Where is New York's $78 Million from the Constellation Disgorgement Fund?

Background.  In a FERC enforcement proceeding begun in March last year, Constellation Energy Services Group settled charges that it had manipulated the NYISO wholesale electricity market, agreeing to pay fines and to disgorge profits for the benefit of electricity consumers.  New York's earmark from the disgorged profits proceeds is $78 million.  For further background, see

• New York Formulating Plans to Use $78 Million Disgorged by Energy Trader for the Benefit of Electricity Consumers, June 16, 2012; 
• FERC Urged to Use Portion of Funds Disgorged by Alleged Wholesale Electricity Market Manipulator to Bolster Utility Consumer Advocacy, July 11, 2012; 
• States File Recommendations with FERC for Use of Funds Disgorged by Alleged Wholesale Electric Market Manipulator, Sept. 10, 2012;
• Comments Filed with FERC on State Recommendations for Use of $104 Million Disgorged by Alleged NYISO Market Manipulator, Sept. 26, 2012

New York has not Asked for Its $78 Million to Benefit Electricity Consumers.
Since October 2012, all or nearly all of the 16 or so states that received Constellation disgorgement fund awards  have asked FERC to pay out the money. New York, however, the largest recipient, has not yet requested its $78 million.

New York's Proposed Use of the $78 Million,  the NYSERDA Conduit, and the ALJ Ruling.
The three New York state agencies deemed "eligible" to make recommendations to FERC (the PSC, the Department of State, and the Attorney General) proposed in their filing to allocate the money for three purposes:

• Direct customer bill credits through the utility companies ($48 million); 
• Unspecified NYSERDA transmission technology improvement projects ($20 million); and 
• Utility consumer advocacy by the Department of State UIU to support "comprehensive" customer advocacy at the NYISO and at FERC. ($10 million, $1 million/year for 10 years).

Comments to FERC on the state's proposals suggested ways to better focus the $48 million benefit, (which would amount to little when spread out on a per-customer basis), and sought more details on the vague NYSERDA transmission technology projects.  Concerns were also raised about the complicated structure proposed by New York  for consumer advocacy, and in particular whether consumer advocacy funds will go to an entity with independence over its staff, operations, workplans and budget, having authority to question NYISO tariffs or FERC rulings  in court and power to advocate for alternatives or modifications to utility and regulatory agency decisions.

Since the abolition last year of the Consumer Protection Board there is no separate state office for utility consumer representation which has the requisite independence and authority. Thus there is no state entity to which the FERC grant could be directly made for the consumer advocacy purpose.  The convoluted proposal to funnel money via NYSERDA, an unnamed trustee, and to operate the program under PSC oversight, is complicated.

The PSC defended how the process will work for distribution of the $1 million per year of consumer advocacy funds to the Utility Intervention Unit, which is within the staff of the New York State Department of State:

The funding may at first appear intricate, but in reality the steps are relatively simple and provide additional assurance that the money is spent wisely. The funding, if approved, will be given to the New York State Energy Research and Development Authority (\\NYSERDA"). Either NYSERDA will act as trustee, or another entity will be named. The New York Department of State's Utility Intervention unit will then hire and work with an entity to staff the consumer advocacy project. To strengthen this framework, the Department of Public Service (\\DPS") would have authority to review the UIU's consumer advocacy budget. The purpose of the system is to provide oversight so the funding is used as effectively as possible. This proposal maintains the independence of the advocate from the NYISO; having a funding source outside the NYISO prevents any conflict between advocate and market operator. NYPSC's plan, as presented, balances oversight with independence.

Relatively simple?

If we have this right, the New York state agencies eligible to ask for the money asked FERC not to give it to them but to an authority, NYSERDA.  NYSERDA will then hold and disburse money as a "trustee" (or another entity will be named trustee).  Apparently money from the trustee will then flow back to the state agencies, and the whole project will operate under PSC supervision of the workplan, staffing, hiring, consultants and budget.

On October 18, 2012, a FERC ALJ brushed aside concerns and issued a decision approving the New York proposal.  With respect for the process of actually disbursing the money, the ALJ stated:

Designated eligible state agencies may now file Requests for Disbursement in this docket. The Parties requesting disbursement are strongly encouraged to make this administrative process as simple as possible to facilitate timely and efficient distribution on the funds. The Request for Disbursement should cite to this order granting approval of the proposed plan, indicate the amount of money to be disbursed, and provide all other necessary information required, with the exception of account wiring instructions, to effect distribution to the designated eligible state agency or agencies that will actually receive the disbursement, or their designee if necessary,[fn] either in the primary filing or under separate cover if appropriate. Parties will have fifteen (15) days from the date of filing the Request for Disbursement to file comments if it becomes necessary to do so.

In a footnote, the ALJ stated:

It is recognized that some state agencies may be prevented from directly receiving funds. However, those state agencies are directed to limit the number of designees to one designee per eligible state agency and to provide the relevant information concerning the designee in the Request for Disbursement.

What is it that might prevent direct receipt of these funds by a New York state agency?  Why would the PSC, DOS and the AG ask that the funds for consumer advocacy to be routed through an authority and a trustee and then back to a state agency?

Perhaps the agencies devised this circuitous route of money through an authority, a trustee, and another entity to circumvent the legislature and the court decision in Anderson v. Regan.  In that landmark case interpreting the state constitution, the New York Court of Appeals held that the executive branch agencies could not receive and spend money from the federal government -- even if it was targeted for specific purposes -- without legislative approval and appropriation in the state budget process.  In rejecting an effort of the state executive branch to keep federal grant money "off-budget" the court stated:

As the framers of the Constitution astutely observed, oversight by the people's representatives of the cost of government is an essential component of any democratic system. Under the present system, some one third of the State's income is spent by the executive branch outside of the normal legislative channels. The absence of accountability in this sector of government is, manifestly, an unacceptable state of affairs in light of the framers' intention that all of the expenditures of government be subjected to legislative scrutiny....  When the appropriation rule is bypassed, as it presently is in the case of Federal funds, the Legislature is effectively deprived of its right to participate in the spending decisions of the State, and the balance of power is tipped irretrievably in favor of the executive branch.

It appears that the proposed state budget provision for NYSERDA does not mention or include the Constellation disgorgement revenue, i.e., neither the $20 million to NYSERDA  for the unspecified transmission enhancement projects nor the $10 million for the consumer advocacy function is mentioned.   The DOS program budget for its consumer program is basically unchanged from the 2012 budget to the 2013 budget, with no mention of any federal special revenue, and thus there is no anticipated receipt by that agency of the funds for consumer advocacy.

Although the $10 million amount is not mentioned, the proposed Executive Budget mentions the first year's installment of $1 million - in the Budget for the Department of Public Service:

Major budget actions include:
$1 million for a wholesale market consumer advocacy initiative, to be operated in conjunction with the Department of State's Division of Consumer Protection. The initiative, funded from a Federal settlement with a major utility, will provide advocacy on behalf of New York's electric consumers on utility rate issues.

So now we have it:  the money for consumer advocacy is going to the PSC.

Consumer groups are asking the legislature to reform the utility consumer advocacy function in New York by creating and adequately funding a separate office of utility consumer advocate with the independence to fight for utility consumers in all forums.  The Constellation disgorgement fund creates a ten year source of funding at a $1 million/year level for a portion of that work:  the NYISO and FERC advocacy regarding wholesale electric rates.  This could be coupled with increased state appropriations and creation of a new, viable and independent state utility consumer advocate office.

Additional funds are needed to build a really effective consumer advocate office, because the current amounts spent to support DOS and PULP do not support the necessary team of lawyers, economists and experts.  One way to find funds for this and other worthy purposes is to end or phase out the tax break favoring ESCO service.  That break relieves ESCO customers of state sales taxes on delivery service from utilities when they buy electricity or gas supply from ESCOs. According to the 2013-14 Tax Expenditure Report, p. 93, this amounts to $60 million/year in lost state revenue. The tax break also creates an uneven playing field by allowing economically inefficient ESCOs to win customers by reselling utility service at a slight markup and giving customers a slightly lower bill due to the tax savings.  This needlessly subsidizes ESCO service and distorts competition.  Ending this tax break, and using just part of the revenue to protect utility customers by creating and funding a new advocate office would be a big step forward.

Gov. Cuomo's Proposed Budget, if Adopted, Will End Revival of PULP

As reported in today's New York Times, New York lacks a strong independent state utility consumer advocate office. See Utility Critics Seek Advocate for Customers in New York.   In addition, the work of PULP, a small independent nonprofit advocate for utility consumers, is about to end, again.

Since the time of Gov. Mario Cuomo, the Public Utility Law Project has depended upon legislative additions to Governors' proposed budgets for its survival.  After 30 years of advocacy on behalf of  low and fixed income energy and utility customers, PULP abruptly closed  in 2010 when then Governor Paterson gained passage of his proposed budget without any legislative amendments including funding for PULP.

In the enacted 2012 New York State Budget, the legislature added $505,000 to revive PULP for the fiscal year beginning April 1, 2012.  Slow processing of the contract to implement the appropriation meant that no funds were actually received by PULP until December 28, 2012.  See DiNapoli: State Agencies' Late Approvals of Contracts with Not-For-Profits Rose to 80 Percent Last Year.

PULP nonetheless began operating again in 2012 with a small bank loan, and the appropriateed state funding is now available under the contract for its operations, but only until March 31, 2013.

Without a reappropriation of some of the 2012 funds to extend the period in which they can be spent, and a new appropriation for 2013-14, PULP will again cease operations.

The Governor's proposed budget for 2013 - 14 includes no funding for PULP.  Thus, the future of PULP is again dependent upon a legislative amendment to the budget.

PULP Comments Oppose Central Hudson/Fortis Merger Case Settlement Proposal

A request for approval of the merger of Central Hudson Gas & Electric Corporation (Central Hudson) and Fortis, Inc. (Fortis) is currently under review by the New York Public Service Commission (Commission) in PSC Case 12-M-0192.  See Proposed Central Hudson/Fortis Merger Offers Little for Consumers; Shutoffs Up 171% Since 2005, PULP Urges Reforms.

After a period for discovery and exchange of information, testimony for and against the merger was filed.  Staff's testimony recommended $95 million in "positive benefit adjustments," most of which would be in the form of deferred accounting credits in favor of customers to write off current and future claims of the utility for money due from customers. 

Then, a statement of material facts in dispute to be decided at a scheduled evidentiary hearing was filed by Department of Public Service (DPS) Staff.  The issues for the hearing identified in the DPS Staff material issues statement are:

Risks

1. Management and Governance

• Will the use of Central Hudson resources for other Fortis affiliates be at Central Hudson ratepayer expense?

• Are the rulings of the Canadian Securities Administrators equivalent to the provisions of the Sarbanes-Oxley Act (SOX)?

• Does an independent audit of internal controls as contemplated under SOX provide a value of benefit to Central Hudson ratepayers?

• In 2008, did Iberdrola or any of its affiliates provide shared services to its regulated U.S utilities?

2. Goodwill

• Is Fortis’ goodwill post-merger a risk only to Fortis Shareholders?

• What was the level of goodwill on Iberdrola’s books under US Generally Accepted Accounting Principles post merger?

• What would be the projected level of goodwill on Fortis's books post merger under Internal Financial Reporting Standards?

3. Excessive Rates

• Is there a risk that Central Hudson rates may be excessive post-Merger?

• If a rate increase is deemed “ warranted” for a specific rate year based on additional costs and expenses, does that necessarily mean that there must be a corresponding rate increase during that rate year?

• If there is deferral treatment for many of the rate drivers for a specific rate year that would “warrant” a rate increase, do ratepayers remain responsible to pay for these drivers at some later point in time?

Benefits

4. “Identifiable” Monetary Benefits/Transaction Risks

• Are there transaction risks requiring Public Benefit Adjustments?

• Are risks requiring Public Benefit Adjustments fully neutralized or mitigated?

• Are the proposed benefits of the Merger fully responsive to the risks of the Merger?• Are there risks associated with this Merger?

• Can all risks of this Merger be mitigated or neutralized?

• Do the risks of this Merger outweigh the alleged benefits?

• Was the “Reduction of Alternative Transaction” amount of $135 million in the Petitioners’ Comparative Analysis (see Mosher Rebuttal Testimony, pg. 7) scaled to the delivery revenues of NYSEG and RGE as compared to KeySpan NY and LI?

• Are the alleged foregone carrying charges on capital expenditures a benefit to Central Hudson rate payers without considering an updated ROE for the time period of the rate freeze?

• Does maintaining the various performance mechanisms, targets and metrics provide a benefit to Central Hudson ratepayers?

• Is it proper to include alleged synergy savings into Petitioners’ PBA comparative analysis?

• What is the age of the holding company Fortis Inc.?

• What were the various credit ratings of Iberdrola in 2008?

Other Issues

5. Natural Gas Capacity Issues

• Reliability Forecasts - Should reliability forecasts be developed independently from sales forecasts and be based on a minimum thirty years of weather data?

• Capacity Asset Management - Should shareholders benefit through a sharing mechanism from the release of excess capacity that is paid by ratepayers?

• Is there excess capacity?

• Transportation and Balancing Procedures and Charges – Should the weighed cost of commodity for gas injected into storage during the non-winter season be utilized to more accurately estimate the actual storage price paid by all sales customers?

Central Hudson and Fortis also filed a statement of the factual issues requiring resolution after an evidentiary hearing before the administrative law judges.  They indicated that the following broad issues exist:

1. Whether Petitioners' proposed rate freeze has no value, as Staff urges, or substantial value, as Petitioners urge?

2. Whether Petitioners' proposed corporate governance and financial protection conditions, efficiency savings, benefit funds, proposed voluntary change to the Earnings Sharing provision, and the value of Petitioners' proposed rate freeze, produce positive net benefits?

3. Whether Fortis is more risky than Iberdrola, as Staff urges on the basis of Staff's three reasons, or less risky as Petitioners urge?

Subsequently, in confidential settlement discussions. a number of parties (including DPS Staff, the Department of State Utility Intervention Unit (UIU), and a representative of large industrial and commercial customers, Multiple Intervenors (MI)), reached agreement with Central Hudson and Fortis to support the merger.  

The Acting Secretary of the PSC then cancelled the evidentiary hearing that previously had been scheduled "in light of an announcement of an agreement in principle among a majority of parties on a comprehensive negotiated settlement of the issues pending in this proceeding...."   The settlement talks culminated in the filing of a "Joint Proposal" to go forward with the merger, supported by signatories -- but opposed by other parties, including the union and PULP.  

The benefits claimed by the proponents of the Joint Proposal include:

• A proposed freeze on Central Hudson electric and gas delivery rates through July 1, 2014 

• A promise of $9.25 million in savings to ratepayers over five years

• Write-offs in the amount of $35 million to be applied against future rate increases

• A one-time funding of $5 million for a Community Benefit Fund for economic development, $500,000 of which would be used for low-income consumer assistance purposes.

A full copy of the Joint Proposal and the attachments to it may be viewed, printed or downloaded from the Commission’s website page for the Central Hudson/Fortis merger case.  

The Joint Proposal may be accepted, rejected or modified by the Commission, which will base its decision on whether it finds the transaction produces a sufficient “net” public benefit.  On February 8, 2013 PULP filed its Initial Comments in Opposition to the Joint Proposal, noting that the settlement is not supported by an independent advocate representing interests of residential Central Hudson customers.  

Points raised in opposition to the merger include:

1) Uncertainty and risk. Any “net” public benefit analysis is inherently subjective and miscalculations of downside risks would more negatively impact economically vulnerable populations than they would financially stronger parties. Therefore, any impact on low and fixed income people should receive a heightened review and greater weight should be given to proposals to protect their beneficial interests, and which would provide concrete, ascertainable benefits.

2) The one-year "rate freeze" is not a significant benefit.  Characterizing a one-year rate freeze as a “positive benefit” is illusory, as Central Hudson did not file any rate case seeking to change existing rates when the current rate plan expires.  If new rates were filed tomorrow rates would remain frozen at the current level for eight months after the current rate plan expires, before any new rates would become effective. Therefore the “freeze” is something that would for the most part occur with or without the merger and thus its “public benefit” should be discounted.  

2) The one-year "rate freeze" is not a significant benefit.  Characterizing a one-year rate freeze as a “positive benefit” is illusory, as Central Hudson did not file any rate case seeking to change existing rates when the current rate plan expires.  If new rates were filed tomorrow rates would remain frozen at the current level for eight months after the current rate plan expires, before any new rates would become effective. Therefore the “freeze” is something that would for the most part occur with or without the merger and thus its “public benefit” should be discounted.  Major flaws in the current rate plan include the absence of any performance standards applicable to storm damage prevention and recovery.  The utility can keep as profit all savings from reduced maintenance, can collect the same amount of money even when service is off for large numbers of customers and meters are stopped for extended periods, and can later obtain 100% recovery from customers of all claimed storm damage costs.  As a result of the weak existing rate plan, all of the customer benefits could be consumed if there are more major storms.

3) "Positive Benefit Adjustments" are too low. The amount of Positive Benefit Adjustments in the Joint Proposal, which sweeten the deal as it was originally filed, are exaggerated, below the benefit level of comparable prior mergers in New York, and are not sufficiently targeted towards low-income consumers, many of whom are at risk of loss of service they cannot afford.  Prior to settling, DPS Staff filed corrected testimony recommending "the Petitioners be required to provide Central Hudson’s customers a total of $95 million of identifiable monetary benefits to obtain Commission approval of the proposed transaction."  Nearly all of that was proposed to be accounting deferrals to be used to write off claims of the utility for money from customers in the future. Based on calculations from prior mergers, DPS staff testified, before agreeing to settle, that a net benefit analysis would arrive at $95 million in material benefits.

4) Minimal low income customer benefits. Out of the total amount of benefits asserted only $500,000 is allocated directly towards low-income customer assistance, comprising 1% of the total claimed benefits.  This is a paltry sum considering 12,704 service terminations in 2011 for bill collection purposes and that more than 20,000 Central Hudson residential customers have fallen behind more than 60 days on payments, subject to aggressive debt collection tactics that rely too much upon the interruption of service to collect bills.

5) Benefit of accounting credits questioned.  Much of the $35 million dollars in “benefits” contained in the Joint Proposal are merely accounting credits to offset unscrutinized claims for deferred storm damage costs, for which customer responsibility has not been determined. See PULP Opposes Central Hudson Request for $9.7 Million Storm Damage Recovery. Risks include unreliable service due to flaws in the existing performance regulation system that should be corrected now by the PSC and not be continued for yet another year.

6) NAFTA implications.  Investor friendly protections contained in the North American Free Trade Agreement ("NAFTA), available to Canadian companies such as Fortis investing in the U.S., could constrain future Commission regulatory action, such as denying or conditioning decisions to make new investments through Central Hudson or limiting its profits.  Canadian economic regulation of investor owned utilities is not as robust as New York's. As stated by Department of Public Service in its testimony filed before the staff agreed to the merger:

"Q. What is the significance of Canadian utility regulation to this proceeding? A. First, it highlights that Fortis is entering a very different regulatory environment than it has been operating under to date. Second, and perhaps more important, a credit rating agency places significant weighting on the regulatory environment when it determines a credit rating for a utility company and, as will be elaborated below, financing issues are of great importance to the Commission in merger proceedings....We also learned that the regulation those Fortis subsidiaries are subject to appears to be much less rigid than what Central Hudson is subject to by the Commission. For example, Fortis was originally formed in 1987 when the shareholders of Newfoundland Power approved an arrangement to form a parent company. However, unlike in New York, where jurisdictional companies must get Commission permission to form holding companies, PUB permission was not required for Newfoundland Power to form Fortis. Thus, Fortis has not been subject to the holding company protections that are commonly part of the conditions accompanying Commission approval of a request by a jurisdictional utility to form a holding company. Also, it appears that rate requests by Canadian utilities are also not subject to the regulatory scrutiny major utility rate filings in New York face. In its July 21, 2011 Credit Opinion for FortisBC Energy Inc. (FEI), Moody’s Investors Service stated, "We consider Canada to have more supportive regulatory and regulatory business environments than other jurisdictions globally...." 

 PULP raised the question whether Canadian investors might, under NAFTA, successfully protest regulatory actions of the New York PSC which deny or limit recovery from customers of the cost of new capital investments through Central Hudson, or which otherwise adversely affect Fortis profits.

7) Future upstream merger jurisdiction.  Central Hudson would be owned by a US holding company that in turn is owned by the Fortis Canadian parent.  In a follow-on upstream merger scenario, it is unclear whether Fortis could transfer its U.S. holding company (which would continue to own Central Hudson) to yet another entity, perhaps another out of state or foreign holding company, without PSC approval.  With no change in ownership of Central Hudson, the factor that normally triggers PSC review of mergers and acquisitions, PSC jurisdiction over a future upstream transfer is in doubt.  See Lisa Gayle Bradley, On The Acquisition Of Upstream Interests In New York Energy Operating Companies – An Uncharted Area?, 31 Energy Law Journal 509 (2010).  This factor may benefit Fortis shareholders and increase risk to consumers without providing discernible public benefits.

PULP concluded that absent significant long term improvement in utility operations, efficiency and services, and without material enlargement of tangible monetary benefits to customers and bolstered consumer protections for low income customers, the putative benefits do not outweigh the risks, the proposed acquisition does not overcome the public interest burden, and the Commission should reject it.  Alternatively, if the Commission were to approve this transaction, PULP urges substantially increased positive tangible public interest adjustments to cushion against risks, and improved benefits and protection for low-income customers.

PULP filed its Reply Brief February 15, 2013, arguing that the putative monetary customer benefits claimed are mainly deferred accounting credits to be applied in future rate cases to offset questionable, unaudited claims of Central Hudson for recovery of past expenses to repair storm damage.  See PULP Opposes Central Hudson Request for $9.7 Million Storm Damage Recovery. 

Update.

After growing opposition to the merger from public officials and community groups, the PSC extended the public comment time to May 1, 2013, and scheduled two additional public hearings on the proposed merger for April 17 and 18, 2013 in Poughkeepsie and Kingston. 

Consumer Groups ask NY Leaders for Better Utility Oversight, Stronger Consumer Protections, and More Resources for Independent Utility Consumer Advocacy

New York utility companies propose to hit New Yorkers with hundreds of millions of dollars in rate hikes to recover Superstorm Sandy-related costs, AARP and the Public Utility Law Project (PULP) say it’s these kinds of actions that demand change in the industry.

Following up on the recommendations made by the Moreland Act Commission, today, AARP and PULP issued a new analysis outlining crucial areas that need improvement to better protect New York consumers and ensure rates are fair.  More than half of AARP’s 2.5 million members live in areas impacted by Sandy.

“New Yorkers, who already pay some of the highest utility bills in the nation, need and deserve a stronger voice to combat soaring utility rate hikes,” Beth Finkel, State Director for AARP in New York State. “Utility companies have the money and resources to be the biggest voice at the table and continually pushing through higher rates, the playing field is uneven for consumers who see their interests go largely unrepresented.  It is time to change that.”

"New York lags other states in supporting advocacy for residential consumers in the complex and protracted Public Service Commission utility rate cases that affect vital consumer and public interests,” said Gerald Norlander, Executive Director, Public Utility Law Project (PULP). “New York should put more resources into independent residential utility consumer advocacy and reform the funding streams and structures to bolster it."

Today, AARP and PULP issued four recommendations the organizations say will better protect New York consumers, provide crucial utility reforms and should be included in a final state budget currently being debated in Albany and due to pass by April 1.  The recommendations are as follows:

Funding an Independent Utility Consumer Advocate: An independent consumer advocate is essential to the strengthening of oversight of the state’s utilities by giving consumers a seat at the table in complicated rate hike and regulatory hearings and level the playing field.  A recent AARP survey found the move is supported by nearly 77% of 50+ consumers in the NYC and Long Island areas. Forty other states in the country already have an independent utility consumer advocate office.

 Establishing Protection for Long Island Power Authority (LIPA) customers: The Moreland Commission recommends re-privatizing LIPA. AARP and PULP believe the costs, benefits, and rate impacts concerning utility consumers on Long Island must be examined when proposing to re-privatize LIPA as well in comparison with continued public ownership.

Reviewing Utility Performance Regulations:  The New York Public Service Commission (“PSC”) “Performance Regulation” ratemaking approach should be reviewed and revised or eliminated. It currently allows utilities to set multi-year rates, and then cut costs while keeping savings during the term of the rate plans so long as they satisfy minimum performance standards, which do not apply to major storm outages, and guarantees no loss of revenue even when meters have stopped registering service during lengthy outages.  These incentives to cut costs may have exacerbated the damage from Superstorm Sandy.

Protecting Consumers from “pass-through” storm recovery costs: AARP and PULP state that storm-related rate hike proposals, such as the $400 million one being proposed by Con-Edison, must be scrutinized to ensure consumers don’t get hit with all the costs, while the utility company bears no risk or liability.

The full comments and analysis, New York Utility Performance, can be found online here. .

“New Yorkers were victimized twice: Once by the path of destruction left by Superstorm Sandy and once by the utilities' failure to plan for this major weather event.  After the nation's economic collapse, we realized that we needed a stand-alone agency to solely look after consumer interests without concern for the financial health of banks.  It's time for a similar approach to utility oversight in New York.  We need an independent utility watchdog with a single, un-conflicted mission: represent the interests of residential and small business ratepayers and fight for an affordable, reliable electric system,” stated Russ Haven, Legislative Counsel, NYPIRG.

"Vision Long Island supports AARP and PULP in asking questions and insisting on full review of utility privatization or any alternative structure to LIPA” Eric Alexander, Executive Director, Vision Long Island. “In this difficult economy ratepayers including seniors, have been squeezed potential rate increased are particularly onerous for residents and Local business”

“In the aftermath of Hurricane Sandy, where consumers experienced widespread service outages, it is clear that the public deserves a much stronger, independent voice in utility regulation,” said Chuck Bell, programs director for Consumers Union, publisher of Consumer Reports.  “This report makes clear that other states such as Connecticut and New Jersey provide significantly larger budgets for consumer representation in utility proceedings, when analyzed on a per capita basis.  In New York, large utilities such as Consolidated Edison, National Grid and NYSEG employ literally dozens of technical experts, lobbyists, and consultants to advance their interests before state government.  We strongly urge the Cuomo administration and the legislature to create a more level playing field for ratepayers, by providing increased funding to support robust consumer intervention at the Public Service Commission and other agencies.”

Background Information on Consumer Opinion in areas hit by Super Storm Sandy:

AARP conducted a recent survey of New York residents 50+, 76% of who reported being LIPA customers and nearly 14% are Con Ed customers.  The survey found over 86% of respondents lost power as a result of Sandy, with 44% saying their electric utilities response was poor. According to the survey a consumer utility advocate office has strong support and need:
69% said their elected officials weren’t doing enough to protect people affected by rising energy costs.
73.2% believed their interests aren’t taken into consideration when rate increases for gas and electric are proposed.
76.7% said they thought New York needed to establish an independent consumer advocate office to represent them in rate cases before the Public Service Commission.

PULP Opposes Central Hudson Request for $9.7 Million Storm Damage Recovery

Yesterday Central Hudson (CH) petitioned the Public Service Commission (PSC) for expedited approval of its request to recover its total $9.7 million in Tropical Storm Sandy costs from ratepayers. To protect the interest of consumers from an increase in rates and to ensure that ineffective storm preparation and response is not needlessly recompensed PULP filed an immediate response in opposition.

The $9.7 million deferral request was questioned on several grounds by PULP in its opposition filing, which also pointed out flaws in PSC performance regulation:

- the PSC approved rate plan may have created financial incentives for CH to trim maintenance budgets (instead of trees), to glean short term profits, and then later request additional funds to be paid by ratepayers, in addition to the more than $5 million covered by current rates, when the lack of adequate preparation for storms results in foreseeable damage to utility lines.
- the PSC-approved "revenue decoupling" further weakens the incentive to restore power quickly, because it guarantees CH the same revenue whether meters are spinning or not, meaning consumers are insulted twice by rules that incentivize slow storm recovery while forcing consumers to pay for energy they are not receiving.
- the  PSC "performance regulation" metrics have no measurement or economic sanction for inadequate prophylactic measures to avoid storm damage or for slow recovery from major storms, thus removing any financial disincentive for poor performance
- when storms knock down untrimmed trees and weak poles, which can be a result of skimping on maintenance, the PSC approves deferral of 100% of storm costs, placing the burden of such inaction on ratepayers and rewarding poor utility practices.

PULP states that Central Hudson should show that the damage was not forseeable and not included in the $5 million allowance for storm costs  when existing rates were set, and argues that the utility has not met its burden to show that the costs and outages could not have been avoided or reduced by trimming more trees before lines came down instead of after, that CH has not addressed whether or why costs cannot be defrayed by insurance or government assistance, and that CH has not shown that it is earning less than its allowed return on investment.

The Joint Proposal for the merger of CH and Fortis is currently under review by Administrative Law Judges and includes $35 million allocated towards the “public benefit adjustment” as a sweetener to the deal, which is supposed to act as a cushion to mitigate against future rate increases.  These funds, however, may be illusory in that $22 million are consumed by liquidating CH claims for customer reimbursement of storm damage cost recovery, which may be questionable, and the remainder is not paid in cash but is reserved to be credited in the next rate case, when in all likelihood far larger numbers will be compromised in rate case litigation and negotiation.

The utility is asking customers to pay all costs from Tropical Storm Sandy a) without showing that absent such an award they would not receive a reasonable rate of return on their capital investment, b) without exhausting efforts to obtain reimbursement of storm damage from insurance or government aid, and c) without proving that all these costs were unusual or unavoidable through better utility practices.

Yesterday's $9.7 million request for deferral of Sandy costs would bring the total CH storm cost deferrals to about $22 million, as envisioned in the merger settlement proposal now under review, thus leaving a smaller cushion to ratepayers and a drastically reduced “public benefit.” If the sweeteners in the Central Hudson / Fortis deal are artificial and will likely leave a bitter aftertaste for consumers, one must seriously wonder if the whole deal isn’t sour and should therefore be rejected outright.

New York PSC Seeks Customer Input on Their Experiences with ESCO Electric or Gas Services via Online Survey

In its pending proceeding to review retail electric and gas markets, the New York PSC is seeking information and input from customers regarding their experience with ESCO gas and electric companies:

As part of the proceeding, the Commission is seeking public input on concerns identified in the Order namely:  (1) Information for Current ESCO Customers; (2) Data for Potential Customers; (3) ESCO Referral Programs; (4) Low Income Customers; (5) Door-to-Door Marketing; (6) ESCO Contracts; (7) Purchase of Receivables; and (8) Other Proposals.  A copy of the Commission's questions can be obtained here.  Comments should be submitted electronically by e-filing for Case 12-M-0476 or send them to the Commission Secretary at secretary@dps.ny.gov.  Those unable to submit electronically may mail or deliver them to Secreatry, NYS Public Service Commission, 3 Empire State Plaza, Albany, NY, 12223-1350.   

In addition to seeking input on the areas identified in the Order, PSC has developed an electronic survey about customer experience with ESCOs.

Moreland Commission Created to Investigate Utilities, Agencies

Governor Cuomo announced appointment today of a Moreland Commission co-chaired by former New York State Attorney General Robert Abrams and Benjamin Lawsky, Superintendent of the Department of Financial Services, to investigate the utility service outages that followed hurricane Sandy.  The charge given to the Commission by the Executive Order is to

(A) study, examine, investigate and review:

(i) the emergency preparedness and response of utilities during and following emergency weather events, including the performance of the utilities during and following emergency weather events;

(ii) the adequacy of present laws, rules, regulations, practices and procedures with respect to utilities’ emergency preparedness and response;

(iii) the adequacy of existing oversight and enforcement mechanisms;

(iv) the structure, organization, ownership, financing, control, management and practices of the utilities as they affect emergency preparedness and response; and

(v) the provision of utility services to New York State under the existing legal regulatory framework, including but not limited to the jurisdiction, responsibilities and missions of the New York Power Authority, the Long Island Power Authority, the New York State Energy and Research Development Authority, as well as the Public Service Commission;

(B) report and make recommendations for legislative, policy and regulatory changes, as well as reforms as deemed appropriate in utility structure, management and practices, to best protect and serve the public’s interest with respect to emergency preparedness and response, and the provision of safe, reliable, responsive utility services; and

(C) review any other matters or activities which may affect the issues herein before specified;

Members of the Commisison are

Co-Chair Robert Abrams, former Attorney General of New York State
Co-Chair Benjamin Lawsky, Superintendent of the Department of Financial Services
Peter Bradford, former Chair of the Public Service Commission
Tony Collins, President of Clarkson University
John Dyson, former Chairman of the New York Power Authority
Rev. Floyd Flake, Senior Pastor of Greater Allen African Methodist Episcopal Cathedral
Mark Green, former New York City Public Advocate
Joanie Mahoney, Onondaga County Executive
Kathleen Rice, Nassau County District Attorney
Dan Tishman, Vice Chairman at AECOM Technology Corporation, and Chairman and CEO of Tishman Construction Corporation

A Moreland Commission has broad investigatory powers, including subpoena power.

After past major outages the Public Service Commission has also initiated investigations.  The Moreland Commission will have power to review matters outside the normal jurisdiction of the Public Service Commission, and is empowered to review the role and performance of the Commission and other state entities.

A root cause analysis might explore the PSC's regulatory style as a contributing factor, as the Commission itself recognized in the aftermath of a pedestrian's electrocution in the streets of New York City, when it issued an order requiring utilities to do more safety inspections of their facilities.  The Commission acknowledged unintended consequences of its deregulatory "performance based"approach:

Over the past 10 to 15 years, we and other regulatory commissions across the nation have moved from traditional one-year litigated rate cases to multi-year performance-based rate plans. The purpose of these plans is to allow for rate stability while allowing the utilities greater flexibility in managing their operations. Staff's investigation into this matter suggests that the utilities may not have been placing enough attention and emphasis on safety matters.

This "performance based" approach typically includes 'metrics" which count the number and duration of outages, and establish benchmarks which, if not met, will have adverse financial consequences.  The scope of potential sanctions for service interruptions is typically agreed upon by the utilities in their multi-year rate case settlements approved by the PSC.  

As stated by the New York State Assembly Task Force Report on the 2006 Queens Outage,

In recent years, the PSC preference has been to set utility rates for service several years at a time, using a "macro" approach based on settlements that are the outcome of confidential negotiations and does not specifically review details of utility spending plans. The intent is to focus on "performance" and results, as a perceived alternative to "micro management" of utility decisions. Utilities, including Con Edison, have been given great flexibility by the PSC to allocate resources during long multi-year rate plans.
As a result, performance-based ratemaking creates strong incentives for the utility to reduce expenditures during the term of the rate plan because any cost savings may be retained by the utility as profit.
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Still another consequence of "deregulation" has been reduced regulatory scrutiny. The Commission no longer reviews the specific details of utility spending plans, certainly not with the same degree of scrutiny that had characterized its review in adjudicated rate cases. Annual rate cases have been largely replaced by multi-year performance-based rate plans. While this approach may have the advantage of providing utility management with more flexibility, not necessarily a bad idea, it has come with a price. As noted above, the Commission itself has acknowledged that on at least one occasion, coincidentally an incident also involving Con Edison, performance-based regulation may have compromised public safety.

This Task Force is concerned that performance-based regulation as conducted by the PSC might also be contributing to a reduction in the overall reliability of Con Edison's distribution system. The nature of the Queens blackout does not appear to have been an isolated, "once-in-a-lifetime" event, certainly not within the Con Edison service territory. Only seven years ago, hundreds of thousands of people in New York City and Westchester County also lost their power during a summer heat wave with the most widespread blackout occurring in the Washington Heights-Inwood area of Manhattan. That blackout was not caused by a failure either in the power supply or in the transmission of that power to Con Edison's distribution system. The 1999 blackout and its associated outages were caused by failures of equipment within Con Edison's electricity distribution system. As a result of the several investigations underway and the information available at this time, it appears that the physical causes of the Queens' blackout were also operational failures and failures of equipment in Con Edison's electricity distribution system. The timing and nature of these outages might only be only coincidental, but a reasonable person might ask whether these outages could have been prevented had the Commission not relaxed its regulatory scrutiny of Con Edison as a result of its changed approach to utility regulation.

The Commission must reassert its mission as "a Tribune of the people" committed to its responsibility for assuring adequate electric service at reasonable rates. Under the best of circumstances, this is a formidable challenge.

Another item for possible Moreland Commission scrutiny may be the operation of Con Edison's "revenue decoupling" rate adjustment mechanism.  Adopted in the name of environmental concern to limit incentives for utilities to spur their customers' utility usage (even though it is customers who ultimately make the usage decisions, not the utilities) rate adjustments are made in an effort to make the utility indifferent to whether customers use more or less electricity. This is also thought to encourage utilities to help customers reduce usage through utility-sponsored energy efficiency programs, without reducing the utility's revenues. Normally, a utility with thousands of customers out of service would have a strong incentive to restore service to get the meters turning again.  But if they make the same amount of revenue per customer, perhaps they are less incented to spend the extra money needed to restore service quickly.  The workings of the revenue decoupling mechanisms should be reviewed to see that they do not compensate utilities as if they were providing service when they did not.

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Utilities Face Scrutiny and Legal Battles Due to Long Electric Service Restoration Times After Hurricane Sandy

When electric service lost due to Hurricane Sandy is restored, there will probably be a major investigation by the Public Service Commission into pre-storm preparation, communications during the outages, the timeliness of repairs, and other issues

With customers lacking electric service for ten days now, and no end in sight for some, lawsuits seeking damages for customers are also on the way.  See Nik Bonopartis, Tarrytown lawyer sues Con Edison over storm troubles, Newsday, Nov. 8, 2012.

Utility tariffs approved by the Public Service Commission generally exculpate the utility for damages proximately caused by ordinary negligence in the provision of service.  For example, Con Edison tariffs provide:

The Company will endeavor at all times to provide a regular and uninterrupted supply of service, but in case the supply of service shall be interrupted or irregular or defective or fail from causes beyond its control or through ordinary negligence of employees, servants or agents the Company will not be liable therefor.The Company may, without liability therefor, interrupt service to any Customer or Customers in the event of emergency threatening the integrity of its system, if, in its sole judgment, such action will prevent or alleviate the emergency condition.

As discussed below, Con Edison tariffs do allow for some compensation to customers for spoiled food and medicine due to power outages, but the utility is interpreting its tariff so as to deny reimbursement.

On the other hand, even though insulated from ordinary negligence liability, utilities may face potential liability if "gross negligence" of the utility causes damage to customers.

After the 1977 New York City blackout, a jury found Con Edison liable for damages caused by an outage that occurred as a result of the utility's gross negligence, and the verdict was upheld by the state's highest court in  Food Pageant v. Consolidated Edison .  In that case, the state Court of Appeals  found support in the record upon which the jury could find gross negligence when Con Edison had not shed load at a critical point when the system was vulnerable due to a lightning strike that had put out transmission lines and due to the lack of emergency power available. The court held that the question of whether gross negligence existed was one for the jury to determine, and expert evidence was not required.  Also, the City of New York won damages in Koch v. Consolidated Edison . Although gross negligence requires proof of more than ordinary negligence, a lesson of these cases may be that juries and courts expect a utility to exercise a very high level of care in the operation of its system.

When an outage is "attributable" to a malfunction of Con Edison lines or cables, customers may be able recover some losses without suing the utility and without the need to prove gross negligence.  Compensation for food and medicine spoiled due to the lack of refrigeration due to the outage, is also available under current Con Edison tariiffs which provide for customer compensation. Residential Con Edison customers may file a claim, up to a maximum of $450, for actual losses of food spoiled due to lack of refrigeration, and for the actual cost of medicines spoiled by lack of refrigeration. Commercial Con Edison customers such as food stores may claim up to $9,000 in compensation for food spoiled due to lack of refrigeration due to an outage.

Con Edison, however, is taking the position that its tariff allowing compensation due to outages does not apply to those related to hurricane Sandy.  This interpretation of the tariff has not been ruled on by the New York Public Service Commission.

Customers who apply for reimbursement are likely to be denied.  A denial is reviewable by the PSC under its complaint handling rules. In such matters, the burden of proof is on the utility to show that its denial of reimbursement was proper.

Claim information is here.
Residential claim forms are here.
Commercial claim forms are here.
PSC Complaint Handling Procedure is here.********************************
Update

Mark Harrington, Class Action Suit Filed Against LIPA, Newsday, Nov. 13, 2012 ("The suit, filed Tuesday [Nov. 12, 2012] in State Supreme Court in Mineola, charges LIPA and National Grid "grossly neglected vital maintenance," failed to fortify its substations, delayed replacing its outage management system, provided false information to ratepayers, and ignored a 2006 study that identified problems and could have minimized outages.").


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Central Hudson Service Interruptions to Collect Bills On the Rise

These are hard times for many of Central Hudson's customers.  Many of them lose service when they fall behind in paying their bills for electric and gas utility service and service is terminated as a bill collection measure:

Central Hudson has about 240,000 residential electric customers, according to monthly collection activity reports filed by the utility with the PSC, so termination of  12,704 of them amounts to approximately 5.29% shut off in 2011.  The wide monthly variations in the number terminated indicates the discretionary nature of decisions to terminate service to collect bills.

The number of customers shut off is a small fraction of the number of customers with arrears more than 60 days:

About 23,000 to more than 25,000 customers were more than 60 days in arrears in every month of 2011.  This amounts to 9.5% to 10.4% of Central Hudson's electric customers.

Central Hudson customers more than 60 days late in paying their bills owe large amounts to the utility:

Customers more than 60 days in arrears owed Central Hudson more than $12 million in every month in 2011.  In May and June, they owed more than $14 million.

The average amount owed by a customer with more than 60 days of arrears was between $500 and $575.

The relatively small monthly variation in the amounts owed by customers more than 60 days in arrears stands in contrast to the much more variable number of monthly terminations and numbers of final termination notices.

Final Termination Notices (FTNs) are sent to customers, threatening interruption of service if payments, or satisfactory deferred payment arrangements, are not made. Apparently, many customers receive more than one FTN in a year, because in 2011, Central Hudson sent 290,720 FTNs -- more than the total number of its residential customers:

The number of FTNs sent to customers by Central Hudson was more than 22,000 in all months of 2011, or about 9% of all customers in each month.  FTNs were sent to 25,000, or about 10.4% of all customers, in two months.  The spike in October FTNs is revealing.   The decision to send FTNs is not linearly related to the amount owed by customers.  Even though the number of customers in arrears is greater in other months, and the amounts owed by customers in October are less than in other months, October is the month  with the largest number of FTNs. The most FTNs were issued in October 2011, but the total amount owed by customers receiving FTNs is greater in four other months, February, March, April, and May.

The total amount owed by customers more than 60 days in arrears was roughly the same in September and October 2011, but there were about 4,000 more FTNs issued in October.  Perhaps the surge in October FTNs is timed by the utility to take advantage of the November opening of the Home Energy Assistance Program (HEAP).  HEAP provides emergency assistance grants (payable directly to the utility) on behalf of eligible low income households with heat related utility service, when they have been shut off or have a FTN.

The number of service terminations to collect past due bills has risen dramatically since 2005.

There has been a 171% increase in the number of residential service terminations since 2005.  A comparison of the monthly differences in the number of terminations is below:

In addition to the much larger number of terminations in 2011, the monthly graphs indicate that the October surge in terminations did not exist in 2005.  This is further indication of the discretionary elements in making decisions to terminate service for bill collection purposes.

The general trend shows that Central Hudson is relying more upon service termination to collect its bills:

PULP's testimony in the pending PSC proceeding underway to consider the takeover of Central Hudson by Fortis, which includes a proposal to extend the current rate plan, urges measures to address affordability issues through low income rates and reforms to curb the growing reliance on service termination to collect bills.  The data obtained in that case indicates that service terminations in 2012 are higher than in 2011.
See Proposed Central Hudson/Fortis Merger Offers Little for Consumers; Shutoffs Up 171% Since 2005, PULP Urges Reforms

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