Background
Unlike most other states, New York has implemented retail electric restructuring through administrative decisions by
the Public Service Commission (PSC). There is no statutory mandate for retail electric restructuring. Since 1997, the New York Public Service Commission has issued orders and approved restructuring settlements that have phased in retail electric competition for all customers, but the implementation of restructuring has varied among the different electric utilities, and there is not a uniform market structure.

However, in all its restructuring decisions, the PSC has required the local electric utility to provide Default Service, referred to as the Provider of Last Resort, at least during the transition period, the terms and pricing for which varies by individual utility settlements. In most decisions, the settlement resulted in either rate freezes (e.g., New York State Electric and Gas Co.) or modest rate reductions for residential customers. Unlike other settlements, however, Consolidated Edison (which serves New York City and Westchester County) proposed to sell its power plantsⁱ   (divest)
by competitive bid and provide Provider of Last Resort Service by relying on the wholesale market and passing through this rate on a variable basis every month. At the time of the restructuring settlement, both Consolidated Edison (ConEd) and the Commission portrayed the settlement as one that would result in a 10 percent rate reduction for customers over the five-year term of the plan.ⁱⁱ

ConEd serves 2.5 million customers, but the average monthly usage for residential customers is very low compared to other electric utilities. Residential customers use an average of 350 kWh per month, due primarily to the plethora of multi-unit structures and apartments in New York City. Furthermore, ConEd’s customers have always had a monthly variable in bills due to a fuel adjustment mechanism that raises bills in the summer even under traditional regulation. Finally, ConEd’s rates have been very high historically due to the lack of sufficient generation sources within its service territory and reliance on high-priced nuclear power and on long-term and expensive Qualified Facility contracts
negotiated in the 1980s.

The PSC has pending a major investigation of its 2000 competition policies, including the structure and role of utilities in providing POLR service.ⁱⁱⁱ   The PSC staff was required to issue a "strawman" proposal for POLR service in mid-January 2001.^iv  Options considered included the gradual elimination of the utility in the provision of commodity services and the use of a competitive bid to obtain POLR service at market-based rates. The staff's approach was based on the notion that the utility should ultimately have no obligation to serve, except for regulated delivery or distribution functions, and that customers should be expected to enter the competitive market by a certain date and then be "given" to competitive marketers in proportion to the market share obtained by the marketer.

Among the many issues considered in the Working Groups formed by the Commission was whether the PSC had the legal authority to order or even approve any utility's proposal to exit the retail market and become a "wires"-only utility. The parties submitted briefs, but the PSC has made no decision or ruling on this significant issue. However, comments submitted by the New York Attorney General and the PSC staff suggest that any move to a model in which the utilities seek to exit the obligation to serve would not be possible without a statutory change to the New York Public Service Law.^v  Also under consideration is whether New York should adopt a comprehensive program to assure reasonably priced electricity for low-income customers. While several utilities have agreed to small-scale programs to provide bill payment assistance to low-income customers, there is no consensus on any statewide program design or funding mechanism for such programs.

Rising prices, uncertain supply in the New York City area, and uncertainty about the market-monitoring role by FERC have stimulated more public attention to restructuring.^vi   Some policymakers have begun to raise significant concerns and urge the PSC to either slow down or make significant changes in this process.^vii   While the Commission continues to take the leadership role, the New York Assembly^viii passed an overhaul of electric restructuring in mid-2002 that was favorably received in the State Senate and opposed by the Republican leadership, including the Governor.

The New York Commission has refused to review ConEd’s retail rates and tariff provisions, even in the face of persistent public outcry and consumer advocates’ attempts to force the PSC to review retail prices charged in the summer of 2000, in light of the statutory requirement of "just and reasonable" rates.^ix  However, the Commission approved a "hedging" mechanism in the market price rate structure that was implemented in August 2001.^x  Furthermore, the ability of New York to survive the summer without significant power outages and the existence of a FERC-approved price cap mechanism^xi on wholesale prices tempered the nature of the price spikes that occurred in 2001 and 2002. Even so, the rates in effect for New York City residential customers remain very high.

On July 13, 2001, the Administrative Law Judges assigned to the PSC's generic competition proceeding published a Recommended Decision.^xii   Among the more significant recommendations were proposals to do away with the
two-tiered system of consumer protections and apply the Home Energy Fair Practices Act policies to all competitive energy providers and require that all energy providers be directly regulated by the PSC. Also significant was the recommendation that the Commission adopt an explicit "universal service goal" for the electric industry and endorse low-income programs and rates. The judges recommended as well that the PSC focus first on the development of workable wholesale competitive markets prior to any full-scale implementation of retail competition. With respect to the Default Service issue, the report rejected the notion of a POLR service that is more expensive than service from non-POLR providers, stating that "Charging higher rates for essential energy services to those who have few, if any additional choices and who may be least able to afford them was not generally believed to be just and reasonable."^xiii

While favoring competition models that eventually remove the utility from the obligation to provide the energy commodity, the judges recommended an approach that would not require a specific POLR, particularly if all energy providers were governed by the same consumer protection policies and rules and each had an obligation to serve. However, the judges did not make clear how all customers would be moved to competitive providers, and even the authors recognized that a POLR would have to exist for short-term services, such as when a provider goes out of business. In the short run, the decision recommended the continuation of utility-supplied default service until the wholesale market was viable and
could be relied upon to provide reasonable price signals and stimulate suppliers to make offers to mass market customers. As of August 2002, the Commission has not ruled on these recommendations, and it is not clear why there has been such a significant delay.

Upstate New York utilities, such as New York State Electric & Gas Corporation (NYSEG) and Niagara Mohawk, have proposed multi-year rate plans in which prices for generation service will be locked in for a six- to eight-year period,
while providing customers with the option to seek lower prices in the competitive market. This would substantially lengthen the transition period for these utilities. NYSEG has been very vocal about the need to provide stable and fixed prices for residential customers in particular and published an April 2001 paper on the New York State’s electric energy crisis, describing the "broken train" that is the New York wholesale market. The paper linked the coming period of uncertainty in wholesale prices with the need to provide price certainty to consumers during this transition period.^xiv

Supplier Activity
Most of the suppliers currently active in the New York retail electricity market are relatively "small" or "home grown" and not connected with energy providers that are active in other states. Furthermore, the number of competitive suppliers marketing to residential customers has dropped significantly in recent years. As of May 2002, ConEd’s website^xv listed eight suppliers who market electricity to residential and/or small commercial customers. However, two of these are
local "cooperatives" limited to certain portions of the service territory, and several others are reported to be inactive with respect to residential customers. Those who do market to residential customers have attempted to contrast their fixed rate offers (typically for at least one year, and several suppliers require two- to three-year contracts) with the variable rates charged by ConEd.

Even with the relatively small number of suppliers, however, the number of residential customers who have chosen alternative suppliers has gradually increased in the ConEd service territory. As of May 2002,^xvi 159,528 customers had "migrated" to alternative suppliers, 137,601 of which were residential customers. This is the largest number of
residential customers who have shopped in New York compared to any other electric utility. Although this represents a 70 percent increase since December 2000, it is still only five percent of ConEd’s residential customer accounts.

According to the web-based Energy Guide,^xvii there are five options available to residential customers in the ConEd service territory, two from ConEdison Solutions, the retail sales affiliate of Consolidated Edison, Inc. Of these five offers, one is for "green" energy, three are fixed rates, and two are variable rate offers. As of April 2002, every one of these offers project a higher bill than the current rates in effect for ConEd’s default service rates. Furthermore, the fixed rate offers require a minimum monthly charge in addition to the cents per kWh rate charged by the supplier for actual usage, and this type of monthly charge results in higher per kWh charges, particularly for low-usage customers. Clearly, marketers who signed up customers for fixed rate deals during a period of high rates (last summer) are charging far more than the ConEd prices for market supply service. Finally, it should be noted that at least two of the marketers listed on ConEd chart have been the subject of investigation and civil suits by the New York Attorney General for violations of consumer protection laws.

An unusual feature of the New York retail market^xviii is that when customers leave their local utility, they are not liable for certain state sales taxes on the distribution or delivery portion of the bill, thus allowing competitive marketers to offer savings that are based on tax loopholes rather than "real" energy savings. When this tax loophole is combined with one-time or upfront customer rebates or sign-up bonuses, customers are often led to believe that the supplier’s offer is cheaper than the current utility rates.

Of course, customers in the ConEd service territory can only make decisions on annual savings based on the current six-month projected rates that are provided every May and November by the utility, thus complicating the comparison of the current rates with multi-year fixed rate offers from marketers. As a result of these unique features, ConEd’s residential customers cannot simply compare rates for the generation portion of the monthly electric bill. The combination of the sales tax break on the distribution portion of the bill and the monthly change in the ConEd generation supply portion of the bill makes shopping for energy a very confusing concept for most customers. While some
suppliers quote monthly total bill savings, others focus on the energy portion of the bill. The PSC has not mandated a uniform method of price disclosure to assist customers in making "apples to apples" price comparisons among competitive suppliers.^xix

Provider of Last Resort
Unlike other restructuring plans approved in New York, Default Service under both ConEd and Orange and Rockland (O&R, a subsidiary of ConEd) consists of a pass-through of wholesale market prices to all customers. The method of passing through the wholesale market prices is complicated and not transparent to customers. ConEd provides its customers with estimated rates for the next six-month period every May and November. However, the actual price charged for the generation supply portion of the bill varies monthly according to a complicated formula designed to
reflect the wholesale market. As a result, the projected six-month rates are "reconciled" and result in monthly bill changes for the energy portion of the bill.

Contrary to the public statements when the plan was adopted, this provision resulted in significant rate increases for the generation portion of the bill beginning in the summer of 2000. As of July 2000, ConEd residential customers were
paying 10 cents per kWh for generation alone, far higher than the 4-5 cents paid by residential customers in upstate
New York and far higher than the 3.3 cents per kWh paid by ConEd residential customers in 1997. The average monthly bill for residential customers increased from approximately $52 in November 1999 to almost $75 in July 2000 and
leveled off at over $60 by late 2000.^xx  This resulted in a total bill rate of over 19 cents per kWh, a 40 percent increase compared to pre-competition prices.^xxi  The resulting furor^xxii led to investigations that concluded that New York's wholesale market was flawed, and ConEd publicly warned the Commission that a "California-type" situation could
result without prompt action from both the New York PSC and FERC. Both the PSC and ConEd initiated petitions to FERC to control prices on the wholesale market.^xxiii

In the summer of 2001, customers were charged 10.9 cents per kwh in May, 9.37 cents in June, 12.16 cents in July,
and 9.13 cents in August for the energy portion of the bill alone. Compared to comparable months in 2000, the 2001 prices were significantly higher for May and August, but slightly lower in June and July.^xxiv  Since August 2001, the generation portion of the bill has averaged 5-6 cents per kWh, but rose in April to 7.16 cents.

Consumer Protection Programs and Policies
Whether due to the lack of underlying legislative authority or the PSC's own policy decision about the need for a "light" hand in the regulation of competitive suppliers, the fact remains that the PSC has not adopted enforceable rules that are directly applicable to competitive suppliers. Rather, the Commission has adopted "Uniform Business Practices"^xxv that require utilities to adopt tariffs which require suppliers to adhere to certain practices as a condition of entering the
utility’s retail access program. While the PSC could have required suppliers to adhere to the uniform consumer protection rules applicable to regulated utility service, and embodied in the Home Energy Fair Practices Act (HEFPA), it choose to adopt a lesser standard.^xxvi

HEFPA remains applicable to utilities that provide POLR service. Furthermore, competitive suppliers cannot disconnect service for nonpayment. As a result, some of the key consumer protections associated with access to payment plans (to avoid disconnection), medical emergencies, and disconnection itself remain applicable to all customers. However, competitive suppliers are exempt from some key consumer protection provisions associated with HEFPA, particularly those addressing deposits and prepayments, the obligation to offer payment arrangements, such as budget payment plans, or those in response to notice of contract termination (and return of customer to utility’s POLR service), response to medical emergencies, handling of customer complaints, or limitations on late payment charges or contract
termination fees.

Unlike other state commissions that have implemented retail electric competition, the New York PSC has not adopted strong disclosure rules that require uniform price disclosures (although the PSC has adopted a requirement for environmental disclosures). Furthermore, the Commission’s requirements governing a Terms of Service disclosure document to new customers, bill format and disclosures, and regulation of certain contract terms, particularly renewals and contract termination notices, lack the specificity and enforceability imposed by commissions in other states. While the PSC does require that marketers be "certified" by the Commission,^xxvii this procedure is not the legal equivalent of the licensing program in effect elsewhere. For example, the Commission has not adopted any rules that govern suspension or revocation of such certification and cannot levy civil penalties directly on marketers. Rather, the PSC is typically left with the option of directing the utility to discontinue service to a marketer.^xxviii

A recent survey by AARP of New York residents age 50 years or older documented strong support for consumer protection programs and policies that should accompany the move to retail energy competition. More than eight out of
10 New Yorkers surveyed believe that it is important for citizens to have the same consumer protection rights with a private energy company as they had with their public utility, and they support proposals to impose HEFPA requirements on competitive suppliers.^xxix

A particular defect of the New York restructuring program is the lack of any direct PSC enforcement mechanism over competitive suppliers. Instead, the Commission appears to defer to the Attorney General for enforcement activities. Furthermore, the PSC does not resolve customer complaints with energy marketers, although it does monitor the number of complaints, and does not require marketers to refer customers to the Commission for informal dispute resolution. Rather, marketers are allowed to include mandatory arbitration or Small Claims Court provisions in their pre-printed customer contracts.

The New York Attorney General's Office has initiated enforcement actions against several marketers under the state’s Unfair Trade Practices law. In April 2001, the A.G. settled a lawsuit against Total Gas & Electric, Inc. (based in Florida), announcing customer restitution, modification in marketing and sales practices, and the payment of a $200,000 civil penalty.^xxx This marketer, like many that have been subject to state enforcement actions, specializes in door-to-door sales. More recently, the A.G. announced that a suit had been filed against ECONnergy of Rockland, New York,
alleging numerous deceptive practices associated with door-to-door sales of energy services in the ConEd and O&R service territories.^xxxi Both of these entities are still listed on the ConEd website as offering energy services to
residential customers, and the PSC has taken no formal action to investigate, suspend, or halt the marketing activities
of either company, even though the A.G.’s investigation against ECONnergy has been underway for 18 months.

The most serious consumer protection failure occurred in western New York State when numerous gas marketers suddenly went out of business or declared bankruptcy after collecting deposits and prepayments from residential and commercial customers. In the case of Iroquois Energy Management, the company collected $1.8 million in prepaid natural gas service from customers, all of whom were transferred back to the utility at higher prices, with little hope of seeing a dime from the unsecured assets of the bankrupt marketer.^xxxii  In response to this debacle, the PSC published a staff proposal on May 9, 2001^xxxiii to regulate supplier deposits and prepayments more strictly and to require marketers to submit evidence that funds collected from customers for prepayments or deposits would be held for the benefit of such customers. The staff also proposed that a residential customer deposit could not exceed twice the average monthly bill.

A full year passed before the Commission’s Final Order on this proceeding, and in general the staff’s proposal was not adopted.^xxxiv  Instead of focusing on direct PSC regulation of marketer security to prevent the loss of customer prepayments or deposits, the Commission directed utilities to amend their retail access tariffs to require marketers to submit evidence of creditworthiness prior to requiring prepayments or deposits from customers. A marketer with a sufficiently high bond rating would not be required to post any financial security. The staff proposal to regulate the amount of security deposits was rejected, along with the proposals of most consumer organizations to prohibit marketers from collecting prepaid service from residential customers.

The PSC has approved metering competition for larger commercial and industrial customers, as well as billing competition for all customers of competitive suppliers. Marketers can issue dual bills (for generation supply service only), opt to bill on the utility bill, or issue a consolidated bill that incorporates all the regulated utility charges as well as the competitive energy charges. However, marketers in New York are not required to comply with the mandatory consumer protection and billing rules applicable to utilities (i.e., HEFPA). Nor are marketers subject to similar bill format and disclosure rules. In fact, several marketers in New York only offer on-line billing, with automated payment by credit card or debit to the customer’s checking account within 10 days of the issuance of the bill (and an e-mail to the customer), dispensing entirely with paper bills or the opportunity to pay by check.^xxxv

Consumer Education
The consumer education effort in New York generally has been conducted by the PSC itself (with a modest $1 million budget for the entire state^xxxvi and by the individual utilities. The utilities have spent $5-6 million/year on this effort. The total expenditures by both the PSC and the utilities are equal to $1/year/customer. The Public Service Commission’s theme, "Your Energy, Your Choice" is not mimicked by the utilities, but their themed approach is typically similar (e.g., NIMO’s "You Choose, We Deliver"). In addition, the New York State Energy Research and Development Authority (NYSERDA) has conducted an extensive education campaign focused on energy efficiency and demand response activities that are funded by the PSC-sanctioned Social Benefits Charge.^xxxvii

However, unlike Pennsylvania, Ohio, Maine, and other states, New York has not adopted a unified education plan for retail electric competition and does not require the utilities to contribute to a Commission-led and controlled education campaign. Nor are the utilities required to use the same terminology when referring to retail access, the sale of generation service, or the regulated portions of the utility business. Awareness levels among customers remain
relatively low compared to states that have conducted more aggressive multi-media campaigns.

Universal Service Programs^xxxviii
Utilities spend about $23 million annually on low-income programs in New York State, most of which is reflected in utility rates. These programs are utility-specific, and the bulk of the funding goes to energy efficiency programs (refrigerator replacement, lighting, weatherization, etc.). Several utilities operate bill payment assistance programs, mostly as arrears forgiveness or reductions in the monthly customer charge for low-income customers, such as Keyspan Energy’s Residential Reduced Rate for natural gas customers or NYSEG’s Power Partners Program, which coordinates the delivery of energy efficiency services with bill reductions. However, these programs are relatively small and enroll only a small percentage of the eligible low-income customers. Furthermore, the bulk of the dollars are directed to natural gas customers and not baseload electricity customers.

In addition to the utility-funded and controlled programs, the PSC ordered the implementation of the System Benefits Charge in 1996. In early 1998, NYSERDA was designated the administrator of the public benefits programs. These programs, collectively named the New York Energy Smart Program, include energy efficiency, low-income services (those not directly implemented by the utilities in the $23 million figure provided above), research and development, and environmental protection monitoring and analysis associated with the transition to competitive markets. Funding for the SBC was set by the PSC at $150 million annually in early 2001. Of this amount, 14.1 percent is allocated to
low-income programs, a portion of which is used to educate low-income customers and communities on the opportunities to reduce bills through participation in the direct access or retail competition programs.

Due to the high concentration of multi-unit dwellings in New York, low-income consumer advocates often focus on bill reduction strategies that should be funded by utilities for these types of structures. According to one recent study, alternative suppliers have done little to market electricity or provide efficiency services to low-use and low-income customers. Furthermore, the New York practice of closely integrating its public assistance programs with direct payments to the client’s energy vendor has not been replicated or unraveled among energy marketers to allow such customers to shop for electricity or natural gas and be assured that their assistance payments will follow them to new suppliers.^xxxix

ConEd does not offer bill payment assistance to low-income customers generally, but it has frozen the monthly customer charge at pre-1996 levels for customers who receive automatic vendor payments within Public Assistance. No reconnection fee is charged for LIHEAP recipients disconnected for nonpayment. In addition, there is a modest refrigerator replacement program available to elderly and disabled customers who receive SSI or HEAP. However, ConEd’s website does not describe this program or refer potentially eligible customers to any agency for possible low-income bill payment assistance.

Preliminary Conclusions and Observations
The pending PSC decision on its Market Structure proceeding will be crucial to the determination of the regulatory
"rules of the game" in New York and in future iterations of the ConEd retail access program. As frequently pointed out
by proponents of the retail access approach in New York, the lack of legislation does allow the PSC to make changes and react to unforeseen developments. However, the lack of certainty in the overall approach and industry structure -- as reflected in part by the fact that the Recommended Decision in the Market Structure and the POLR proceeding have been pending for over a year -- has certainly contributed to the lack of robust activity by competitive suppliers. While such lack of interest can be explained by the price stability and rate freezes in effect at most utilities, the price volatility experienced by ConEd customers has certainly not produced significant public or market interest in competition in that area.

The retail uncertainty in New York is only exacerbated by the uncertainty of the wholesale market and the pending proposal by FERC to combine the New York Independent System Operation with New England and/or the mid-Atlantic state market (PJM). Finally, the two-tiered system of consumer protections and the marketer failures and consumer losses associated with numerous natural gas marketers in western New York (as well as the violations of consumer protection laws documented by the Attorney General) has contributed to customer dissatisfaction.

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^v Press Release, New York State Electric and Gas Co., ANYSEG Proposes Electric Price Protection Plan that Freezes Rates and Assures Energy Reliability, March 8, 2001, http://www.nyseg.com.