Claim: N.Y. Order on Transmission Cost Recovery "Will Discriminate Against Competitive ESCOs"

In a filing rich with irony, a group of ESCOs have claimed that a New York order on the cost recovery mechanism for transmission projects meant to ensure reliability in the face of a potential shut down of the Indian Point nuclear plant, "will discriminate against competitive ESCOs."

In early November, the PSC adopted a cost recovery mechanism for certain transmission projects included in an Indian Point contingency plan. The mechanism adopted by the PSC will allocate the transmission project costs to all load serving entities, including ESCOs.

This departed from Staff's proposal, and the ESCOs' preferred solution, to recover costs through utility delivery rates (with no costs assigned to ESCOs).

The Retail Energy Supply Association sought rehearing of the PSC's determination, claiming that the adopted transmission cost recovery mechanism, "will discriminate against competitive ESCOs."

The crux of RESA's argument is that allocation of non-market reliability project costs to LSEs, with such costs representing solely the result of administrative determinations, is inconsistent with competitive market principles.

The ESCOs may have a point, but only if their argument is consistent across all administrative, reliability-driven costs, including the NYISO capacity market. Given that ESCOs have acquiesced to (and in some cases -- particularly those ESCOs affiliated with generation -- actively promoted) the capacity market, which assigns administrative costs to all LSEs even though the costs are derived from administrative reliability determinations to meet a public policy, not competitive market forces, it strikes us as untenable for ESCOs to complain about the transmission cost recovery mechanism chosen by the PSC.

Admittedly, the PSC's decision to assign these new, administrative, unknown, and unhedgeable transmission costs to all LSEs challenges ESCOs' ability to offer longer-term fixed price electricity contracts. But no more so than the NYISO capacity market, which does not have a forward component, and therefore, has no forward visibility that ESCOs can reflect in contracts. If the RESA members do not consider the capacity market to be a mechanism that, "will discriminate against competitive ESCOs," because of its imposition of unknown and unavoidable costs on ESCOs, then they really have no leg to stand on in arguing that the transmission cost recovery mechanism adopted by the PSC poses any problems for ESCOs.

Specifically, RESA frames the argument as such:

"ESCOs provide competitive commodity supply service to retail customers. Their charges are designed and do reflect the competitive cost of supply electricity. In this manner they compete against each other as well as the utility. However, their ability to compete on even terms against the utility is degraded if they are compelled to include non-competitive based costs in their charges. These types of charges are not tied to any competitive market developments or caused by market changes. Instead, as previously noted they are the result of government policies or mandates which operate apart and outside of the competitive energy market. When faced with such charges, customers may opt to remain with the utility or migrate from ESCO to utility commodity service. In either event, the ESCO may lose customers and diminish its economic viability," RESA said (emphasis added).

"Essentially, the fact that these costs are neither induced nor incurred due to market forces is ignored and cost recovery will proceed erroneously as if the TOTS [transmission] projects are market based rather than created solely by the intervention of government policy," RESA said (emphasis added).

If RESA has this concern with the transmission costs we see no reason why capacity costs are distinguishable and do not raise the same competitive balance concerns. While there is nominally "competition" in the capacity market, pricing is driven by administrative designs and government mandates to purchase capacity -- mandates that can't be avoided (similar to the transmission cost allocation).

Indeed, while RESA tries to paint the PSC's decision as inconsistent with the cost recovery mechanism for other public policy charges, the assignment of costs to LSEs for reliability-driven projects (in this instance, transmission projects) tracks the assignment of another reliability-driven charge, capacity, to all LSEs.

RESA specifically notes that for RPS and energy efficiency portfolio standard costs, the distribution utility assumes responsibility for such costs for all of its distribution customers, with costs recovered in distribution rates. RESA said that Indian Point contingency transmission project costs should be recovered in a similar manner, and noted that other Indian Point contingency programs, namely Energy Efficiency, Demand Reduction and Combined Heat/Power projects, will be recovered in this manner.

However, with the capacity market, New York has already determined that having a reliable supply of power should be charged to all LSEs, essentially making this a "bypassable" generation charge, even if the cost is arrived at through an administrative mechanism. Therefore, assigning to all LSEs, not just distribution utilities, the costs of transmission projects prompted by concerns about adequate generation supply is entirely consistent with current market design.

"The contingency plan and construction of the TOTS facilities are solely related and directed to serving the public policy goal enunciated by New York State which contemplates the forced retirement of the Indian Point generating facilities and the attendant requirement to maintain the reliability of electric service in New York," RESA said (emphasis added). "It is regulatory public policy, rather than competitive market forces, which is the basis for and drives the need for these proposed facilities. Consequently, the cost recovery mechanism should mirror the non-market based function that is being served by the TOTS projects," RESA said (emphasis added).

Given the capacity market's sole purpose is also to, "maintain the reliability of electric service in New York," we await RESA's petition to relieve ESCOs of responsibility of paying capacity charges, and to transfer this function to the distribution utility on behalf of all delivery service customers (while capacity charges are FERC-regulated, this can still be done, much as many utilities in PJM assume certain federal PJM charges (though not yet capacity) on behalf of both default service and competitive supply customers even though the charges are nominally assigned to the LSE supplying the customer).

RESA raises concern with how utilities will recover the Indian Point contingency plan transmission costs from full service customers, worrying that the costs will not be fully reflected in default service rates and therefore artificially depressing the price to compare. While certainly something which needs to be strictly monitored, RESA does not make note of the utilities addressing this issue previously in support of the adopted cost recovery mechanism, in which the utilities said, "The NYTOs, in their role as an LSE, will charge this NYISO-billed amount to their full service retail customers consistent with their existing PSC-approved retail tariffs or, where necessary, under newly approved PSC tariffs."

Such language certainly makes it apparent the transmission charges are to be bypassable (only applicable to full service customers), though RESA is correct the specific mechanism to be used to ensure this charge is bypassable has not been addressed, and is an area in which affirmation would be beneficial.

Case 12-E-0503