Pyrrhic victory or the Greeks at Thermopylae? Drastic expansion of ratemaking authority or continuation of the status quo? And what does this all mean for the future of New York’s retail energy market? Welcome to Part 2 of “Resetting the PSC’s Reset Order”; an examination of the recent judicial ruling on the New York Public Service Commission’s February 23 Reset Order.

• Part One  gave a ‘barebones’ overview of the ruling vacating the Reset Order
• Part Two digs deeper into the Vacating Order and what we’re likely to see in the near future
• Part Three will discuss next steps and potential opportunities for the retail energy industry

As noted in Part 1, on July 22nd, a New York Supreme Court judge vacated most of the Commission’s contentious February 23 ‘Reset Order,’[1]  which was challenged in court by several retail energy associations. (For more information on the original Order, please click here). However, the judge determined that it was the PSC’s lack of proper notice – not lack of authority – that violated the law. It is still unclear whether the PSC now has to ‘go back to the drawing board’ or if its April SAPA notices are sufficient to replace the Reset Order, and if this ruling now means that the PSC has legal ratemaking authority over ESCOs. Despite these open questions, the PSC has signaled that it intends to move forward with the requirements first outlined in the February 23 Reset Order.

“Any inkling of the type of change”

After examining the history of the New York retail market, the PSC’s ongoing proceedings addressing the retail energy market, and the contents of the February 23 Reset Order, Judge Zwack concluded that the Reset Order did not meet the legal standard of providing a ‘meaningful’ opportunity to be heard and respond. He found that the Reset Order “bears little rational relationship” to the rest of the retail energy market proceedings, such that it would have been impossible for the petitioners to anticipate the result, participate in the process, or realistically comply with the Reset Order’s requirements. Below is an overview of the relevant procedural history leading up to the Reset Order:

1996 – February 23, 2016:

• 1996: Creation of Competitive Energy Market
• 2002: NYS Legislature adopts tax breaks for utilities
• February 25, 2014: PSC Orders Modifications to UBP & Utility Tariffs[2]
• February 2014 – February 2015: Rehearing proceedings
• February 6, 2015: Order enhancing protections for Low-Income Customers
• February 26, 2015: Order launching staff investigation into ESCO eligibility requirements
• July 28, 2015 Comments on Staff Report
• August 12, 2015: Notice Seeking Comments on Staff Report
• November 5, 2015 Report of the Collaborative Regarding Protections for Low Income Customers of Energy Services + Notice Seeking Comments (due February 11, 2016)
• February 23, 2016: Reset Order issued along with Notice Seeking Comments

Judge Zwack noted that both the New York State Legislature and the PSC had taken steps to encourage entry into the competitive energy market since its inception in 1996, but that, starting in late 2013, the PSC began to issue a series of dockets aimed at addressing what it saw as serious flaws in the retail (i.e. residential and small commercial) market.[3] Changes included proposed protections and requirements for low-income customers almost identical to those applied to all mass market customers in the Reset Order, discussions on energy-related value-added services, ESCO eligibility requirements, and billing.

Nevertheless, Judge Zwack did not find these proposals sufficient to meet the legal standard of “providing an opportunity to be heard in a meaningful manner and at a meaningful time.” He pointed out that none of the many proceedings or Reports ever proposed applying the discussed low-income protections across the entire retail market, and questioned why the PSC, in the Reset Order, was so insistent that the current market was unworkable when these previous proceedings had focused on ways to improve protections access to the retail market.[4] Nor could the PSC use suggestions made by consumer advocacy groups to satisfy it notice requirements. The judge concluded that neither these comments, nor other proceedings “would give petitioners any inkling of the type of change which resulted from the Reset order.”[5] He also concluded that the PSC’s actions after the Reset Order were enough to ‘fix’ the issue of notice, especially since companies were given only ten days to comply.

February 23 – July 22, 2016:

• February 23, 2016: PSC issues Reset Order & Notice Seeking Comments
• Late February – Early March: PSC issues several guidance documents on Reset Order
• March 4, 2016: Initial Deadline to Comply / TRO Issued
• March 18, 2016: Deadline for Initial Reply to Notice Seeking Comments
• March 23, 2016: Deadline to Request Reconsideration of Reset Order
• April 4, 2016: Deadline for Reply Comments to Notice Seeking Comments
• May 4, 2016: PSC issues three new proposed Rulemakings in State Register + DPS issues Whitepapers on 3 of the 7 issues in the February 23 Notice Seeking Comments
• June 6, 2016: Deadline for Comments on the DPS Whitepapers

Calling the PSC’s actions after the Order a ‘tacit admission’ that the notice was inadequate, the judge noted that “an agency’s order must be upheld, if at all, on the same basis articulated in the order by the agency itself and not by the agency’s post order actions.”[6]

However, when the judge remitted the matter to the PSC for further proceedings, it is not entirely clear whether the notices issued since February 23, 2016 can be used towards any future order issued by the PSC, or whether the PSC does in fact need to start from scratch and re-issue all notices.

“The very broadest of powers” – or not?

Adding another layer to the regulatory Jenga, while Judge Zwack disagreed with the PSC on the how, he agreed with the Commission on the what: that ESCOs are included in the type of ‘electric and gas’ corporation over which it has rate-making authority: after looking at the submission by both parties on the issue of the PSC’s ratemaking authority as well as New York Public Service Law (PSL) and legal precedent, Judge Zwack concluded that “it is counterintuitive to claim that the PSC lacks jurisdiction over the retail energy market.” Below is a list of the relevant PSL sections:

Relevant Sections of the Public Service Law

• PSL 5 (Powers of the Public Service Commission)[7]
• Article 1, Section 2 (definitions of electric and gas corporations)[8]
• Article 2, Sections 30-49 (HEFPA protections) and Section 53 (Application of Section 2)[9]
• Article 4, Section 65 (‘Just and Reasonable Rates’)[10]

Public Service Law 5 gives the PSC general authority over the sale of gas and electricity as well as electric and gas corporations, as defined in Article 1, Section 2. Article 2 address consumer protection and was amended by the New York State Legislature in 2002 to include ESCOs. Article 4 allows the PSC to regulate rates to ensure that they are ‘just and reasonable’ and applies to all electric and gas corporations, as defined in Article 1, Section 2.

Judge Zwack pointed out that these regulations give the PSC almost complete authority over all aspects of the energy market, and that the Commission’s authority to establish rates over all ‘public utilities’ “has been ‘recognized as the very broadest of powers.’”[11] It was thus counterintuitive, he claimed, to conclude that the PSC has such expansive authority over the energy market, and yet, no such authority over ESCOs.

Nonetheless, questions continue as to whether (1) Article 4 does in fact apply to ESCOs and (2) even if it did, if the Judge’s conclusions on the issue constitute ‘dicta’ and thus are not legally binding.

In fact, the PSC itself was not always certain it possessed such powers[12] and in several decisions, made it explicit that Article 4 of the Public Service Law did not apply to ESCOs.[13] The actions of the New York State Legislature seem to support this position. In 2002, the Legislature amended Article 2 to require ESCOs to comply with the HEFPA consumer protection regulations. The new Section 53 language was very specific that that ESCOs were included in the definition of electric corporation “for purposes of this article.”[14] This – and the fact that it did not include similar language in the ratemaking portions of Article 4 – strongly suggests that the Legislature did notintend for ESCOs to be generally included in the definition of electric or gas corporations.

Complicating matters further, the actual language of Judge Zwack’s Order does not include language ‘ordering’ the conclusion that the PSC has rate-making authority over ESCOs. Rather, it first vacates provisions 1 through 3 of the Reset Order, and then remits the matter to the PSC, “including Notice specific to the directives of the February 26 Reset Order.”[15]

This would suggest that the portions of the Order discussing ratemaking are dicta – non-binding statements reflecting a judge’s opinion but possessing no precedential binding power. Therefore, regardless of whether the judge was correct or incorrect, and even though his reasoning will be a factor if (or more likely when) the issue is re-litigated, his finding is not legally binding at this time.

What Does It All Mean?

Part Three of this series will go into more depth on the potential implications and possible outcomes. For now, however, this much is clear:

The February 23 Reset Order Is Out

Judge Zwack found that the August 12, 2015 SAPA notice, the July 28, 2015 Staff Report, the November 5, 2015 Report of the Collaborative Regarding Protections for Low Income Customers of Energy Services, and the February 25, 2015 Order, upon which Staff allegedly relied when drafting the Reset Order failed to provide sufficient notice to support the Reset Order.[16] The Judge’s decision to vacate Ordering Paragraphs 1-3 of the Reset Order gives ESCOs some breathing room to revise their internal operational strategies, and has the effect of ‘resetting’ the Resetting Order and sending the PSC back to the drawing board.

But Change is Still Coming

Despite this setback, the PSC has not backed down from the positions it staked out in the Reset Order. After the decision was issued, Chairwoman Audrey Zibelman issued a press release indicating the Commission’s intention to continue to pursue the objectives contained in the Reset Order:

This injustice will be short-lived. The Court’s decision recognizes the Commission’s authority and firmly sided with the Commission that it is both our right and obligation to protect consumers against price gouging and other abuses. We will and we must use this authority…[17]

And, even if Article 4 is found not to apply to ESCOs, the PSC still has significant regulatory powers at its disposal with which to shape the retail energy industry. It will be interesting to see if the industry collaborative that has been going on since February 23 will have any impact on PSC’s next steps or if they will simply re-issue the original Reset Order. In either event, Part 3 of this series will discuss important next steps as well as potential opportunities for the retail energy industry.

[1] Notice Seeking Comments on Resetting Retail Energy Markets for Mass Market Customers (issued Feb. 24, 2016) Case 15-M-0127, et al. at 21.

[2] Case 12-M-0476

[3] Case 12-M-0476

[4] Id, at 21.

[5] Retail Energy Supply Association et al v Public Service Commission et al, (issued July 22, 2016) Index Nos. 868-16, 870-16, 874-16, at 17.

[6] Retail Energy Supply Association et al v Public Service Commission et al, (issued July 22, 2016) Index Nos. 868-16, 870-16, 874-16, at 20.

[7] http://codes.findlaw.com/ny/public-service-law/pbs-sect-5.html Public Service Law 5 gives the PSC general authority over “the manufacture, conveying, transportation, sale or distribution of gas (natural or manufactured or mixture of both) and electricity for light, heat or power, to gas plants and to electric plants and to the persons or corporations owning, leasing or operating the same.” It also includes language that the PSC encourage energy conservation programs.

[8] http://codes.findlaw.com/ny/public-service-law/pbs-sect-2.html Article 1 defines electric corporation as “every corporation, company, association…owning, operating or managing any electric plant….” and gas corporation as “every corporation, company, association…owning, operating or managing any gas plant…”

[9] http://codes.findlaw.com/ny/public-service-law/pbs-sect-53.html Article 2, Sections 30-49 outline the ‘HEFPA’ (i.e. consumer protection) rules, and Section 53 notes that, “for purposes of this article, a reference to a gas corporation, an electric corporation, a utility company, or a utility corporation shall include, but is not limited to, any entity that, in any manner, sells or facilitates the sale or furnishing of gas or electricity to residential customers…”

[10] http://codes.findlaw.com/ny/public-service-law/pbs-sect-65.html  Finally, Section 65 of Article 4 requires that rates be just and reasonable and gives the PSC authority to regulate those rates: “every gas corporation, every electric corporation and every municipality shall furnish and provide such service…as shall be safe and adequate and in all respects just and reasonable.  All charges made or demanded by any such gas corporation, electric corporation or municipality for gas, electricity or any service rendered or to be rendered, shall be just and reasonable and not more than allowed by law or by order of the commission.  Every unjust or unreasonable charge made or demanded for gas, electricity or any such service…or in excess of that allowed by law or by the order of the commission is prohibited.”

[11] Retail Energy Supply Association et al v Public Service Commission et al, (issued July 22, 2016) Index Nos. 868-16, 870-16, 874-16, at 14.

[12] Order Adopting ESCO Price Reporting Requirements and Enforcement Mechanisms, Case No. 06-M-0647 (Nov. 8, 2006).

[13] See Case 94-E-0952, Opinion 97-5, May 19, 1997, Case 96-E-0898, In the Matter of Rochester Gas and Electric Corporation’s Plans for Electric Rate/Restructuring Pursuant to Opinion 96-12, Dec. 24, 1997

[14] http://codes.findlaw.com/ny/public-service-law/pbs-sect-53.html

[15] Retail Energy Supply Association et al v Public Service Commission et al, (issued July 22, 2016) Index Nos. 868-16, 870-16, 874-16, at 23.

[16] Retail Energy Supply Association et al v Public Service Commission et al, (issued July 22, 2016) Index Nos. 868-16, 870-16, 874-16, at 16-19.

[17] Statement from Public Service Commission Chair Audrey Zibelman Regarding Consumer Protections and Energy Service Companies (issued June 26, 2016) Case No. 12-M-0476.