February 2004: New York To Update Flex Rate Contract Guidelines

About The Author:

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions.

He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive
Suite 301
Concord, NH 03301
rolson@bowlaw.com
(603) 225-9716

February 2004
New York To Update Flex Rate Contract Guidelines
by Robert Olson -- Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 2004/02/13)

The New York Public Service Commission (the “Commission”) has instituted a new proceeding to update its flex rate contract negotiation guidelines to reflect changes in the electric industry. Case 03-E-1761, Proceeding on Motion of the Commission to Reexamine Policies and Tariffs for Flexible Rate Contract Service to Economic Development Customers, Order Instituting Proceeding (January 12, 2004) (the “Order”). Under flex rate contracting, a utility may negotiate contracts with business customers “at rates and conditions outside the scope of a utility’s standard tariff classifications” when the business customer is considering alternatives to utility service, such as “on-site generation, relocation out-of-state, or ceasing operations.” Flex contracts are allowed because of the concern that “if the customer is lost, all of the contributions it makes toward meeting both marginal costs and system common costs will also be lost.” The Commission established the current flex rate contract guidelines in 1994. Since then, the electric industry has been restructured. “[N]ew wholesale electric market structures have been created, electric rates have been redesigned and unbundled, and new retail energy supply options have become available.” These new industry conditions have led to numerous disputes between utilities and their existing flex rate customers and have impeded the negotiation of new flex rate contracts. The Commission maintains that “flex rate contracts remain a valuable tool for promoting economic development through the retention and attraction of business customers” and has decided to develop new “policies and procedures that will best advance continued use of flex rate contracts to promote economic development” in light of the electric industry’s new structure.

Under current guidelines, any lost revenues “arising out of the discount from tariffed rates provided for in a contract [must be] shared between shareholders and ratepayers.” The discount price must be “set at the level most advantageous to utility customers as a whole.” The guidelines require the utility to charge its flex rate customers a minimum “floor price” of 1 cent per kWh “above the marginal cost of serving the customer.” The floor price is required “to ensure that all flex rate customers [make] some contribution toward meeting utility common costs.” This minimum bill provision has been the source of numerous disputes between utilities and their flex rate customers since 2000.

As the Commission explains, the New York Independent System Operator (“NYISO”) commenced management of wholesale energy markets at the end of 1999, including day-ahead pricing. Soon thereafter, “unexpected increases in the cost of generation fuels, and other factors, began to force prices upward in NYISO’s new wholesale energy markets.” The utilities responded by implementing the minimum bill provisions in their flex rate contracts, and “flex rate customers, for the first time, [began] to experience price volatility in their monthly bills.” Numerous proceedings before the Commission and the courts concerning implementation of these provisions ensued.

Against this backdrop, the Commission has identified several policy and implementation issues to be considered in the development of new flex rate contract guidelines. Among other things, the Commission will consider: (1) whether prospective flex rate contracts should be limited to delivery rates or should include energy commodity service; (2) what would be the appropriate floor price; (3) the extent to which marginal costs should be based on the “location and load pattern of the individual customer”; (4) whether to allow flex rate customers to opt for standard tariff service if the tariff price falls below the flex rate contract price; (5) how to calculate lost revenues and how to share revenue losses between the utility’s shareholders and its other customers; and (6) how to incentivize utilities to enter flex rate contracts. The Order requires specified utilities to collaborate with other interested parties to develop a joint proposal that addresses these and other issues. The joint proposal must be submitted to the Commission within six months.

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:
Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301

rolson@bowlaw.com | (603) 225-9716