Sellers cannot have it both ways, i.e., escaping initial public and agency scrutiny of unfiled rates for reasonableness while demanding the protection of the filed rate and Mobile Sierra doctrines.

Significantly, after the Supreme Court struck down the FCC's attempt at agency deregulation in MCI v. AT&T , Congress enacted a new statute, the Telecommunications Act of 1996 which took into account changes since the 1930's, recast the duties of utilities, revised the powers of the agency, established standards for relaxation of regulation and reintroduction of regulation. Further, Congress added significant new universal service and consumer protection measures the federal agency either lacked any power to create, or which, in its deregulatory zeal, it had overlooked.

This broader, congressional solution is exactly the result contemplated by the Supreme Court in FPC v Texaco, another case that discussed energy agency departure from statutory requirements:

It is not the Court's role, however, to overturn congressional assumptions embedded into the framework of regulation established by the Act. This is a proper task for the Legislature where the public interest may be considered from the multifaceted points of view of the representational process.

The actions taken by Congress in the aftermath of MCI v. AT&T included

• requiring all local telephone companies to offer reduced price Lifeline and Linkup service for low income customers
  
• requiring comparable and affordable telephone rates for customers in urban, rural, and low income areas, and
• requiring low cost internet broadband service for schools and libraries.
  

If the Supreme Court affirms the obligation of FERC to review questioned rates for reasonableness, and follows MCI v. AT&T precedents and trims back FERC's effort to deregulate wholesale electricity utilities without statutory authorization, it is possible that Congress would respond with new statutory alternatives to the longstanding consumer protection provisions of the Federal Power Act. If so, it is to be hoped that Congress would begin to correct the glaring deficiencies in FERC's minimalist approach to review of market rates and abysmal record on consumer protection. In addition, as it did in the Telecom Act of 1996, Congress could address universal service and affordability issues presented when rates are based on market forces.

Marketizer Revisionism: FERC Reinvents Itself as Overseer of Markets, Abandoning Review of Utility Rates

Traditionally, reasonableness of wholesale electric rates has been determined by some measure of cost and the level of utility profit, neither of which have been matters of much concern to FERC lately. This is because FERC is attempting to substitute competition and markets for price regulation. In essence, FERC prefers to be more like the SEC, which polices the stock markets, generally without concern about reasonableness of the price of any particular stock on any day.

Unlike the SEC, however, Congress requires all utility rates and charges for wholesale electricity and interstate transmission under FERC jurisdiction to be "just and reasonable." The Federal Power Act also declares that any unreasonable utility rates are illegal. Congress charged FERC with the duty to enforce the reasonableness requirement and gave it the power to review utility rates for reasonableness before they are implemented, and to revise current rates prospectively if they become unreasonable.

FERC's shift in emphasis from rate regulation to market oversight was clearly stated in a five-year plan adopted in 2002, which explicitly states its goal is to "foster nationwide competitive energy markets as a substitute for traditional regulation." A key assumption of FERC is that so long as the market cannot be skewed by any single seller, a market rate will be a reasonable rate. This becomes justification for not reviewing the rates and not providing effective refund remedies when a market rate is excessive and unreasonable.

Today, there is growing public and judicial disenchantment with FERC's market rate regime. See More Doubts About FERC's Market Rate Regime From Ninth Circuit.

FERC is now more circumspect and less direct in public statements about replacing traditional regulation with markets and competition than it was in 2002, but the effects of the agency's direction and recent actions remain the same: oversight of utilities and their charges for electric service is being reduced. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed.

In a recent rule making proceeding, FERC invoked a court decision to support its emphasis on market structure and competition rather than oversight of the level of rates set in the markets:

The Commission’s core responsibility is to “guard the consumer from exploitation by non-competitive electric power companies.”[citing National Association for the Advancement of Colored People v. FPC, 520 F.2d 432, 438 (D.C. Cir. 1975), aff’d, 425 U.S. 662 (1976)]. The Commission has always used two general approaches to meet this responsibility—regulation and competition. The first was the primary approach for most of the last century and remains the primary approach for wholesale transmission service, and the second has been the primary approach in recent years for wholesale generation service.

One might observe that in recent years, FERC's "primary approach" of relying on markets to set utility rates results in market manipulation, consumer exploitation, and many billions of dollars of wealth transfer from consumers to essentially deregulated "competitive" generators, marketers and energy traders like Enron. Also, since its enactment in 1935, the Federal Power Act has permitted sellers and buyers to set prices in contracts, so long as the contract prices, terms and conditions were just and reasonable and non discriminatory. FERC has eased up on review without authorization from Congress to change the regulatory system. The major deviation is to eliminate the statutory transparency requirements which require public notice by filing of all rates and contracts affecting rates in advance.

Interestingly, the snippet FERC quoted from the decision of the Court of Appeals in National Association for the Advancement of Colored People v. FPC, was not adopted by the Supreme Court when it reviewed the case. Instead, in its discussion of the statute's purpose, the Supreme Court said:

In the case of the Power and Gas Acts it is clear that the principal purpose of those Acts was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices. **** 16 U.S.C. § 824a (a) (The purpose of the Power Act is to "assur[e] an abundant supply of electric energy throughout the United States with the greatest possible economy"); Pennsylvania Power Co. v. FPC, 343 U.S. 414, 418 ("A major purpose of the [Power] Act is to protect power consumers against excessive prices"); FPC v. Hope Gas Co., 320 U.S. 591, 610 (The "primary aim" of the Natural Gas Act is "to protect consumers against exploitation at the hands of natural gas companies").

Conspicuously absent in the Supreme Court's opinion is any reference to "non-competitive" companies. The statutes require all rates to be reasonable, without regard to whether the seller is "competitive" or "monopolistic." The Supreme Court had just decided a case the year before, in 1974, in which it emphatically rejected any conflation of the notion of a "competitive" market rate with the "reasonable" rate required by law:

Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price.... This does not mean that the market price of gas would never, in an individual case, coincide with just and reasonable rates or not be a relevant consideration in the setting of area rates...; it may certainly be taken into account along with other factors.... It does require, however, the conclusion that Congress rejected the identity between the "true" [just and reasonable price] and the "actual" market price.

Thus, the lower court's emphasis on competition was at odds with longstanding teachings that the statute's purpose is protection of customers from excessive and unreasonable charges. See FERC Commissioner Kelly: The Purpose of the Federal Power Act is to Protect Consumers. Also, FERC's notion of "letting go" regulation of the charges of competitive providers and regulating only those who are monopolistic is at odds with the language of the Federal Power Act and teachings of the Supreme Court which do not allow the agency to forbear regulation of any rates based on its notions of competition. The wisdom of Congress is borne out by the example of "competitive" utilities extracting billions of dollars from consumers by exploiting their market rate waivers from rate review and FERC's blindness to market manipulation.

FERC's effort to recast the purpose of the Federal Power Act from reasonableness of prices to competition and regulating spot market structure is now being touted by a prominent advocate of deregulated spot markets as a foundation for even greater reliance on wholesale spot markets with even more "scarcity" pricing and fewer limits on market prices ultimately paid by consumers. See Looking for the “Vroom”: A Rebuttal to Dr. Hogan’s “Acting in Time: Regulating Wholesale Electricity Markets”. But no matter whether a utility is "competitive" or monopolistic, and no matter how "workable" the market is, the law still requires all rates and charges to be just and reasonable and subject to review and revision by FERC.

More Doubts About FERC's Market Rate Regime From Ninth Circuit

In several opinions in recent years, the Court of Appeals for the Ninth Circuit has remanded cases to FERC to consider refunds to remedy flagrant market rate manipulation by sellers with FERC-approved "market-based rates." Also, for at least five years, consumer advocates have been asking FERC and the federal courts to consider whether the FERC private market rate regime is consistent with the public filing requirements of the Federal Power Act. To date, the courts have not ruled on the merits of their claims, which are based on the plain language of statutory filing requirements of the Federal Power Act and a Supreme Court decision involving analogous efforts of a federal regulatory agency to implement price deregulation without a change in the law establishing a filed rate regulation system. See May the FERC Rely on Markets to Set Electric Rates?

The Ninth Circuit has indicated further judicial impatience with FERC arguments that market rates, never filed or reviewed, should receive the same deference courts normally give to reasoned federal agency decisions based on a full record and their expertise. Circuit Judge Fletcher, in a case questioning whether the "filed rate doctrine" should be followed when rates were never filed subject to FERC review, stated in her concurring opinion:

Without minimum standards for FERC oversight, the Filed Rate Doctrine threatens to come unmoored from its rationale of respecting the actions of a federal agency to which Congress has delegated authority. Instead, I fear respect is being given to agency passivity, allowing anticompetitive and otherwise illegal actions to escape review. E & J Gallo Winery v. EnCana Corporation, No. 05-17352 (9th Cir. Sept 19, 2007)

Several consumer advocates have been pressing claims that the current FERC system allowing unfiled market rates and unfiled contracts for wholesale electricity sales is inconsistent with Supreme Court decisions involving similar statutes which hold that a federal regulatory agency cannot disregard rate filing and review procedures contained in statutes enacted by Congress. See Consumer Challenge to FERC "Market-Based Rate" System Proceeds; FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime; Consumer Advocates Seek Rehearing of D.C. Circuit Court Decision Allowing FERC to Avoid Consideration of Statutory Filing Requirements

To date, the Court of Appeals for the District of Columbia, which wrote opinions generally supporting FERC's deregulation agenda in the 1990's, has never analyzed the argument of consumers -- supported by strong Supreme Court Decisions rejecting attempts of other federal regulatory agencies to deregulate the industries they were charged by Congress to regulate -- that under Section 205 of the Federal Power Act, all rates for wholesale electricity must be publicly filed in advance, subject to FERC review and protest by consumers. On four recent occasions the court has dismissed petitions without grappling with the apparent inconsistency of FERC's relaxation of filing and review requirements with longstanding statutes. The Ninth Circuit decisions have arisen in cases where FERC invoked the "filed rate doctrine" as a bar to refunds of charges inflated by rate manipulation, even though the actual rates and charges had never been filed and thus were never publicly known or subject to FERC review for reasonableness before the charges were imposed.

Some utilities ordered to give refunds under other Ninth Circuit decisions are challenging whether those decisions permitting refunds of excessive market rates -- involving billions of dollars -- are correct. Eventually, these cases, or cases brought by consumers, may reach the Supreme Court.

Excelsior! Con Edison Residential Rates Spike (Again)

Typical Bill Reports
The New York Public Service Commission (PSC) for many years has published a series of reports on typical utility customer bills for each major customer class. These reports show what a typical electric bill would be at various levels of usage and permit comparison of prices of the major electric utilities. The reports provide a "snapshot" over time of typical bills for the months of January and July.

Reflecting the New York state motto "Excelsior!" (ever upwards) the most recent typical bill report shows once again that Consolidated Edison Company of New York (Con Edison) has the highest prices of the major investor owned utilities in New York State, and, perhaps, the nation:

(click on chart to enlarge)

The Effects of Restructuring and Con Edison Reliance on NYISO Wholesale Spot Markets for Energy Supply
The chart also illustrates how Con Edison rates began to increase and destabilize beginning with the first summer of operation of the NYISO wholesale electricity spot markets in 2000. See Con Ed Bills Spike 43%: Hike Despite Cool July; and PULP Testimony to Westchester County on Summer 2000 Con Edison Price Spikes.

Con Edison agreed to divest nearly all of its New York City area power plants in voluntary restructuring agreements with the PSC in 1997. Its long term buy-back contracts with the new owners of its divested power plants were designed to expire when the NYISO spot markets were initiated. The idea at the time, promoted by Enron and adopted by the PSC as its vision, was to allow the wholesale sellers to charge what the market would bear (regardless of their costs of production) and eventually to allow the retail utility simply to flow through spot market energy prices to retail customers, without the retail utility attempting to control price levels and volatility by producing electricity at its own plants or by purchasing outside the spot markets to assemble a portfolio of wholesale supply contracts for long term, medium, and short term energy needs.

The PSC "vision" in 1996 was that a new group of middlemen- including traders like Enron - would eventually supply energy to all customers, while Con Edison's role as a producer and seller of electric energy for its customers would diminish or end. See Disconnected Policymakers. Enron went bankrupt in 2001, no state has followed the lead of New York since then, a number of states that implemented the restructuring model have turned away from it, and others are experiencing electric restructuring remorse as their electricity rates soar and their electricity intensive industries close down operations.

In November, 1999, the NYISO began operations, and in May 2000, the PSC allowed Con Edison to flow through month to month price changes, which are often dramatic. At the time, the New York Times reported:

In April [2000], the regulatory commission authorized Con Ed to pass along to users its cost of buying electricity on the new spot market. By contrast, upstate utilities, including New York State Electric & Gas, which covers parts of northern Westchester County and Putnam County, provide energy to residential customers at fixed prices that do not fluctuate with spot market prices.

The commission's critics say that by eliminating Con Ed's risk when buying electricity on short notice (and shifting that risk to its customers) the commission gave the utility little incentive to try to make long-term deals with suppliers that could result in lower prices. Con Ed is allowed to recover part of the savings it gets when it makes such deals and buys electricity at below-market prices, but it can also lose money if it makes the wrong prediction and gets stuck with electricity that costs more than the market price.

Con Ed officials say they have been forced to buy on the spot market because a shortage of power plants has meant that the long-term deals needed to meet the surging demand have not been available.

Deregulation and Weather Fail to Cool Electric Rates, NY Times, August 22, 2000.

Con Edison had enthusiastically adopted the restructuring "vision" of the 1996 PSC, and reshaped itself into an Enron-like utility holding company, with new affiliates engaged in energy trading, power production at plants built in other states, a retail energy seller, and a now-defunct telecom company. See Con Edison Subsidiaries. In its June 30, 2007 SEC 10-Q report, at page 43, Con Edison's Income Statement indicates that $1.26 billion was invested in its power production affiliate (Con Edison Development) and that $241 million was invested in its energy trading affiliate (Con Edison Energy).

There was no net income from these holding company affiliate ventures, which represent about 6% of the company's total assets. Con Edison's main income remains from its regulated subsidiaries. In May 2007 Con Edison of New York filed for a major increase in rates - 17% - to fund new investment in its regulated operations. See Con Edison Asks PSC for 17% Increase in Residential Electric Rates: Low Income Customers Would Pay Even More

Con Edison still provides energy to nearly all residential and small commercial customers in its service territory. It still has legacy long-term contracts and residual generating plants, and so it has only partially implemented the 1996 restructuring "vision." Con Edison is increasingly dependent upon purchases of energy from a small number of sellers at the NYISO, at spot market rates, and it may be planning to become even more dependent on the spot market for future energy purchasing. Con Edison's Exhibits 45 and 48 in the 2008 rate case (Adobe pages 19 and 22) indicate that in 2006, Con Edison acquired 24.6% of the energy supply for its customers through spot market purchases, and that it plans to acquire 49% of its customers' needs from the spot market by 2011, approximately doubling its reliance on the spot market.

Heavy reliance on next day and next hour purchasing was criticized by FERC after the California electricity spot market rate manipulation of 2000 - 2001. Basically, FERC acknowledged that market rates it had allowed in the spot markets are unreasonable, and said no one should heavily depend upon them, just as no consumer would buy all household food and necessities at a convenience store:

we would expect any responsible retail supplier to rely on a portfolio of resources and to turn to the spot market only to engage in economy transactions or to meet portions of its load that could not be predicted well in advance or which were not
anticipated due to resource outages greater than are covered by prudent reserves.

San Diego Gas & Electric Company, FERC Docket No. EL00-95-000, p. 10 (Aug. 23, 2000).
See also, NYISO Costs Skyrocket, Benefits Questioned.

Some maintain that retail utilities can buy at the spot markets and control for price and volatility through purchase of exotic financial derivative contracts, in which one party pays the other when spot market prices exceed or fall below certain designated points. Con Edison's 2008 rate case exhibit indicates that in 2006 the company incurred net hedging costs of $169,335,578. One can only wonder, when looking at the chart of 2006 prices, what bills would have been without "hedging."

Customers of Other New York Utilities Fared Better with Less Reliance on NYISO Spot Markets
In contrast to Con Edison, the chart above shows that the major investor owned utility with the lowest rates in New York state is now RG&E. That utility did not embrace the Enron model and did not divest its power plants (except for its interest in the Ginna nuclear plant, which was sold with a long term buy-back contract).

In contrast, the utility that previously had the lowest rates, Central Hudson, eventually agreed with the PSC to sell its power plants. Unlike Con Edison, and despite PSC resistance, Central Hudson entered into energy buyback agreements with the new owners that kept rates low for several years after divesting the power plants. The idea was to stabilize retail prices during a "transition" period until wholesale and retail markets developed. According to a 2002 article

The short-term future for Central Hudson consumers is price stability -- an achievement of which the company is proud, and that it pioneered by being the first to persuade the PSC to allow power supply deals with Dynegy Inc. and Constellation Nuclear, the buyers of its plant interests.

''Importantly, this agreement also means that we can promise price stability during the next few years while the deregulated energy markets mature here in New York -- and that is priceless,'' Senior Vice President Arthur Upright said last August.

Now, Central Hudson is hoping that maturation occurs before its favorable deal with Dynegy runs out after 2004.

After 2004, however, due to expiration of the initial energy buy-back contracts,Central Hudson began to flow more of the impact of NYISO wholesale market rates through to its customers. A 2005 article describes what happened:

If you're a customer of Central Hudson Gas & Electric Corp., you might want to grab a stiff drink before opening your next bill.

The utility's electric customers can expect to pay about 15 percent more this July than they did a year ago, even if they use the same amount of power.

The higher bills are largely the result of Central Hudson's growing reliance on the state's deregulated power market. When Central Hudson sold its power plants to Dynegy Inc. in 2000, the companies signed a four-year contract allowing Central Hudson to buy varying amounts of power at fixed prices for four years.

That contract expired in October, leaving the utility at the whim of the state's power market, where prices are higher and more volatile than its customers are used to.

Central Hudson's market supply charge - the price it passes through to customers based on what it pays for electricity - is 7.3 cents per kilowatt-hour for July, said spokesman John Maserjian. Last July, with an assist from the Dynegy contract, the price was 5.4 cents per kwh.

Year-over-year, that's an increase of about 35 percent.

Central Hudson's residential rates, once lowest in the state, are now destabilized, and are higher than RG&E's. See A Failed Experiment: Why Electricity Deregulation Did not Work and Could not Work.

In essence, what RG&E customers pay for energy is closer to what the power costs to produce locally at the utility's power plants, and the cost of RG&E's long term wholesale power contracts. As a result, the price of service from RG&E is less affected by NYISO spot market rates. The benefit of low cost power plants still flows to RG&E consumers, not to merchant power producers, because the energy can be acquired at cost, not at whatever price the market will bear in the seriously flawed wholesale markets. Those markets pay all producers the same price, regardless of their costs, at the price level demanded by the last seller needed to meet demand.

Con Edison Rates Eclipse LILCO/LIPA Rates
The chart also illustrates how Con Edison surpassed those of LILCO, which was bought by a publicly owned utility, the Long Island Power Authority (LIPA). LILCO once had the state's highest rates, mainly due to the $7 billion cost of constructing an unused nuclear power plant. When LILCO was taken over by LIPA, the stranded cost of the abandoned nuclear facility could be financed with lower cost municipal bonds. Also, with no investors in the publicly owned utility, there was no longer a need to set rates at a level necessary to provide an ample after-tax return on their investments. LIPA rates dropped below Con Edison's in 1999.

NYISO spot market prices are in many hours far higher for Long Island than for Con Edison's area, but LIPA has managed to keep its rates lower than Con Edison's. This appears to be due to LIPA's proactive energy planning, long term contracting, construction of transmission lines to non-NYISO areas, all of which reduce dependence on NYISO spot market energy purchasing. Also, because LIPA still owns an 18% interest in the Nine Mile 2 nuclear plant in upstate Oswego, NY, low cost power from that facility may benefit LIPA ratepayers. LIPA refused to divest its interest when ownership of the plant shifted from Niagara Mohawk to Constellation. In contrast, Con Edison divested its nuclear facility at Indian Point to Entergy, and also sold most of its other power plants, including Ravenswood, which has capacity for about 25% of the New York City area market. As a result of divestiture, Con Edison today has little power available at the cost of production, requiring more purchases of power at market-based rates.

Other states that restructured and required their utilities to do what Con Edison has done voluntarily to comport with the 1996 PSC vision are now considering whether to allow power plants again to be built by retail utilities. Then, power can be produced and made available to consumers at state regulated cost based rates instead of buying it all at federal wholesale market rates, which are not meaningfully regulated by FERC. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed

New York Residential Real Time Pricing Experiments Must be Voluntary

In recent years, industrial and residential customers have become increasingly concerned about excessive rates charged by sellers in dysfunctional wholesale spot markets. (See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed). To the extent that a utility buys electricity for its retail customers in the wholesale markets (rather than producing it), the wholesale costs are passed through to customers.

Advocates of deregulation, as usual, have proposed a new market solution to correct obvious flaws in the spot markets and "market-based rate" system created by FERC. They argue for passthrough of high (and possibly manipulated) "real-time" wholesale spot market rates, on the theory that when faced with extreme market prices at times of peak usage, some consumers might alter their demand for electricity and their usage patterns in order to avoid the excessive and unreasonable charges. This "demand response," in theory, will increase elasticity of demand and perhaps tame the excesses of the flawed spot markets. On the other hand, under existing conditions where power producers perceive no obligation to serve at reasonable prices, where meaningful regulatory oversight of wholesale rates is absent, and where energy planning has been abdicated by the state, allowing extreme prices during hours of scarcity may only induce more scarcity. See NYISO "Scarcity Pricing" Events.

Real time pricing is often touted as a "green" solution. See 'Smart' Electric Meters Debated over Cost. That may be true to the extent extreme prices deter customers from using electricity without corresponding loss of productivity or loss of other social benefits. But, to the extent real time pricing simply shifts customer usage to off-peak times when the incremental usage is more likely to be produced by coal-fired power plants (instead of cleaner natural gas), it may actually increase greenhouse gas emissions.

Spiking rates, in any event, may not be affordable to residential customers living from check to check on low or modest incomes. See Not so Smart? High Tech Metering May Harm Low Income Electricity Customers. After previous experiments with mandatory time of use pricing for high usage residential customers, and consumer opposition to it, a New York statute now permits time of use pricing for residential electricity customers only when they voluntarily consent to it.

In April 2007 Con Edison proposed a tariff modification to expand residential real time pricing experiments, conducted in cooperation with NYSERDA, that will affect electricity consumers living in subsidized housing projects that have been submetered. PULP filed comments expressing concerns regarding voluntariness of consumer participation and the right of submetered consumers to continuation of price capped service with full consumer protection rights.

On July 18, 2007, the New York PSC issued an order approving Con Edison's new Rider I -- Experimental Rate Program for Multiple Dwellings, recognizing validity of PULP's concerns, stating

NYSERDA should require that a notice of intent to participate in the NYSERDA pilot program be provided (by the building owner or manager) to each existing tenant and include a summary and explanation of the pilot program. In addition, new tenants should be notified when they sign a lease agreement that the building is participating in the NYSERDA pilot program, and the lease agreement should summarize the NYSERDA pilot program. The building owner or manager should certify that the method of tenant rate calculation, rate caps, complaint procedures, tenant protections, and the enforcement mechanisms will be incorporated in plain language in all current and future lease agreements. The NYSERDA pilot program participant should also notify each tenant that, at any time, the tenant can file a complaint pursuant to the Home Energy Fair Practices Act (HEFPA) with the Department of Public Service together with contact information for the Department’s Office of Consumer Services.

For further information, see PULP's Help Center web page on Submetering.

Governor Spitzer Asked to Name Pro-Consumer PSC Chair

Safe, reliable, efficient provision of affordable utility service sufficient to meet customer demand is critical to the lives of all New Yorkers and to the state's economy. The New York Public Service Commission regulates rates, rules and practices of the utilities that provide electricity, natural gas, water, steam, telephone, and cable television service in order to achieve these goals.

The New York PSC was formed in 1907. The state legislature previously regulated utilities and their rates directly, before delegating its powers to the PSC. Normally a five member body, the PSC has been operating with four members since late 2006. The next appointment to the Commission will be made by Governor Eliot Spitzer to fill the vacancy. It is widely anticipated that the new appointee will also be designated by the Governor to be the Chairman.

Under New York Public Service Law Section 4, PSC Commissioners are appointed by the Governor by and with the advice and consent of the state Senate. The statute, however, establishes no specific qualifications for PSC commissioners.

Historically, the role of the New York Commission as the active protector of the public interest has at times been diminished or lost. In the past, Governors have acted to correct the situation. For example, in 1932, former New York Governor and President Franklin Delano Roosevelt described his vision of the PSC:

When I became Governor, I found that the Public Service Commission of the State of New York had adopted the unwarranted and unsound view that its sole function was to act as an arbitrator or a court of some kind between the public on the one side and the utility corporations on the other. I thereupon laid down a principle which created horror and havoc among the Insulls and other magnates of that type.

I declared that the Public Service Commission is not a mere judicial body to act solely as umpire between complaining consumer or the complaining investor on the one hand, and the great public utility system on the other hand. I declared that, as the agent of the Legislature, the Public Service Commission had, and has, a definitely delegated authority and duty to act as the agent of the public themselves; that it is not a mere arbitrator as between the people and the public utilities, but was created for the purpose of seeing that the public utilities do two things: first, give adequate service; second, charge reasonable rates; that, in performing this function, it must act as agent of the public, upon its own initiative as well as upon petition, to investigate the acts of public utilities relative to service and rates, and to enforce adequate service and reasonable rates.

The regulating commission, my friends, must be a Tribune of the people, putting its engineering, its accounting and its legal resources into the breach for the purpose of getting the facts and doing justice to both the consumers and investors in public utilities.

A number of organizations are now calling upon Governor Spitzer to appoint a pro-consumer Commissioner. In an August 10, 2007 letter to Governor Spitzer they stated:

It is vital that you choose from your candidates a nominee who understands consumers’ concerns and has a demonstrated pro-consumer record so that he or she can best represent the public’s interest. * * * * From his or her past experience, your nominee should demonstrate a strong conceptual familiarity with the basic pocketbook issues that every household confronts. Your nominee should also understand the importance of wise investments in building an energy and telecommunications infrastructure that is economically and environmentally sustainable.

The letter was signed by New York AARP, Citizen Action of New York, Citizens Union, New York ACORN, NYPIRG, and PULP.

NYISO "Scarcity Pricing" Events

Click on chart to enlarge

Upward Trend in NYISO Scarcity Pricing Events
Under NYISO tariffs approved by FERC, scarcity pricing may occur at times when there is no actual scarcity. The number of NYISO scarcity pricing events grew rapidly from 2004 through 2006, according to Some Issues on Scarcity Pricing, a recent presentation by California PUC and FERC staff.

For example, slide 28 (above) shows that the number of NYISO scarcity events more than tripled over the three year period. In the Long Island zone the number rose more than five-fold, from about 60 in 2004 to about 340 incidents in 2006. NYISO appears to have far more of these scarcity pricing occurrences than any of the other RTO/ISO organizations that perform similar functions in other areas of the country.

A conclusion of the presentation suggests that "[m]arket manipulation under [Scarcity Pricing] and Performance metrics for generation investment should be addressed."

Background
To implement the restructuring "vision order" of the New York Public Service Commission (PSC), coordination of the state's bulk power grid was shifted from the New York Power Pool to a new utility, the New York Independent System Operator (NYISO). See Outline of Orders and Issues in New York Electric Industry Restructuring. See also, NYISO Costs Skyrocket, Benefits Questioned. In addition to physical coordination functions, such as balancing electricity supply with load, adjusting transmission line transfers, and dispatching power plants to run at specified levels of output and times, the NYISO also operates day ahead and real time spot markets in which electricity is bought and sold at whatever price the market will bear, subject to certain limitations.

NYISO market participants include power plant owners (e.g., KeySpan Ravenswood), distribution utilities that now buy most of the power needed to serve their customers after having sold most of their power plants (e.g, Consolidated Edison of New York), and numerous "virtual" electricity traders who neither produce nor use the electricity they buy and sell (such as Morgan Stanley Capital Group). According to the 2006 NYISO Annual Report, unaudited wholesale electricity market trading volume was $8.6 billion in 2006.

Since the inception of the NYISO, concerns have been raised about the exercise of market power by sellers who may physically or economically withhold power in its markets as a strategy to drive market prices higher. See Justice Department Investigating NY Energy Markets, and Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006? regarding possible economic withholding of capacity. The possibility of physical withholding surfaced early, as discussed in a PSC Staff report issued in the first year of the NYISO's operations:

Physical withholding of generation can be accomplished in several different ways. Some examples are: a generator may report a false outage to the ISO; a generator may not bid all of the MWs that the generator is able to provide; or a generator may submit a maintenance schedule that is intentionally lengthened. All three examples result in the next highest cost generator being chosen over the lower cost generation being withheld. Staff’s data analysis regarding physical withholding keys on actual operational data. * * * *

A review of data for the period January 2000 through September 2000 indicates an increase in reserve pickups from historical levels. Frequent calls for reserve pickups can impact prices, reliability, and equipment maintenance. We plan to thoroughly review possible causes of reserve pick-ups (e.g. regulation units that are underperforming or insufficient levels of regulation, generators unable to maintain basepoints, insufficient number of units on dispatch, excessive generator outages, or external transactions with neighboring ISOs) to determine the primary causes and assess the impacts on price and reliability.

See Interim Pricing Report On New York State’s Independent System Operator, December 2000, requesting public comment. Numerous parties submitted comments on the "Interim Report."

A Final Report on the investigation of the NYISO that might have identified reasons for the "increase in reserve pickups" that began with the advent of the NYISO, but a final report was never issued by the PSC.

"Scarcity Pricing" Allowed Under NYISO Rules
Ample electricity is available to meet New York's peak usage, but there are times when the NYISO grid operator must call for generating plants to provide service on short notice, for example, when a power plant abruptly trips off line. While additional plants are coming on line to meet a temporary deficiency in reserves, NYISO rules permit the payment of very high "scarcity" prices. These prices are paid to all sellers in the real time markets, under the notion that this sends "price signals" to encourage new power plants to be built. During these scarcity pricing events, NYISO real time market prices paid to a seller may rise to more than ten or twenty times the cost of electricity production.

News stories sometimes mention that electricity prices spiked during outages or on hot days, but the precipitating factor of the soaring prices may not be high demand, but a loss of supply due to a power plant or transmission line tripping off line. Or, it may be due to other events in the operation of the power plants and grid, such as a reduction of output by one plant that requires others to provide operating reserves:

• See Blackout Boosted Power Price 900 Percent, regarding the Upper East Side of Manhattan power outage on June 27, 2007. Reports to DOE filed by Con Edison and the NYISO indicate there were several power plant outages associated with the event. Also, see Power Outage Mystery.
• See Heat Wave Pushes Power Prices Above U.S. Caps, reporting on NYISO price spikes on August 2, 2006. The NYISO log of Operational Announcements indicates there were numerous "large event reserve pickups" that day. These may be an indication of power plants tripping off line.
• Minutes of the New York State Reliability Council reveal that in the month of July 2006 “Indian Pt. 3 and Astoria Energy East each tripped twice at near full load.”
  
• Within the hour preceding the initial events of the July 2006 Queens outage, power plants tripped and prices spiked.
  

NYISO tariffs and FERC rules prohibit its participants, including local retail utilities like Con Edison, from disclosing information regarding power plants that trip off line. See Power Outage Mystery. Information about the identity of sellers and the prices they demand is deemed confidential, as is certain information related to contracts for transmission system congestion rights.

PSC Scrutiny of NYISO and Merchant Power Plant Operations is Also Needed
The tripping of merchant power plants at times when prices are allowed by FERC to spike to extreme levels should be fully investigated by the New York PSC. Power plant shutdowns played a role in the California energy crisis, creating shortages that led to spot market price spikes. See Regulation's Rationale: Learning from the California Energy Crisis. Also, the official US-Canada Task Force report on the 2003 blackout found, at page 96, that New York generator protection devices were set to trip the machines off line unnecessarily in response to minor disturbance levels. The Times said, "[a]ccording to the report, some were set to trip much sooner than protecting the generator required."

Additional scrutiny is particularly important because FERC's market rate system and the NYISO market rules may allow some sellers or traders of electricity to reap very large financial rewards at times of temporary scarcity created by unscheduled outages or transmission constraints. Although FERC has jurisdiction over the level of rates paid to sellers during scarcity events, FERC effectively abandoned meaningful regulation of market rates, and does not otherwise supervise the generators.

It cannot be assumed that generators will voluntarily run their plants to keep prices low. Indeed, in another context, involving the early retirement of merchant power plants (which could maintain shortages and high prices even as new power plants are built), the association of New York's merchant power plant owners asserted that the New York PSC lacks "authority to constrain a wholesale supplier's decision to exit the wholesale market or to require a wholesale supplier to provide any service."

The PSC has ample power to investigate NYISO scarcity pricing events and unscheduled power plant outages.
The New York PSC adopted a policy of "lightened regulation" over new electric companies that purchased power plants from the old utilities, but the PSC still retains supervisory authority to assure that all electric companies in New York - including the merchant power generation companies and the NYISO - perform their public service duties.

As stated by the New York State Court of Appeals in Matter of Astoria Gas Turbine Power, LLC v. Tax Commission of City of New York, :

the PSC maintains "light regulation" over AGTP covering "matters such as enforcement, investigation, safety, reliability and system improvement . . . . This light regulation also gives the PSC authority to limit AGTP's power in the market and any actions in contravention of the public interest.

Similarly, the PSC stated, with respect to its jurisdiction over the NYISO:

the NYISO is nonetheless an 'electric corporation' that operates and manages 'electric plant,' as set forth in Sections 2(12) and 2(13) of the Public Service Law (PSL). It is therefore under the Public Service Commission's general jurisdiction pursuant to Section 5(b) and Article 4 of the PSL * * *

Section 65 [of the Public Service Law] assigns the Public Service Commission the responsibility to ensure that electric corporations such as the NYISO furnish safe and adequate service at just and reasonable rates. Moreover, 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.

Thus, the PSC, under its own precedents and those of the state's highest court, possesses ample power to investigate the cause of the scarcity pricing events and whether the NYISO and its participants who may have the ability to trigger such events are functioning in the public interest.

Time for Action
Despite its clear powers, however, the PSC has not required the NYISO or the electric companies that generate power to explain the reasons for so many "scarcity pricing events" during times when there is no actual shortage. Nor has the PSC required the utilities to file public reports of all unscheduled power plant and transmission outages, the reasons, and the cost to consumers of the high price spikes that accompany them.

The reliable operation of all electric companies in the state and the economic provision of safe service are very major matters affecting core public interests and core duties of the New York PSC. This requires reassertion of vigilant PSC supervision of the NYISO and the new utilities producing and marketing power in this state. This duty cannot simply be "divested" by the PSC and left to "the market" and the new utilities.

Consumer Advocates Seek Rehearing of D.C. Circuit Court Decision Allowing FERC to Avoid Consideration of Statutory Filing Requirements

On June 22, 2007 the Court of Appeals for the District of Columbia denied the petition of consumer advocates (including Public Citizen, PULP, NCLC, and several state utility consumer advocates) for an order requiring FERC to enforce statutory filing and rate review requirements for sellers of electricity with "market-based rate" authorizations from the agency. FERC basically ignored these issues in its administrative proceedings, which were commenced after obvious market manipulation had led to unreasonable market rates. FERC found all the existing market rates to be unjust and unreasonable, and adopted "Market Behavior Rules" intended to reduce market manipulation.

The petitioners contended the actions taken by FERC were insufficient to bring the unlawful market rates into compliance with the statute. Although FERC acknowledged that its "Market Behavior Rules, taken alone, will not be adequate to ensure that the rates, terms and conditions offered by market-based rate sellers will be just and reasonable,” FERC would not consider petitioners' argument that sellers must file their rates publicly in advance as the statute has required for more than 70 years. Prior Supreme Court cases have held that federal regulatory agencies lack any power to deregulate and substitute markets for filed rate regulation, as this is a power that only can be exercised by Congress. See Consumer Groups Question FERC Market Rates.

The court, in an unsigned per curiam decision, said FERC was not required to consider the filing and other issues raised by the consumer advocates after it found all market based rates to be unreasonable. Rather, FERC effectively can choose to "fix" only the provisions it identifies in advance as unreasonable when it commences its investigation, without considering arguments that more reforms are needed to make the the resulting rates lawful. See FERC Escapes Court Review of Legal Authority for its Electricity Market Rate Regime.

On August 6, 2007, the Consumer Advocates filed a petition for rehearing asking the court to reconsider its decision.

Governor Includes Public Service Commission in Economic Security Cabinet

New Focus on Low Income Working Families
New York Governor Eliot Spitzer recently announced creation of a multi agency Cabinet to coordinate policies designed to assist working families living in or near poverty. See Spitzer Targets Working Poor in `Economic Security' Plan. According to a press release, the objectives are to

• Reduce New York's high cost of living;
  
• Establish educational and workforce development opportunities for a highly competitive economy
• Improve services that target low-income, working New Yorkers at risk of falling into the social safety net, and
  
• Bring back jobs into our communities.
  

See Governor Spitzer Announces Economic Security Agenda for New York's Working Families.

The 17-agencies involved include the Public Service Commission (PSC). The other agencies are: Office of Temporary and Disability Assistance; Department of Agriculture and Markets; Banking Department; Division of Budget; Office of Children and Family Services; State Education Department; Empire State Development Corporation; Department of Health; Higher Education Services Corporation; Division of Housing and Community Renewal; Division of Human Rights; Insurance Department; Department of Labor; Public Service Commission; SUNY/CUNY System; Department of Taxation and Finance; Office for Technology.

While the focus is on working families, the Cabinet should recognize that many households fall into poverty for periods of less than a year, often due to health reasons, temporary disability, loss of employment, change of household composition due to separation or divorce, and so forth. It is during these periods that families often fall into arrears in paying for essential services, such as utilities. Indeed, loss of utility service is often a precursor to homelessness. It is hoped that the new inter agency Cabinet will bring a broader vision to bear upon PSC policies to promote self sufficiency and affordability, rather than burdening households at risk with additional charges and termination of utility service that may undermine household and family stability, frustrating the education of children and the provision of social services by other agencies.

PSC Decisions Directly Affect Affordability of Utility Service
The PSC is a crucial actor in policies affecting affordability of utility service for low income energy and telecommunications consumers. While incomes of lower income households have stagnated, energy costs have been rising. In response, PSC decisions in utility rate cases over the past decade have gradually required some low income rate or program designed to reduce monthly bills for energy and telephone service at each utility, often at the urging of PULP. See, for example, Reduced Electricity Rate for Low Income Con Edison Electric Customers.

PULP estimates that the total amount of PSC - authorized utility rate relief for low income customers is now in the neighborhood of $75 million per year. In addition, the PSC requires some of the funds collected from electricity consumers for the System Benefit Charge administered by NYSERDA to be allocated for low income energy efficiency measures that can help reduce consumption and bills, and has required additional utility-specific efficiency programs that also benefit low income households.

California and Massachusetts have far more robust programs designed to reduce energy and telecommunications cost burdens for lower income households. In contrast, New York’s low income rates and programs reach a smaller percentage of low income consumers, and the amount of bill reductions is generally smaller. As demonstrated in a report annexed to PULP rate case testimony, Utility Ratemaking to Meet the Needs of Low- and Fixed-income New Yorkers, much more can and should be done by the New York PSC to address the energy burdens of economically vulnerable households, through rate relief and efficiency measures.

It is clear that utilities have not received a consistent, strong message from the PSC to enhance low income rates and programs to make service more affordable for working poor customers. For example, in a pending case, Con Edison is proposing rate increases that will raise rates more for the customers on the low income rate. See Con Edison Asks PSC for 17% Increase in Residential Electric Rates: Low Income Customers Would Pay Even More. Also, in the prior rate case, the PSC allowed Con Edison to restrict eligibility triggering categories so that working poor families that do not receive cash assistance, but receive only Child Health Plus benefits, or only Medicaid benefits, lost their eligibility. See Reduced Electricity Rate for Low Income Con Edison Electric Customers.

New York No Longer a Leader in the Telephone Lifeline Program
New York once led the way with innovative strategies to improve telephone service subscribership and affordability. In recent years, however, enrollment in the New York telephone lifeline program, which provides rate reductions for low income households of over $16 per month, dropped from over 700,000 households to less than 500,000 households. The consequence is that telephone service subscribership is decreasing, and far more than $25 million per year is being paid for telephone service by households that should be eligible for reduced telephone lifeline rates, with these funds coming out of tight budgets and contributing to economic hardship.

The PSC does not issue regular reports on the lifeline program, participants, and subscribership, and appears to have no plan to deal with the fall off of participation. In contrast, the Vermont Department of Public Service commission issues an annual telephone lifeline report monitoring trends in lifeline enrollment. The PSC has not been responsive to PULP efforts to examine the decline in telephone Lifeline rate customers. See, for example, PULP testimony on lifeline eligibility and PULP Comments on Verizon Incentive Rate Plan.

Inmate Telephone Issues
When the PSC refused to correct excessive and unreasonable rates paid by the relatives of prison inmates, who are often struggling to make ends meet, it was necessary for the Court of Appeals and the legislature to correct the rates that had been allowed by the PSC. See N.Y. Court of Appeals Revives Suit to Recover Excessive Charges for Inmate Telephone Calls. While the high rates for calls from state prison inmates are now being addressed, some other institutions (local jails and mental hospitals) still collect high commissions from inmate calls, with no meaningful PSC review of the rates for reasonableness. Also, based on customer calls to PULP, the PSC apparently does not act upon bill complaints from customers disputing the amount of charges. For example, when a call is dropped by the carrier and then redialed - a not infrequent occurrence - additional substantial per-call charges may be imposed for the reconnection, with no effective remedy for the consumer for the poor service or over billing.

Electricity and Natural Gas Rate Stability and Predictability
A large proportion of households in New York state lack the savings needed to absorb unpredicted spikes in their energy costs. Probably for this reason, rate stability and predictability is well embedded in the Public Service Law. For example, the law specifies that

• the PSC will establish maximum rates that cannot be changed without future notice and regulatory review
  
• rate increases of more than 2.5% require major rate case hearings, which typically take 11 months to conclude
• time of use pricing must be voluntary, and
  
• seasonal electric rates may only be charged for amounts used in excess of 250 kwh per month.
  

In its rate setting practices, however, the PSC allows the rates of some utilities to become volatile and unpredictable, in a continued effort to foster its misguided deregulation vision. That vision, promoted by Enron and not adopted by any other state since 2000, is that customer needs for stable, predictable electric and gas rates somehow will be met by new electric and gas companies called "ESCOs" in a virtually deregulated gas and electricity marketplace. Neither Congress nor the state legislature authorized such deregulation and residential price destabilization.See Disconnected Policymakers. This has not occurred and PULP has demonstrated that "fixed" price contracts offered by ESCOs are not fixed at all.

The PSC adopted its policy of bill destabilization first with Con Edison, which since 2000 has bought much of the energy for customers at volatile spot market prices. When PULP and AARP petitioned for review of this deliberate introduction of price volatility, the PSC rejected the challenges. This resulted in unpredictable utility bill spikes that cannot be managed by Con Edison customers living in or near poverty

HEFPA Enforcement
Another area deserving attention by the new Cabinet is more vigorous PSC enforcement of the protections available to consumers under the Home Energy Fair Practices Act (HEFPA). The statutory goal of HEFPA, declared in Section 30 of the Public Service Law, is continuous natural gas and electricity service “without unreasonable qualifications or lengthy delays." The Legislature adopted this objective because it found that continued electricity and natural gas service "is necessary for the preservation of the health and general welfare and is in the public interest.” The threatened interruption of utility service creates household crises and makes education of children and the provision of other services by other agencies all the harder.

In recent years, the PSC allowed some utilities to create new barriers for service. These include

• closing many customer service walk-in offices
• allowing National Grid to demand deposits in circumstances not allowed by HEFPA
• allowing National Grid to demand large payments as a condition of receiving service when a new applicant for service owes money for prior service, even though payment agreements are required to be based on customer financial circumstances
• not issuing decisions on customer complaints against ESCOs
• requiring customers with complaints to complain twice, by referring the complaint to the utility and requiring the customer to lodge a second complaint when the utility does not change its position.
  
• allowing utilities to terminate service via court replevin proceedings while complaints regarding disputed bills are pending.

The PSC also attempted to deregulate prices, terms and conditions of the new companies it favored, and administratively exempted them from the coverage of HEFPA. As a result, many vulnerable customers seeking relief from high energy costs were abused. See State Forgot Consumer Protection in Deregulating Gas. The legislature rebuked the PSC on this issue by enacting the Energy Consumer Protection Act of 2002. Although HEFPA provides for Commission determination of customer complaints, PULP is not aware of any reported PSC customer complaint determinations against an ESCO, even though the incidence of ESCO customer complaints appears to be higher than with the traditional utilities.

Service Termination as a Bill Collection Strategy
Termination of service is exceedingly disruptive to the lives of lower income households struggling to live without welfare. It often occurs at times of stress and vulnerability due to loss of income or employment, health problems and other household emergencies. The use of termination of service as a utility bill collection strategy is an extraordinary remedy not available to other creditors, and the decision to seek termination lies within the discretion of the utility. There are wide variations in the number of terminations for nonpayment among the utilities and over time with the same utility.

The PSC usually reacts when there is a significant outage affecting the general population, (see Queens Power Outage Update), but it has not shown major concern with the deliberate cessation of service for bill collection purposes. See Candle Fires: A Symptom of "Rolling Blackouts" Affecting Low-Income Households.

The PSC has embraced lighter regulation of the utilities through “performance regulation” which grants great latitude to the utility so long as performance criteria are met. For example, the PSC measures service reliability by counting the number and duration of customer outages and service interruptions, but may not be assessing enough other factors essential to continuity of service. See Report of the New York State Assembly Queens Power Outage Task Force - Improving the Accountability of Con Edison and the PSC. The New York PSC has not established any performance measure that would incent utilities to reduce the number of deliberate service interruptions made in order to collect bills, in contrast to at least one other jurisdiction, the State of Washington.

Coordination of PSC Policies with Public Assistance and HEAP
Low income customers may receive payments under Section 131-s of the Social Services Law, which authorizes grants to cover up to four months’ utility bills within the last ten months. That amount is sufficient to preserve or restore utility service, and any balance, while still owed to the utility, cannot justify termination once the four-month payment is made. The PSC now allows some utilities to bring on a new termination - perhaps years later - when the customer leaves the public assistance rolls, to collect any arrears that were not covered by the four-month payment. HEFPA was intended to prevent situations where large arrears are built up and then are impossible for low income households to pay, to limit the exposure of public assistance agencies to four months' bills, and to bring situations to a head promptly so that social services, energy efficiency services, etc. might address a problem. A large unaffordable bill when the customer leaves the welfare rolls may only drive them back to the welfare offices for emergency aid, or, if they struggle to pay it, it may lead to major hardship, inability to pay other bills such as rent, or hazardous situations.

Another area deserving review by the Cabinet is the tailoring of the state’s HEAP plan with PSC policies. Currently, the PSC allows utilities to refuse to accept emergency HEAP payments, and to refuse to restore or continue service, jeopardizing the state’s compliance with the crisis assistance provisions of the Low Income Home Energy Assistance Act, which requires state plans to assure that emergencies are resolved with the HEAP assistance. See OTDA Receives Input at Hearings on Draft HEAP Plan for 2007 - 2008.

Conclusion
The new Cabinet is a welcome opportunity to bring utility and PSC policies into line with broad objectives to assure continuous utility service at prices affordable to families struggling to live without welfare.

NYISO Report on Capacity Market Faulted at FERC

Background
The NYISO operates capacity markets which pay owners of existing power plants amounts in excess of what they receive for the sale of the electricity they produce in order to give a price signal to them or other market participants to meet rising needs for generating capacity available with new power plants or other resources. This private market approach was endorsed by the PSC as a substitute for integrated resource planning undertaken by other states.

When new power plants were not built, despite rising demand, a "demand curve" capacity market modification was adopted by the NYISO on the theory that it would pay more to owners before needs become urgent and thus stimulate the market to make new resources available. The modified NYISO capacity markets have resulted in large amounts being collected from customers, but still have not worked to stimulate new resources, even as the capacity reserve margin in New York is shrinking. (The capacity reserve margin represents the amount of spare energy in excess of estimated peak demand. When the New York PSC restructured, the reserve margin was 18%. Under the 18% standard, the state would soon violate this reliability standard. In 2007, the PSC reduced the amount to 16.5%).

Economic Withholding of Capacity
Due to the failure of the market approach to induce new capacity additions, new plants were added by the publicly operated New York Power Authority and under contract with Con Edison. It was assumed that the cost of capacity in 2006 would change with this addition of new resources, but it did not. Sellers in capacity markets may be able to raise the price paid to all through strategic withholding, which is done by offering a portion of the capacity at a price so high it is effectively withheld. It became apparent to some market participants that capacity had been withheld from the NYISO capacity market in 2006 to maintain high prices. See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006?

Although the economic withholding issue was brought to FERC's attention, FERC did not investigate the apparently unreasonable NYISO capacity market rates, which had been implemented without being publicly filed in advance. Instead, FERC rejected a proposal for tighter price caps, which would have the effect of reducing the maximum price, and commenced a new case to look at NYISO capacity markets. On May 18, 2007, in response to the allegations that one or more owners of generation had been withholding capacity from the NYISO market to maintain high prices, FERC issued an Order directing the NYISO to submit additional information and analysis with respect to the ICAP Demand curves.

NYISO Report Finds No Problem
In response to the order, on July 17, 2007 the NYISO filed its “Report on Implementation of the New York Installed Capacity Demand Curves," finding no market withholding or other dysfunction:

"the performance of the market does not raise concerns about withholding in the overall NYCA or Long Island markets. The observed bidding behavior in New York City is consistent with expectations under the Commission-approved mitigation measures."

New York City Says NYISO Capacity Charges are Double a Competitive Price
In reaction to the NYISO report, the City of New York stated in August 8, 2007 comments:

While physical withholding by DGOs is barred, the harmful effect of economic withholding on consumer welfare is essentially identical. Therefore, in the face of bidding behavior that reflects economic withholding to artificially raise in-City capacity prices, it is not sufficient to offer an innocuous description of capacity bidders’ behavior in the context of a Report on Demand Curve implementation. **** [The bidding pattern] has constituted an attempt to forestall the beneficial market effects that would ordinarily flow from the addition of 1000 MW of new, highly efficient generation in the City. **** The benefits that were expected to be associated with the NYISO capacity market Demand Curves created at the direction of the Commission in 2003 have proven in the view of many parties to be largely illusory. * * * * In essence, as the NYISO’s Independent Market Monitor himself has stated, in-City UCAP prices have been effectively doubled by the use of economic withholding by capacity bidder(s).

Multiple Intervenors Says NYISO is Taking Credit for Events Unrelated to its Capacity Markets
Mulitple Intervenors, in its comments, points out that the NYISO report claiming the capacity market is succeeding has counted power plants that were built by the state or under bilateral contracts due to the failure of the market approach, projects which were proposed before the new market changes, and wind energy projects that were more likely stimulated by tax and policy initiatives completely unrelated to the NYISO markets. Further, Multiple Intervenors notes that

Recently, the [PSC] recognized that “new capacity might not be built in the absence of long term agreements between a new entrant and one or more load serving entities.” In doing so, the New York Commission ordered an examination of the use of long term contracts to facilitate the entry of new resources. Thus, the New York Commission already has expressed concern that generation projects may not be developed in the absence of long-term bilateral contracts. **** Importantly, the July, 2007 Report does not demonstrate the role that the Demand Curve may have played in the proposed projects, nor does it conclude that the proposed projects would go forward in the absence of long-term contracts.

Con Edison Notes Harm to Consumers
Con Edison, in its comments, states

The NYISO’s independent economic advisor, Dr. David B. Patton, stated in the NYISO’s December 22, 2006 filing in Docket No. ER07-360, “I conclude that the ICAP Spot Market Auctions during the 2006 Summer Capability Period have been characterized by economic withholding of Capacity to exercise market power to the maximum extent allowed by the existing offer cap for the DGOs.” **** As a result, consumers paid double the price of capacity, $12.71/kW-month, instead of a competitive price of “less than $6 per KW-month.” High capacity prices in New York adversely affect electric consumers, a point that bears emphasis in the Commission’s review of New York’s electric markets.

Con Edison's concerns for consumers, however, apparently did not go so far as to protest the overcharges at FERC and seek refunds of the unreasonable market rates, even though there are court precedents requiring FERC to review market rates and allow refunds when it is discovered that the market relied upon to set the rates was not competitive. Con Edison is allowed by the PSC simply to pass through its electricity costs, including purchases of capacity, through its "Market Supply Charge." and so it had little incentive to protest the rates already paid. In contrast, Massachusetts regulators apparently have devised rate plans which give the incentive to the utility to keep the cost of electricity purchases down for the benefit of retail consumers. See NSTAR Electric & Gas Corp. v. FERC. Also, a Con Edison holding company affiliate, Con Edison Development, owns power plants in the PJM and NE ISO areas. It stands to benefit when high capacity market prices set in RTO markets similar to those of the NYISO are paid to all providers.

Upstate Utilities Say NYISO Fails to Address Capacity Withholding Outside the New York City Area
The comments of the upstate utility transmission owners also said the NYISO report is deficient, and did not satisfy the requirement of FERC's May 18, 2007 order. The transmission owners further pointed out that the NYISO is not addressing the apparent economic withholding of capacity outside the York City area.

The NYTOs initially brought this issue to the attention of the NYISO during a presentation given at the July 6, 2006 meeting of the NYISO’s ICAP Working Group made on behalf of the New York Transmission Owners. As the NYTOs pointed out in the comments filed in February of this year, that presentation “illustrated [that] approximately 900 MW of capacity may have been physically or economically withheld from the Rest of State region … during the summer 2006 months to date, resulting in higher prices for ICAP supplied by resources in the Rest of State region… [but] to our knowledge the NYISO has never performed an evaluation of this occurrence to determine whether market power was involved.”

The apparent indifference of the NYISO to market power concerns contributes to the lack confidence that rates privately established by this utility are reasonable. See Justice Department Investigating New York Energy Markets.

Independence of Market Monitor Functions
Recently, the PJM market monitor alleged that his warnings about the exercise of market power were being suppressed. See PJM Electric Grid's Watchdog Muzzled The head of the PJM RTO subsequently resigned and PJM is trying to settle a FERC case dealing with the market monitor's allegations. See PJM Seeks to Settle Claims of Meddling With Monitor Unit.

The NYISO has staff who work in a market monitoring unit and an outside consulting "advisor" who periodically issues reports largely favorable in nature. Under the NYISO plan for monitoring its markets, both the NYISO staff and the consultant "Market Advisor shall be accountable to the Chief Executive Officer, and shall serve at the pleasure of the Board." The NYISO plan forbids the monitor from releasing "Protected Information," which may include, for example, evidence of capacity withholding or bidding patterns of a utility without permission of the sellers.

FERC Proposes "Reforms"
The RTOs and ISOs that now privately set wholesale rates without meaningful public scrutiny and FERC review continue to be dominated by producers, utilities and traders, with consumer interests and states marginalized. The rising costs of administering the RTO/ISO markets (see NYISO Costs Skyrocket, Benefits Questioned) and the growing lack of public confidence in them apparently led FERC to propose more "reforms" of the ISO and RTO utilities . In a proceeding begun in June, 2007, FERC is seeking public comment on "strengthening market monitoring" and "the responsiveness of RTOs and ISOs to customers and other stakeholders," and is proposing "reforms" in RTO/ISO governance and management.

Implicit in FERC's order is the suggestion that customers are just one of a bunch of "stakeholders," rather than the primary constituency whose protection is the paramount concern of the Federal Power Act.