Unhedged!

New York electricity customers in many areas of the state have received soaring electric bills in the last two months. The basic reason given is that the NYISO spot market prices soared with the combination of cold weather and high prices for natural gas used to fuel the generators that win the day-ahead and hourly NYISO spot market auctions which set the price for all energy in the market. According to a news report, the Public Service Commission has asked the Federal Energy Regulatory Commission to look into the natural gas price spikes to see if more than supply and demand is at work, i.e., gaming or manipulation of the markets for gas which may have played out in the electricity markets, where electricity supply charges of some utilities more than tripled.  The NYISO spot markets and natural gas markets have experienced numerous past instances of market gaming or manipulation costing New York consumers hundreds of millions of dollars.It may take years to find out if market manipulation made the situation worse, and if there was, there may be little or nothing in the way of remedies for consumers.  See Paul B. Mohler, Has The “Complete And Permanent Bond Of Protection” Provided By Ferc Refunds Eroded In The Transition To Market-Based Rates?

 

There are some basic problems in relying on the short term markets for so much of the supply.  Just as consumers do not buy all their staples at the convenience store every day, and purchase in advance for predictable needs, utilities know that  a major part of their load can be predicted and they should not need to wait until the day before to make large purchases.  Yet that seems to be what has happened.  The electricity marketeers convinced policymakers in 15 states that utilities should sell their power plants and buy wholesale power for their customers in wholesale markets.  Further, they urged them to rely on the short term markets for supply, rather than buying in advance under long term contracts.  The New York PSC in 2004 decided that utilities should just buy at spot market rates for large customers, and temporarily continue to “hedge” the fluctuations in short term prices for small customers.  This “end state” was exactly what Enron and the marketeers wanted, so that customers would be faced by unpredictable spot market price spikes and would fall into the arms of new middlemen– like Enron, — whose market and trading wizardry would enable them to offer more stable (and higher, marked up) prices.  See Disconnected Policymakers.

When spot market prices spiked in California due to market manipulation, the Federal Energy Regulatory Commission had this to say about utilities who bought large amounts of power at spot market prices and passed through the spikes to consumers:

While the Commission has no authority over retail electricity rates nor authority to rule on the prudence of SDG&E’s provision of retail electric service, 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)(Emphasis added).

Load-serving utilities should be able to supply their own energy from self-supply or bilateral contracting outside the NYISO spot markets. The spot markets approved by FERC may be gamed, if not manipulated.  FERC screens sellers to see whether standing alone they have enough market share to exert market power, and approves the RTO/ISO tariffs, which set the market procedures, but not the actual prices. FERC assumes that if no single seller has market power the prices set in the market will meet the “just and reasonable” requirement of the law.  The record of market gaming belies this theory, and in a case where the issue was not raised, pointedly indicated that it has not determined whether FERC’s “metaphysical” reliance upon markets to set rates and charges is legal.

Even if the spot market price is not found unreasonable by FERC or the courts, that does not mean state regulators should find it prudent for utilities to buy so much power there.  A prudent retail utility would not rely too heavily on energy spot markets.  Utilities  properly should obtain  a portfolio of  resources which may include a mix of long term contracts for energy which assure development of new resources, or by self -supply.  Even though that is out of favor with the PSC,  Con Edison still generates a small amount of energy at its steam plant, and RG&E has hydro plants. See Genesee Waters Roaring Again in RG&E Hydro Tunnel, Rebuilding 2,000’ Tunnel System Key to $111 Million Generating Station Modernization,   Energy from these utility plants did not have to be bought at piratical prices from the NYISO sellers.   Also, the recent reallocation of cheap Niagara hydro power from residential customers to business customers now means that more power had to be purchased in the wholesale markets from other more expensive sources such as the NYISO market.

Residential customers require stable utility prices.  See Borrowing At High Interest To Pay Unaffordable Utility Bills.  That is why the Public Service law requires an ordeal and a rate case hearing before increases of 2 1/2%, and why summer/winter price variations can only be added to amounts used over 250 kwh, and why time of use pricing is voluntary for residential customers.  The Enronian recipe, still avidly followed at the PSC, is to overturn that statutory paradigm and deregulate prices, turning up the heat on customers with price volatility so that they would switch to third party ESCO marketers for energy.  See  PSC Typical Electric Bills Show Trend Of Higher Prices And Volatility.  But ESCOs generally offer only more expensive service.  As a consequence, consumers are suffering more due to misguided policies. and may continue to see high prices in the future:

While many energy officials expect electricity prices to drop as spring turns to summer, [a National Grid spokesperson] thinks power prices are likely to remain higher than they have been in the last few years because the need to rebuild depleted natural gas inventories will keep gas commodity prices from dropping too low. And that could mean further price spikes this summer if a heat wave causes an air conditioning-driven jump in demand.

See  David Robinson, ‘This is crazy’ – huge electric bills: Gas spike, bitter cold make costs skyrocket, Buffalo News. March 5, 2014.

The impact of excessive  wholesale prices is directly passed through to retail consumer prices.  No independent advocate for New York consumers is actively participating as a party in these important proceedings at FERC, or in the judicial review proceedings, which often follow significant FERC orders and play an important role in rate matters.   An independent advocate could, for example, participate in NYISO decision-making structures (where the vote of residential consumers is marginalized), in FERC proceedings to review whether NYISO tariffs are just and reasonable, and in the federal court proceedings that review FERC decisions.  State advocates from other states frequently do this.  In 2012, FERC approved using $10 million of a disgorgement by an alleged NYISO market manipulator for advocacy for New York residential consumers on wholesale electricity matters.    The fund is held by NYSERDA to be distributed at $1 million/year for ten years.  In March of 2013, the legislature appropriated $1 for advocacy on wholesale electricity issues to the Department of State Utility Intervention Unit, but to date nothing has been done to implement the program, and the money would be reappropriated in the Executive Budget for FY 2014-15.

bill pending in the state legislature would address the programmatic and structural deficiencies of the existing state agency advocate, the UIU, which is the legacy CPB utility unit that was reorganized into the Department of State in 2011.  The bill would completely reform the scope of the UIU  activities on behalf of New York’s utility consumers, by making it a separate entity capable of participation in any forum where utility issues are decided, and makes its structure more independent.Under the existing UIU statute, there is no express authority for the UIU to represent consumers in FERC or FCC proceedings, even though the federal agencies’ role in setting rules and prices have more effect than ever on consumers.  Also there is no express authority for UIU to challenge utility or regulators’ actions in court, and there is no independence in the structure of the office, for example, to challenge settlement agreements when other arms of the state agree to settle matters, which is a principal mode of decision making by regulatory agencies.

In addition to statutory overhaul of the UIU and implementation of the wholesale electricity advocacy fund with the FERC funds, we believe there is a need for continuation and expansion of funding for the Utility Project, to advocate on behalf of low-income utility and energy consumers, and for eventual enactment of a utility intervenor funding program to support more adequate representation of consumers in lengthy and complex utility regulatory proceedings.

Gerald Norlander

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