Microsoft Word - 201a.00m0504.doc

STATE OF NEW YORK

PUBLIC SERVICE COMMISSION

CASE 00-M-0504- Proceeding on Motion of the Commission

Regarding Provider of Last Resort

Responsibilities, the Role of Utilities in

Competitive Energy Markets and Fostering

Development of Retail Competitive

Opportunities.

STATEMENT OF POLICY ON FURTHER

STEPS TOWARD COMPETITION

IN RETAIL ENERGY MARKETS

Issued and Effective: August 25, 2004

CASE 00-M-0504

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TABLE OF CONTENTS

Page

PREFACE

PROCEDURAL HISTORY

PURPOSE OF POLICY STATEMENT

PROCEDURAL ISSUES

THE CURRENT STATE OF THE MARKETS

VISION

Models

Vision Statement

Gas Policy Statement

TRANSITION STEPS

Unbundling

Timelines

Customer Migration Strategies

1. Auctions

2. Near Term Strategies - Residential Customers

3. Longer Term Strategies – Residential Customers

4. Near Term Strategies – C&I Customers

5. Longer Term Strategies – C&I Customers

Ratemaking

1. Portfolio Management

2. Long-Term Supply Contracts

3. Gas Pipeline Capacity

4. Economic Development and Flexible Rate Contracts

5. Utility Rates

Electric Transmission Infrastructure

Other Issues

1. Rochester Single Retailer Experiment

2. Aggregation

CUSTOMER PROTECTIONS AND CONSUMER OUTREACH

Market Monitoring

Consumer Protections

Consumer Education and Outreach

Provider of Last Resort (POLR)

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TABLE OF CONTENTS

Page

PUBLIC BENEFIT PROGRAMS

Universal Service

Low-Income Programs

1. Consensus Statement

2. Funding of Low-Income Programs

Public Benefits and Competition Councils

COMMISSION AUTHORITY AND RELATED LEGAL ISSUES

SUMMARY

ORDER

APPENDIX A – APPEARANCES

APPENDIX B – STRAW PROPOSAL 2

APPENDIX C – COMMENTS SUMMARY

APPENDIX D – SWITCH AND SAVE

APPENDIX E - CONSENSUS STATEMENT ON LOW INCOME PROGRAMS

STATE OF NEW YORK

PUBLIC SERVICE COMMISSION

COMMISSIONERS PRESENT:

William M. Flynn, Chairman

Thomas J. Dunleavy

Leonard A. Weiss

Neal N. Galvin

CASE 00-M-0504 - Proceeding on Motion of the Commission

Regarding Provider of Last Resort

Responsibilities, the Role of Utilities in

Competitive Energy Markets and Fostering

Development of Retail Competitive

Opportunities.

STATEMENT OF POLICY ON FURTHER

STEPS TOWARD COMPETITION

IN RETAIL ENERGY MARKETS

(Issued and Effective August 25, 2004)

BY THE COMMISSION:

PREFACE

The policy statements issued today

set forth our goals

and visions for the further development of robust retail energy

competition in New York and provide a flexible framework for us

to analyze and respond to evolving market conditions and thereby

to facilitate market development as required. Our policies have

been guided by the successes and challenges experienced in this

and other states, and especially by the promising level of

success that has been achieved in New York without most of the

serious difficulties others have encountered. Much of the credit

for that success is due to the flexible administrative course to

restructuring the market that New York alone has taken. Credit

for our successes must also go to consumers willing to take a

chance on new providers, new providers willing to take a chance

in a developing market, and the cooperation and creative input of

Case 00-M-0504, Statement of Policy on Further Steps Toward

Competition in Retail Energy Markets and Statement of Policy on

Unbundling and Order Directing Tariff Filing.

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our utilities and last, but by no means least, our experienced

and dedicated Staff.

In this Policy Statement, we review the development of

competitive markets in New York, and conclude that we have in

many ways been highly successful. We have a workably competitive

wholesale market, and a retail market for the largest usage

customer classes that has attracted most of the electric and gas

load. We have created and implemented the infrastructure for the

market by establishing electronic data interchange standards and

uniform business practice (UBP) requirements and have equalized

the protections available for consumers from the utilities and

the energy services companies.

However, we acknowledge that there is much work

remaining to be done. Migration rates for small customers have

lagged those of larger users, and competitive suppliers continue

to adjust to changes in wholesale and retail markets. Suppliers

have not yet begun to offer the variety of price and service

packages that we anticipate will occur in a more mature market,

especially to mass market customers. Therefore, in these Policy

Statements, we reaffirm our commitment to fostering competition

whenever possible through steady progress in retail access

program design and incentive ratemaking.

Our vision for the future of the markets is also set

forth in this Policy Statement. We begin by acknowledging our

public charge to ensure the provision of safe and reliable energy

at just and reasonable rates. The vision also sets forth our

conclusion that one of the most efficient and powerful tools we

can use to meet the statutory requirements is competitive

markets. Finally, our vision acknowledges the need to adjust the

degree and focus of our regulatory oversight efforts as market

dynamics replace the need for governmental controls. While our

vision statement is not as prescriptive as some parties proposed,

our experience suggests that markets rarely develop in the

precise manner envisioned by regulatory authorities. We find it

sufficient to conclude that competitive markets are in the public

interest, and, if they continue to develop robustly, there may be

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no need for the utilities to remain in any competitive fields in

the future.

We also discuss below various strategies that could be

especially productive in increasing participation in the

competitive markets. The retail access model at Orange and

Rockland Utilities has been a highly successful voluntary

migration program. In addition, gradually increasing the

exposure of a customer class to spot market pricing has produced

significant migration results by providing increased

opportunities for a variety of ESCO offerings. We also find that

auctions would be a useful approach to migrate large numbers of

customers, but we reserve the right to approve the use and

details of any auction proposal. Finally, we emphasize again the

continuing need for outreach and education for the public and

strongly encourage the utilities, the ESCOs, and our Staff to

increase their efforts in this area.

The companion Policy Statement and order on rate

unbundling also constitutes a landmark effort. It is one of the

first efforts to accurately quantify a fair utility competitive

rate against which the ESCOs can compete, and it sets forth our

guidelines for calculating these rates in future cases. In

addition, we are ordering Consolidated Edison Company of New

York, Inc. (Con Edison) to implement these rates for electricity,

with the implementation for other utilities and services

scheduled in accordance with individual rate plans.

Together, the policies we are adopting are expected to

further stimulate market development, bringing the benefits of

competition to more New Yorkers, while fulfilling our rate,

safety, and reliability obligations under the law.

PROCEDURAL HISTORY

This proceeding was instituted in March 2000: "to

address the future of the competitive natural gas and electricity

markets and the role of the regulated utilities in such markets;

to identify and suggest actions to eliminate obstacles to the

development of such markets; and to provide recommendations

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regarding provider of last resort and related issues."

The

instituting order reviewed the progress made in opening energy

markets in New York State but noted that some issues could be

fully resolved only after retail markets had begun to develop.

We said that our purpose in this case was to "refine our concept

of the mature competitive retail energy markets (especially the

future role of the regulated utilities) and to identify and

remove obstacles to its achievement."

We also emphasized that the proposals and solutions

offered in this proceeding must be consistent with our

established values and principles:

1. The benefits of competition, including increased

customer choice, should be available to all

customers as soon as possible.

2. Safe and reliable energy supplies and services,

provided in a manner that preserves environmental

values, should be available to all New Yorkers on

reasonable terms.

3. Consumer protection issues, including those

associated with Public Service Law §30 et seq. (the

Home Energy Fair Practices Act (HEFPA)), and other

public policy programs, including low-income

assistance programs, must be addressed.

With respect to process, we instructed our Office of

Hearings and Alternate Dispute Resolution (OHADR) to "structure

Case 00-M-0504, Order Instituting Proceeding (issued March 21,

2000), ordering clause 1.

Developments in recent years in the energy markets demonstrate

that some issues may not be recognized or will not be known in

advance as the transition to competitive markets continues.

Thus, flexibility is required in the oversight of the market.

We should maintain the ability to change direction, adopt new

policies, or abandon established ones should circumstances so

require. The greatest benefit of the administrative approach

to energy market restructuring undertaken in New York is that

it provides this needed flexibility.

Order Instituting Proceeding, supra, p. 2.

Id., p. 4.

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the proceeding in a manner that will achieve comprehensive

results as efficiently as possible."

The Administrative Law Judges

conducted the proceeding

as a broadly-based collaborative, inquiring into the issues

identified in our initial order, and examining additional issues

as further defined throughout the proceeding. The proceeding

included three phases: information gathering, analysis of policy

options, and litigation where consensus could not be obtained.

Numerous parties volunteered to serve on committees and

subcommittees, and a number served as committee chairs,

contributing long hours doing research and writing reports;

planning and presenting material at subcommittee, committee, and

plenary meetings; attending Executive Committee meetings; and

coordinating all these activities among the various committees

and subcommittees. The result of these broad-based efforts is

the report, dated April 3, 2001, entitled "Concepts, Issues, and

Views of the Future: Report on the Parties' Collaborative

Efforts," with a set of Appendices dated February 15, 2001

(together, the April 3 Report). All of the material facts,

allegations, and analyses deemed important by any of the parties

up to that point were reflected in the April 3 Report.

Id., p. 5.

The Administrative Law Judges assigned to this proceeding were

Jeffrey E. Stockholm and Joel A. Linsider. Joining them as a

hearing officer was then-Chief of Residential Advocacy Michael

Corso. As used in this Order, the term "Judges" refers to

these three case managers.

A more detailed description of the process is contained in the

report and appendices prepared by the parties ("Concepts,

Issues, and Views of the Future: Report on the Parties'

Collaborative Efforts" (April 3, 2001)), and more detail can be

obtained on the case web site at

http://www.dps.state.ny.us/00m0504/00m0504).

The organizations that volunteered individuals to serve as

committee co-chairs during the proceeding included Amerada Hess

Corporation (Hess), Consolidated Edison Company of New York

(two chairs), New York State Consumer Protection Board,

Department of Public Service, New York State Energy Research

and Development Authority, Niagara Mohawk Power Corporation

(two chairs), Public Utility Law Project, and the Small

Customer Marketer Coalition.

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The April 3 Report contains a detailed description of

the facts gathered and the analyses performed by the parties, but

it does not contain consensus recommendations on either the

long-term vision of the competitive markets or the more immediate

steps that should be taken to foster the development of the

energy markets.

During the proceeding, Staff of the Department

of Public Service (Staff) circulated two straw proposals and met

with the parties to determine whether a consensus on the issues

could be reached.

Despite the best efforts of the parties,

The parties developed a consensus statement on low-income

programs (April 3 Report, p. VII-38, discussed infra). In

addition, broad-based support was apparent for unbundling

rates, and that effort began in a separate track of this

proceeding (Case 00-M-0504, Proceeding Regarding Provider of

Last Resort Responsibilities, the Role of Utilities in

Competitive Energy Markets, and Fostering the Development of

Retail Competitive Opportunities - Unbundling Track, (hereafter

Unbundling Track) Order Directing Expedited Consideration of

Rate Unbundling (issued March 29, 2001)). The parties

generally agreed as well that equivalent consumer protections

were required concerning ESCO and utility services. Consumer

protections regarding ESCO security deposits and prepayment

plans were adopted at our January 23, 2002 session (Order on

Rehearing Petition and Motions, issued and effective January

24, 2002).

Straw Proposal 2 (hereafter SP2) is set forth as Appendix B.

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agreement could not be reached. Accordingly, briefing schedules

on legal and policy issues were established.

In addition to the foregoing procedures, a variety of

outreach mechanisms were used to gather information from the

public and from other interested parties who were not directly

participating in the proceeding. That effort began in the summer

of 1999 with discussions held across the State with interested

parties. Those discussions culminated in a November 1999

Report,

which ultimately led to the order instituting this

proceeding.

A separate committee of the parties planned and

coordinated public input and outreach efforts.

Existing market

research was reviewed; roundtables, forums, and focus groups with

residential and business customers were undertaken; surveys of

low-income advocates and municipal officials were completed; and

new primary research consisting of a substantial telephone survey

Briefs were received from The Attorney General of the State of

New York (Attorney General); Association for Energy

Affordability and Pace Energy Project (AEA); Consolidated

Edison Company of New York, Inc. and Orange and Rockland

Utilities, Inc. jointly (Con Edison); Consolidated Edison

Solutions (Con Edison Solutions); Consumer Protection Board

(CPB); Dynegy Marketing and Trade (Dynegy); 1st Rochdale; Joint

Brief of the Small Customer Marketer Coalition, Amerada Hess

Corporation, TXU Energy Services and Smartenergy, Inc. (Active

Marketers); Brooklyn Union Gas Company d/b/a KeySpan Energy

Delivery New York and KeySpan Gas East Corporation d/b/a

KeySpan Energy Delivery Long Island (KeySpan); Multiple

Intervenors (MI); National Fuel Gas Distribution Corporation

(NFGDC); National Energy Marketers' Association (NEM); New York

Energy Service Providers Association (NESPA); New York State

Electric & Gas Corporation (NYSEG); New York State Energy

Research and Development Authority (NYSERDA); Niagara Mohawk

Power Corporation (Niagara Mohawk); Public Utility Law Project

(PULP); Rochester Gas & Electric Corporation (RG&E); Staff of

the Department of Public Service (Staff); Texas Eastern

Transmission Corporation (Texas Eastern); Utility Workers Union

of America, AFL-CIO, Local 1-2 and International Brotherhood of

Electrical Workers, Local 97 (Unions); and Westchester County

(Westchester).

Stakeholder Views on Competition: From Transition to the

End-State, a copy of which is available on the case web site at

www.dps.state.ny.us/00m0504/00m0504/Stakeholder.htm.

April 3 Report, Section VIII.

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was conducted by a nationally recognized research firm.

This

public outreach and input effort is one of the most ambitious

ever undertaken in our proceedings.

The Judges also made extensive use of the internet,

collecting a large amount of information on a case-specific web

site. Among other materials, the web site contains: plenary

meeting agendas and presentations; committee and Executive

Committee minutes, meeting agendas, report drafts, and meeting

schedules; bibliographies of relevant Commission opinions and

orders and professional articles; and copies of all rulings and

notices in the case.

Communication among the parties, the

Committees, and the Judges took place using the Internet. We

commend the parties for their innovative use of technology and

for the substantial efforts all contributed to this complex

undertaking.

On July 13, 2001, the Judges' Recommended Decision (RD)

was issued. The Judges reviewed the current status of the

wholesale and retail energy markets and the development of retail

markets elsewhere, and recommended the adoption of a long-range

vision of the retail markets for New York. They also generally

endorsed the Staff proposal for guiding the transition to

The Center for Research & Public Policy was chosen for the

study based on its prior experience in energy restructuring

matters and following a comprehensive competitive bidding

process. Funding for the research was provided through NYSERDA

(April 3 Report, pp. VIII-6 through VIII-14 and Appendix

VIII-C).

www.dps.state.ny.us/00m0504/00m0504.

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competitive markets and recommended the adoption of guiding

principles to assist that transition.

Briefs on Exceptions were filed by Active Marketers,

the Attorney General, the City of New York, Con Edison, Con

Edison Solutions, CPB,

Dynegy, KeySpan, KeySpan Energy

Services, Inc.,

MI, NEM, NESPA, NFGDC, NYSEG, Niagara Mohawk,

PULP, RG&E, Staff, Texas Eastern, the Unions, and Westchester.

Briefs replying to the exceptions were received from Con Edison

Solutions, CPB, Con Edison, Dynegy, Active Marketers, KeySpan,

KeySpan Energy Services, MI, NFGD, NESPA, Niagara Mohawk, NYSEG,

PULP, RG&E, Staff, Texas Eastern, and the Unions.

On January 14, 2004, the Secretary issued a Notice

Seeking Comments (January Notice) in this proceeding that

solicited the parties' comments on a proposed vision statement

for the future of energy markets and on 14 questions designed to

address new issues and changed circumstances since the issuance

of the RD. Twenty-six parties submitted initial comments and

The Judges recommended the adoption of the following

principles:

1. The provision of safe, adequate, and reliable gas and

electric service at just and reasonable rates should

be the primary goal, having priority above all

others.

2. Where possible all services and products should be

provided by competitive markets and not by regulated

utilities.

3. The regulation of rates, services, and competitive

market activities should be appropriate for the

status of the transition (with greater scrutiny being

exercised at the outset, and less as the dominant

players lose the ability to exercise market power)

and for the status of the service provider (with

greater scrutiny being exercised over those with

greater market power) (RD, pp. 62-64).

The CPB's brief addressed various legal issues as requested in

the RD, but otherwise endorsed the RD and took no exceptions.

The brief of this energy services company (ESCO), an affiliate

of KeySpan, also included a motion to intervene as an active

party. That motion is hereby granted.

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fifteen parties submitted reply comments,

all of which are

summarized in Appendix C.

PURPOSE OF POLICY STATEMENT

In this Policy Statement, we set forth our view of the

markets as they exist today and our vision of the competitive

markets of the future. We discuss as well a variety of

transition issues -- how to get from "here" to "there" -- and

note the continued need for various public benefit programs. We

begin with a consideration of the procedural concerns that some

parties have raised, and we conclude by noting our legal

authority to take the steps we contemplate.

This document should not be seen as the last word on

retail access issues. It is, rather, the next step in an

evolving and predictably unpredictable process, intended to

provide guidance at this stage of market development. While we

cannot predetermine with great specificity the best competitive

outcome and ensure under all circumstances that it is achieved,

we can and should guide the process on the basis of our informed

judgment about where energy markets in New York should go and how

they should get there. We here set forth that judgment and chart

a path for the next steps toward competitive markets.

The parties' collaborative efforts, guided by the

Judges, generated a remarkable compendium of pertinent

information. Similarly, the RD dealt with a wide array of issues

and offered numerous recommendations, many of which are the

subject of exceptions. Finally, the number and range of comments

received in response to the January Notice was also substantial.

In a document such as this, we cannot and need not discuss all of

the individual documents or the exceptions in full, though we

have considered them carefully and commend them to readers for

the important and informative background and ideas they provide.

Accordingly, the Judges' recommendations and the parties'

exceptions, as well as the comments responding to the January

In addition, Staff filed a reply to the initial comments

concluding that further responses were unnecessary.

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Notice, are adopted herein only to the extent we do so

explicitly.

PROCEDURAL ISSUES

KeySpan argues that the process prior to the RD was

flawed in a number of ways. It contends that the April 3 Report

produced by the parties should not be considered evidence nor is

it balanced. The report, according to KeySpan, cannot provide a

foundation for the recommendations in the RD nor for Commission

policy determinations.

NFGDC contends that the process was inadequate and

alleges that the utilities thought the process unfair because the

legal issues were not resolved before policy issues were

considered. NFGDC excepts to the conclusion that the process was

adequate.

NYSEG joins NFGDC in criticizing the decision to

schedule briefs on legal issues at the end of the proceeding.

According to NYSEG, this damaged the collaborative process which,

in its view, ultimately broke down. The process had fundamental

procedural defects, according to NYSEG, including a lack of

notice, inadequate guidance, and Staff's alleged misleading of

the parties in its presentation of Straw Proposal 2 (see Appendix

B).

In contrast, Con Edison expressed the view that the

RD's recommendations were appropriate and consistent with the

nature of the record developed. Staff expressed the opinion that

the case was professionally guided and allowed for a thorough

airing of complicated issues among many diverse parties.

We have reviewed the collaborative process established

by the Judges as well as the detailed complaints raised by NYSEG,

KeySpan and NFGDC. We conclude that, while any process might be

improved, the collaborative approach, designed by the Judges and

significantly influenced by the parties themselves, was thorough,

fair, and balanced. Further, the record developed, consisting of

the April 3 Report and Appendices and more recently, the comments

in response to the January Notice, contains a well balanced

exposition of the variety of views, positions, and factual

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allegations which the parties desire to have considered in this

policy proceeding. Accordingly, we conclude that the record as a

whole creates substantially more than an adequate basis on which

policy determinations can be made for the future of retail energy

competition, and the exceptions challenging the process and

resulting record are denied.

THE CURRENT STATE OF THE MARKETS

The Judges expressed considerable overall skepticism

about the degree to which fully competitive energy markets had

developed as of mid-2001. They found that the only workably

competitive retail market

was the commodity market for large

non-residential gas customers. The wholesale gas commodity

market, in the RD's view, was workably competitive but the market

for gas pipeline capacity was not; and workably competitive

retail electric markets (which the RD argued depends, in turn, on

corresponding workably competitive wholesale markets) were likely

to require at least three to four years to develop for large

customers and longer to develop for small gas and electric

customers. Among the factors identified as impeding the

development of workable competition in the electricity market

were the absence of supply or demand elasticity, the potential

for the exercise of market power, and the difficulty of providing

real-time pricing information to customers. As a general matter,

the Judges warned against removing utilities from markets before

they become workably competitive.

Several parties question the Judges' views of the state

of the market. Energy service companies (ESCOs)

suggest they

We are using the term "workably competitive markets" to mean

retail and wholesale markets, uninfluenced by the potential or

actual exercise of market power, where customers have a variety

of supplier choices and the choice of a number of different

products and services.

We have defined the term "ESCO" as "an entity that can perform

energy and customer service functions in any competitive

environment, including provision of energy and assistance in

the efficiency of its use." (Case 94-E-0952, Competitive

Opportunities, Opinion No. 97-5 (issued May 19, 1997), p. 2, n.

1).

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understate the degree of competition already in place, while

utilities believe them too optimistic about when workably

competitive markets will emerge.

In our view, the 2001 RD understates the degree to

which competitive markets have now developed, though not

necessarily to the degree the ESCOs argue. In the three years

since the RD's issuance, barriers to competition that had been

obstacles at that time (e.g., lack of widespread electronic data

interchange (EDI), need for revised Uniform Business Practices

(UBPs) including revisions to consolidated billing practices

concerning payment priorities, and lack of HEFPA-type consumer

protection from ESCOs) have either been resolved or are well on

their way to resolution.

Furthermore, nearly 100% of the

State's largest gas customers and more than 60% of the large

time-of-use commercial and industrial statewide utility

electricity load is now being supplied by ESCOs. In each major

service territory, there are at least three ESCOs providing

electricity and five providing gas service; most service

territories have many more.

Because markets have continued to

develop, selected service classes are now ripe for more

aggressive approaches to complete the transition to fully

competitive markets.

With respect to electricity, recent developments

suggest a more optimistic view of the development of both the

wholesale and retail markets than that taken in the RD. Some

demand elasticity now exists, as shown by the success of the

demand side load management programs, and demand elasticity is

likely to increase with the implementation of further programs of

this type and the installation of advanced meters. In addition,

a number of improvements have been made since the issuance of the

RD and are continuing to be made to the wholesale market

EDI is being used by ESCOs in all utility territories; HEFPA

protections are now available to residential customers served

by ESCOs; and the UBP is updated to reflect these changes.

In addition, there are now three Meter Service Providers and

five Meter Data Service Providers that are serving retail

customers. Further, there are a number of competitive metering

pilots that are planned or underway.

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structure to mitigate or eliminate the exercise of market power.

Limited wholesale price volatility in upstate New York suggests

that the supply is adequate and, therefore, the wholesale

electric energy market is workably competitive in that region.

Reports by some ESCOs suggest that, due in part to the adoption

of market power mitigation measures, the downstate retail market

is also workably competitive, at least for large customers.

Market power concerns at the wholesale level are being

addressed and resolved by the New York Independent System

Operator (ISO) and FERC, and wholesale electric energy prices in

New York, for the most part, can be considered to be unaffected

by the exercise of market power. But until forward energy

markets mature, residential customers and possibly some small

commercial customers may continue to need some regulatory

protection against market volatility, whatever its causes. We

consider this further, below, in the context of hedging.

For all these reasons, it appears to us that, contrary

to the views expressed in the RD, efforts to accelerate the

development of retail electric markets now for all service

classes are likely to result in success. New York's deliberate

approach that encourages step-by-step preparation of a proper

infrastructure to support long-term competitive markets has now

put the state in a position to make more rapid progress in

transforming energy markets. That deliberate approach still

requires that we carefully examine market conditions by customer

service class and by utility territory before deciding on how

best and how aggressively to assist the development of the

market.

With respect to natural gas, the RD reasonably

describes the current situation: the wholesale gas commodity

market is workably competitive, while the retail gas commodity

market is workably competitive only for larger customers. The

matter is more complex, however, with respect to pipeline

capacity.

See Appendix B.

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The Judges regarded the market for pipeline capacity as

not workably competitive. That oversimplifies the matter.

Currently, the condition of the pipeline capacity market differs

from region to region within the State, by market segment, and by

season of the year. Pipeline capacity serving the downstate

market, as a general matter, is very tight. Typically, these are

long haul pipelines from the production regions to the citygate.

Capacity serving the upstate market consists of upstream and

intermediate pipelines. There currently is capacity available in

the upstream capacity market, while the intermediate capacity

market is tight. These conditions, moreover, may be affected by

variations in the level of demand; for example, the New York City

market can be highly liquid during the summer, when firm customer

demand is relatively low. However, the most important factor to

increasing the availability of pipeline capacity is the approval

and construction of new pipeline expansion projects. We have

supported and will continue to support the addition of pipeline

capacity to serve New York. Overall, these markets seem to be

moving toward workable competition. However, the pace of that

movement and their anticipated arrival at a competitive state

cannot be predicted. Despite the uncertainties and complexities,

however, our task is to continue doing what we can to promote the

development of competition in the pipeline capacity markets and

doing what we must to provide customers with just and reasonable

rates and safe and adequate service during the market transition.

A major success in the residential market that has also

become apparent since the issuance of the RD is the utility

purchase of accounts receivable to simplify ESCO operations and

reduce ESCO overheads. One successful application of this concept

is Orange and Rockland's Switch and Save program (described in

detail in Appendix D). Approximately 1/3 of Orange and

Rockland's gas and electric mass market customers have switched

to non-utility providers, which makes this one of the most

successful competitive offerings in the nation. Among the

program's features is the utility purchase of ESCO accounts

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receivable without recourse,

simplifying ESCO program

administration and eliminating the need for ESCOs to perform

credit checks.

ESCOs in the program agree to offer a guaranteed

discount to participating customers for a two-month period and to

take all residential and small commercial customers that are

referred to it by the utility, thereby lowering the ESCOs'

customer acquisition costs. Customers that call the company for

any service question (e.g., billing inquiry) are asked if they

would be interested in taking part in this program, which offers

guaranteed savings for the first two months. This sign-up

process is simple for customers and many decide to participate.

Orange and Rockland has found that customers that sign up for the

program usually remain with the ESCO beyond the initial two month

period. This program has proven to be highly successful for

moving both electric and gas mass-market customers.

In comments responding to the January Notice, some

utilities expressed a willingness to consider a Switch and Save

approach, and the ESCOs generally supported this initiative. We

view the Switch and Save program as a good transitional model

that will help residential customers get acquainted with

obtaining energy supply from a non-utility provider. In the long

run, however, we believe that ESCOs should no longer need the

support of the utilities to provide customer care services and

should ultimately provide all customer services associated with

the provision of commodity. In the meantime, we strongly

encourage that purchase of ESCO accounts receivable, especially

when used with a Switch and Save approach, be considered in

upcoming rate cases and during the course of current rate plans

for utilities that agree to do so, because it has proven to be a

model that works extremely well in jump-starting the energy

market for residential and small commercial customers.

When receivables are purchased "without recourse," it means

that the utility cannot subsequently bill the ESCO for amounts

that it could not collect from customers. A discount on the

receivables purchase may be used to account for uncollectible

amounts.

CASE 00-M-0504

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The market migration of non-residential electric

customers has also made significant strides since the RD was

issued. On a statewide basis as of August 2001, about 37% of the

large time-of-use customer load had migrated. As of May, 2004,

that migration has increased to 62% of the utilities' total

commodity load. Programs designed to help commercial and

industrial customers evaluate their energy supply options have

proven to be highly successful and should be continued. These

include the Market Match program, which provides information

about price offers from various suppliers based on the individual

customer's usage patterns, and the Market Expo program, which

involves a forum where customers have an opportunity to hear from

and speak with a number of ESCOs all in one location where it is

easy to obtain information and sign up on the spot.

VISION

Models

The parties extensively examined several potential

models of the future state of the retail markets in the

collaborative. The RD rejected the adoption of any particular

model and recommended adopting a vision in which commodity

markets will be fully competitive and there will be no need for

utilities to provide commodity. The RD also envisioned all

utility functions, other than delivery service, would be open for

competition; competition being fostered by the Commission

wherever it appears feasible; and utilities ultimately departing

any market that becomes competitive.

We share the Judges' view that robust competition,

where feasible, should be our long-range vision. In the best of

all worlds, all retail functions (except delivery) now provided

by utilities would be competitive. To that end, all potentially

competitive utility functions will be opened to competition, and,

subject to the requirements of the Public Service Law and

Transportation Corporation Law,

regulated utilities should be

These laws now require utilities to provide service upon

request, and, unless amended, would prevent the utilities from

completely exiting the provision of utility service.

CASE 00-M-0504

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replaced by ESCOs when markets become workably competitive. In

determining when markets are becoming workably competitive, and

are therefore prepared for more aggressive migration strategies,

we intend to consider a number of factors, including those

proposed by Staff in SP2 (Appendix B).

We decline to adopt any of the particular models

considered in the collaborative. In the face of the uncertainty

already noted, it is important to maintain flexibility to respond

to evolving circumstances. We will continue to take an

incremental and flexible approach, favoring competition as an

overall policy and creating a fair and balanced market structure.

Vision Statement

The January Notice included a draft vision statement as

follows:

The provision of safe, adequate, and reliable

gas and electric service at just and

reasonable prices is the primary goal.

Competitive markets, where feasible, are the

preferred means of promoting efficient energy

services, and are well suited to deliver just

and reasonable prices, while also providing

customers with the benefit of greater choice,

value and innovation. Regulatory involvement

will be tailored to reflect the

competitiveness of the market.

Most parties providing comments on this vision

statement agreed entirely or in large part with the vision as

presented. Several parties recommended wording changes to

emphasize certain concepts.

MI recommended modifying the vision statement to say

that the primary goal should include lower prices, not merely

just and reasonable prices. The second concept MI emphasized is

that the intent behind the transition to increased competition in

While we are adopting the general approach recommended in SP2

regarding its measurement of the existence of a workably

competitive market, we are not endorsing the document's

timelines or other details except as discussed here.

CASE 00-M-0504

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New York's retail energy markets was, and should remain, economic

relief for end-use customers.

NFGDC believes that to remain focused on the primary

objective of safe, adequate, and reliable service at just and

reasonable prices, competitive markets cannot be "preferred" over

regulation. It recommends that instead of characterizing

competitive markets as the "preferred" means of promoting

efficient energy services, competitive markets should be seen as

"among the means" available. NFGDC rejects the notion that

choice has intrinsic value to customers.

NEM supports the vision statement if the first sentence

is modified to read as follows: "The utilities [sic] prompt,

safe, efficient and reliable delivery of competitively provided

gas and electric service at just and reasonable prices is in the

public interest and is the primary goal."

According to NEM:

"These modifications recognize and reinforce that it is critical

to the public interest for utilities to deploy available

financial resources on infrastructure maintenance, operations and

upgrades to ensure the safety and reliability of the energy

delivery network."

NEM goes on to say that it believes it is

no longer in the public interest to establish utilities as the

default provider of all energy supply-related services.

Pace Law School Energy Project and the Natural

Resources Defense Counsel (PACE) note the absence of any

reference in the proposed vision statement, to the Commission's

role in ensuring environmentally sound energy service. PACE also

contends that achievement of the Vision Statement does not

necessarily require that the dominant position of the utilities

providing competitive retail services be reduced, or in some

cases, eliminated. PACE states that the distribution utility may

be the most effective and economically efficient deliverer of

commodity and delivery service and may be able to provide

economies of scope.

NEM's comments, p. 5.

Id.

CASE 00-M-0504

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SCMC notes that the draft vision statement builds on

the work of the RD, but has failed to incorporate the overarching

vision that the utilities exit the merchant function for natural

gas and electricity. SCMC says that a clear view of the

competitive end state must be adopted in order for ESCOs to

develop and secure funding for their business plans and to

formulate rational, workable and logical plans for transitioning

customers and the utilities from a regulated to a competitive

model.

UGI Energy Services, Inc. (UGI) generally supports the

proposed Vision Statement but suggests changing the last sentence

to read: "The Commission will administer its oversight

responsibilities and work with utilities and other industry

stakeholders to develop policies, rates and service offerings

that promote the competitiveness of the market."

UGI intends

this change to emphasize a proactive role for the Commission.

After reviewing the wording changes proposed by the

parties, and considering the nearly unanimous support expressed,

we conclude that the draft vision statement best reflects our

view of the future. We of course remain committed to providing

economic relief to end-use customers, as well as the benefits of

a variety of service and supplier choices, in a manner that

preserves environmental values, as we stated above. Further, we

are committed to ensuring the reliability of the networks. In

our view, those commitments can best be met if utility services

and products are opened to competition, a view set forth in the

draft vision statement. We do not find that any of the proposed

changes better reflect our views at this time, and we therefore

adopt the draft.

Gas Policy Statement

On November 3, 1998, the Commission issued its Policy

Statement Concerning the Future of the Natural Gas Industry in

New York State and Order Terminating Capacity Assignment

(Gas

UGI comments, p. 2.

Cases 93-G-0932 and 97-G-1380.

CASE 00-M-0504

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Policy Statement). The Policy Statement noted that the gas

industry had undergone dramatic change in the previous decade and

set forth the Commission's vision for competition in the gas

industry. The goals associated with this vision were presented

(p. 4) as follows:

(1) Effective competition in the gas supply market

for retail customers;

(2) Downward pressure on customer gas prices;

(3) Increased customer choice of gas suppliers and

service options;

(4) A provider of last resort;

(5) Continuation of reliable service and maintenance

of operations procedures that treat all

participants fairly;

(6) Sufficient and accurate information for customers

to use in making informed decisions;

(7) The availability of information that permits

adequate oversight of the market to ensure its

fair operation; and,

(8) Coordination of Federal and State policies

affecting gas supply and distribution in New York

State.

The Gas Policy Statement further stated that "[t]he

most effective way to establish a competitive market in gas

supply is for local distribution companies to cease selling

gas."

The Policy Statement also called for termination of the

mandatory assignment of capacity allowed by the Commission's

March 28, 1996 Order in Case 93-G-0932, except for system

reliability or system operation reasons.

The Judges recommended integrating our existing Gas

Policy Statement with their broader vision recommendations (RD,

Gas Policy Statement, p. 4.

CASE 00-M-0504

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pp. 62-66), but concluded that pipeline capacity and potentially

other utility services might not become workably competitive.

We see no need to amend the overall vision presented in

the Gas Policy Statement, although we recognize that the retail

market has not developed at the pace anticipated. We will

further discuss pipeline capacity issues below. Nevertheless,

competitive markets remain a worthy goal wherever feasible, and

the increased use of market mechanisms should be included in any

overall vision of the future.

TRANSITION STEPS

Unbundling

The RD contemplated an inquiry into the unbundling of

utility rates, a process supported by many parties for the

purpose of ensuring a reasonable calculation of the rates

customers will avoid when they no longer subscribe to various

utility services. That inquiry is under way in a separate track

of this proceeding and the results of that inquiry will be issued

with this Policy Statement.

Below, we consider other

transitional steps that have been examined in the case.

Timelines

The Judges declined to recommend any specific schedules

for utility displacement by workably competitive markets, noting

the drawbacks to attempts by government to dictate the details of

how quickly and in what manner a market must develop.

It seems clear from our experience since the issuance

of the RD that development of markets will depend on a number of

factors, ranging from regulatory and tax policy to the business

model chosen by the utilities and the ESCOs. Given these

As discussed under "hedging" below, the Judges also recommended

adoption of the gas commodity purchasing approach that we

adopted in our April 28, 1998, Statement of Policy Regarding

Gas Purchasing Practices (Gas Purchasing Policy Statement)

(Case 97-G-0600 – Proceeding to Reduce Gas Cost Volatility and

Provide for Alternate Gas Purchasing Mechanisms).

Case 00-M-0504, Unbundling Track, Order Directing Expedited

Consideration of Rate Unbundling (issued March 29, 2001).

CASE 00-M-0504

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variables, it is not possible to establish a date certain by

which all markets for each service and each customer class will

become workably competitive. We therefore affirm the RD's

refusal to establish such deadlines and overrule the exceptions

to those recommendations.

We will monitor market conditions, following the

utilities' and ESCOs' progress in developing the market by

implementing the transitional steps described in the next

section. When market development conditions for a given class of

customers seem appropriate,

more aggressive migration efforts

will be undertaken.

Additionally, all utilities will be required to prepare

plans in consultation with Staff and other interested parties, to

implement the goals and policies set forth herein, including

methods for accelerating migration of customers to non-utility

suppliers. When new rate cases or rate plan extensions are

filed, the utilities will be expected to include specific

proposals to encourage migration of customers and to otherwise

further the development of retail competitive markets. For

utilities willing to implement migration strategies before the

expiration of their current rate plans, we encourage them to work

with Staff and other interested parties toward fulfillment of

those strategies. Staff is further directed to work with the

utilities and the interested parties to create retail market

development plans and to periodically report to us on the status

of those efforts. Should these informal efforts prove

inadequate, we would consider directing the filing of formal

plans by each utility for our approval.

Customer Migration Strategies

After reviewing the various mechanisms that have been

or might be used to encourage or require customers to migrate

from utilities to ESCOs, the Judges concluded that many such

mechanisms could be appropriate depending on the particular

circumstances. The one exception was large-scale forced

See Appendix B.

CASE 00-M-0504

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migration, i.e., requiring customers to leave the utilities

against their will or without their affirmative consent. The RD

noted that such an approach might be used to enable utilities to

leave a market that had largely migrated to ESCOs and had become

workably competitive, but forced migration was not generally

endorsed.

We agree with the RD that any of the large array of

migration strategies examined on the record may be appropriate

depending on the state of market development. We are also

encouraged by some of the relatively recent migration strategies

that have been implemented or are being considered by some New

York utilities (e.g., Niagara Mohawk's exploration of an auction

process for SC3 customers and its facilitation of a fixed or

capped gas price offering by ESCOs; Orange and Rockland's Switch

and Save program; utilities' willingness to purchase ESCO

accounts receivable). We additionally note that other states

have implemented competitive market initiatives that we believe

can be successful in New York (e.g., Ohio's use of municipal

aggregation and the dissemination of information that facilitates

comparison of ESCO offerings).

We encourage utility efforts to continue the

development of new migration strategies and to fine tune

strategies that prove successful. Our long-term goal is for

competitive suppliers to displace utilities from the commodity

function (as well as any other functions that become workably

competitive), but because of the differences in market maturation

among service areas and customer classes, a one-size-fits-all

approach to fostering migration is ill-advised. Some migration

strategies are more appropriate during the early phase of market

maturation and others should be considered in the longer-term and

to achieve our end-state vision. Similarly, some approaches are

best designed for residential customers and others for non-

residential. Accordingly, we discuss below recommended

approaches for fostering migration depending on customer class

and time frame.

To achieve a fully competitive end state, we envision a

transition that can be characterized as having near-term and

CASE 00-M-0504

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longer-term goals and strategies. Although we decline to set a

specific statewide timeframe to achieve the end state, we expect

to implement these strategies in a step-by-step manner that will

largely be determined by the timing of utility rate case

filings

and by utilities willing to submit proposals to foster

the competitive marketplace outside of rate cases. "Near-term"

encompasses actions that are underway; or are now being

considered, planned, or negotiated in or outside of current rate

cases. "Longer-term" encompasses rate plans that will be filed

in the next several years and other strategies that may take some

years to fully develop.

Given the durations and parameters of existing rate

plans, there may be some limitations on possible migration

initiatives in the near-term for some utilities. But even for

utilities that have a number of years remaining in their rate

plans, we believe that significant migration, especially for

larger-usage customers, can occur in the near term. For example,

even though its rate plan ends in 2011, Niagara Mohawk has said

it is moving forward with a number of migration strategies in the

near term and is willing to consider other new approaches.

In the short term, we encourage the development of

programs that will foster the large scale migration of customers

to ESCOs, especially in classes where workably competitive

markets now exist. We anticipate at the outset that these

programs will be most relevant to large customer classes. Where

most customers in a class have migrated, it may well be in all

parties' interests to develop a method to migrate the remaining

customers and to allow the utility to exit the function. We

acknowledge that this may well require statutory amendments, but

we remain open to other suggestions regarding an appropriate

approach to this end-state issue.

Finally, in its reply comments to the January Notice,

Central Hudson said that it would now be appropriate to eliminate

its provision of commodity supply to its largest electric

We do not preclude, in fact we encourage, implementation of

some near-term strategies by the utilities during existing rate

plans.

CASE 00-M-0504

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customers, except for provider of last resort (POLR) service.

Hourly pricing would be most appropriate for its SC-3 and SC-13

customers that now have interval metering. Central Hudson

proposed that if these customers do not want hourly pricing, they

would be free to choose from among competing suppliers with

alternative pricing plans. We encourage Central Hudson to meet

with Staff and other parties for the purpose of developing a more

comprehensive proposal for our consideration.

1. Auctions

Auctions have been used in a number of states to

increase the number of customers purchasing energy supply from

ESCOs and to increase the number of ESCOs offering services in

the market. We are convinced by the arguments of the parties and

the experience reflected in this record that auctions of

customers may be the most effective way of facilitating market

development.

Auctions could take a number of forms, including

auctions of load or of customers. In this section we discuss

some possible approaches, but others may be acceptable as well.

We encourage interested parties to explore the idea of auctions

to further develop the approaches that would best serve the New

York energy marketplace.

A number of those submitting comments in response to

the January Notice recommended use of the New Jersey auction

process. This approach uses a descending clock bidding process

done over the Internet. Participants (suppliers) bid on a fixed

percentage of utility load for a fixed time period with bidding

continuing until demand matches supply. We are not endorsing the

New Jersey model because it unnecessarily prolongs the utilities'

commitment to multi-year wholesale contracts and their role as a

commodity supplier. Although the commodity auction proposal

would create a visible price to beat, it does not directly

facilitate the movement of customers to competitive retail

Customer migration to ESCOs also seems to be stimulated when a

customer class becomes subject to spot market utility pricing.

CASE 00-M-0504

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suppliers and it does not encourage an ESCO/customer

relationship.

Direct Energy/Centrica North America (Centrica), in its

initial comments (p. 2), recommends an auction process for

assigning large blocks of customers, as opposed to blocks of

load, to ESCOs. This is potentially a more effective retail

migration strategy.

Under Centrica's proposal, each ESCO with

a winning bid

would provide its assigned block of customers

with a fixed price for commodity for one year. At any time

during that year, a customer could return to the utility or

select another ESCO. At the end of the year, the ESCO would

offer commodity to these customers under arrangements that it

chooses to offer, including short and long-term contracts, fixed

or variable pricing, etc.

Niagara Mohawk has also been considering a program to

aggregate the SC-3 (medium to large commercial/industrial)

electric customers

who still purchase commodity from the

utility, and to hold an auction in which ESCOs would bid to

provide supply to blocks of these customers. The customers in

the auction pool could choose to take service from another ESCO

or return to the utility's commodity supply, if they had

otherwise been assigned to a supplier. Niagara Mohawk and Staff

have already conducted extensive consumer education to encourage

all SC-3 customers to select an ESCO. Depending on the ultimate

success of those efforts, an auction may or may not be necessary.

We would support an appropriately designed auction pilot for this

customer class, if needed, especially considering that hedges for

this class will completely expire on January 1, 2005.

Centrica proposed that this auction process be used only for

mass market customers, but we consider it a useful strategy for

commercial and industrial customer migration as well.

In practice, winning bids could be determined solely based on

the lowest price or on price and a number of other factors,

such as the stability of the company, ability to perform the

task, experience, etc.

These customers will no longer be hedged and will be exposed to

spot market prices after January, 2005.

CASE 00-M-0504

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Aspects of the Centrica proposal are also attractive,

especially for classes that are or will soon be subject to spot

market pricing. We are concerned, however, with an aspect of

both proposals that would assign customers to ESCOs unless the

customer affirmatively chooses not be included in the auction (so

called "opt-out" provision).

Our concern is with the consistency of such an approach

with our UBPs (Section 5(k)), which generally consider transfers

of customers without their affirmative consent to be slamming,

and with our statutes

which guarantee customers (subject to

limited exceptions) that the utilities will always be available

as a supplier. Regardless of the approach taken, however, the

design for an auction process is by no means simple, and care

must be taken to ensure a sufficient number of ESCO bidders and

an effective bidding process. Accordingly, we will require

auctions to be filed with us for approval, and we expect any such

filing to include a detailed and complete description of the

process and a fully supported justification for the approach

taken.

We encourage the utilities and interested parties to

continue to work with Staff to develop auction approaches,

including voluntary (i.e., opt-in) pilot auction program for mass

market customers, wherever market conditions could benefit from

such programs. Based on the results of these pilot auctions,

utilities, Staff, and interested parties should meet to develop

approaches that may be applied statewide in the long term. We

expect the results of the pilots and lessons learned to be

reported periodically.

2. Near Term Strategies –

Residential Customers

In the near term, we believe that utilities should

continue to maintain a balanced contract portfolio for

See Cases 01-E-0359, et al., supra, Order Adopting Provisions

of Joint Proposal with Modifications, p. 12.

Public Service Law, §65; Transportation Corporation Law, §12.

CASE 00-M-0504

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residential customer commodity.

As the residential energy

market matures, we will consider proposals by utilities for

alternative commodity pricing approaches.

We strongly encourage utilities to consider

implementing purchase of ESCOs' accounts receivable without

recourse under utility consolidated billing programs, discounted

as appropriate, and supported by a utility customer service call

center program that will facilitate the transfer of customers to

ESCOs. We believe that a properly designed and implemented

program patterned on Orange and Rockland's Switch and Save

program

will stimulate significant ESCO and customer interest,

and result in meaningful migration results. We view the Switch

and Save program as an interim, near-term strategy, and would

expect that it would be made obsolete and be superseded by ESCOs

undertaking customer care functions for residential customers

over the longer term.

Billing options and easily understood formats are

important to customers and critical to the development of the

market as we have previously noted.

On December 5, 2003, we

solicited comments in this proceeding from the parties on these

issues

and we will soon provide general guidance regarding bill

formats based on those comments. However, each company's bill

format and the limitations and abilities for creating the bills

are different. Accordingly, Staff should also review bill format

issues on a utility-by-utility basis as new rate plans are being

developed.

It is our expectation that many ESCOs will want to use

utility billing services, but others will want to provide their

own billing capability. Utilities should provide for these

options and offer ESCO consolidated billing options for ESCOs

that want to provide their own billing services.

See the "Ratemaking" section below for more details.

See Appendix D for a full explanation of Switch and Save.

March Order, pp. 29-30.

Case 00-M-0504, Unbundling Track, Notice Soliciting Comments

(issued December 5, 2003).

CASE 00-M-0504

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It is also important to make the process of switching

to an ESCO as easy as possible for consumers. To that end, we

endorse Staff's recommendation that, in situations where the

customer is physically present with appropriate identification, a

process that accepts an actual signature from the customer

requesting the utility to provide the utility account number

(needed to make the switch to the ESCO) and, at the same time,

enroll the customer with the ESCO will be acceptable. We will

separately propose changes to the UBPs to eliminate any

requirements that might obstruct the contemporaneous feature of

this process.

We recognize that the mass market (residential and

small commercial) is not likely to be ready for advanced metering

(including interval metering) in the near term. However, we

encourage parties to consider pilots and other programs that

would evaluate the feasibility of advanced metering and time-of-

use pricing arrangements.

We have approved such a program in

the recently completed Central Hudson proceeding.

Up to

$500,000 from the Central Hudson Benefit Fund is reserved for

potential use in encouraging appropriate installations of

advanced metering technologies and implementation of related

pricing strategies intended to facilitate development of

competitive markets. Staff should present a proposal for

implementing this competitive metering initiative after

consultation with Central Hudson and other interested parties.

3. Longer Term Strategies –

Residential Customers

In the longer term and depending on the state of market

development, it may be reasonable for utilities to expose

residential customers to seasonal pricing (for example winter,

While current competitive metering tariffs generally apply to

large customers, there is a metering pilot for residential

customers underway in Con Edison's service territory.

Cases 00-E-1273, 00-G-1274, Rates, Charges, Rules and

Regulations for Central Hudson Gas & Electric Corporation for

Electric Service, Order Modifying Rate Plan (issued June 14,

2004).

CASE 00-M-0504

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summer, and shoulder rates). The sooner customers experience

pricing variations, the sooner competitive markets will provide

alternatives, including fixed-price options and peak and off-peak

pricing, possibly accompanied by interval metering.

ESCOs, not

the utilities, are expected to provide those options in the

longer-term.

For example, a pilot program has been developed by NYSERDA and

Econnergy that provides advanced meters and for a group of

residential customers in Con Edison's Westchester County

territory.

CASE 00-M-0504

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4. Near Term Strategies –

Commercial and Industrial Customers

In the near term, non-residential electric and gas

customer migration can be facilitated by exposing the largest-

usage customers to spot market

pricing as contract and hedging

arrangements expire. There should be no new hedging for medium

to large C&I customers unless we determine that hedged products,

similar to those now offered by the utilities, are not available

to the class in the particular retail market. Utilities should

consider and implement migration strategies during their existing

and yet-to-be filed rate plans that will focus on encouraging

migration in these larger C&I classes, including the use of

auctions (infra).

5. Longer Term Strategies –

Commercial & Industrial Customers

Over the longer term, we expect all remaining utility-

served commercial and industrial customers will be exposed to a

pass through of spot market prices in utility rates. Our

expectation is that ESCOs will provide fixed and other stable

pricing options to those customers who desire it. As utility

contracts expire and utilities reduce their hedging exposure,

it should be easier for ESCOs to attract customers seeking to

avoid market volatility.

Ratemaking

The Judges considered a variety of ratemaking issues

posed by the transition to a competitive market. We provide our

guidance on some of the issues.

1. Portfolio Management

To protect ratepayers against wide swings in spot

market prices until supply and demand are brought into better

balance, the Judges recommended portfolio-theory-based hedging

for all electric and for small-use gas customers. Portfolio

We intend by "spot market" to refer to either the day-ahead

and/or the real time market.

This is happening now for Niagara Mohawk's SC3 and 3A

customers.

CASE 00-M-0504

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theory suggests that neither 100% hedging (i.e., fixed rates

regardless of the market) nor 100% exposure to the spot market,

with no hedging at all, would be prudent. The hedging

recommended parallels that established in our Statement of Gas

Purchasing Policy Statement,

which the Judges recommended

adopting for electricity customers.

While hedging can provide useful protection against

market price variation, requiring utilities to enter into

ongoing, long-term, full-service contracts for its existing

commodity customers may be inconsistent with the movement toward

a fully competitive marketplace. Our existing gas purchasing

policies, which require a portfolio purchasing approach and

generally consist of contracts of a few months to a year or so,

should remain in place for small-use gas customers. As we

previously stated:

We expect companies to manage their gas portfolios

to meet the needs of their systems. We note that

since we issued our previous order, several of the

[local distribution companies] LDCs have

diversified pricing, while others have remained

largely with predominantly non-diversified pricing

strategies. While we are not directing any

particular mix of portfolio options, volatility of

customer bills is one of the criteria, along with

other factors such as cost and reliability, that

LDCs should consider in their gas supply

purchasing strategies. Excessive reliance on any

one gas pricing mechanism or strategy does not

appear to reflect the best management of the gas

portfolio. Any utility without a diversified gas

pricing strategy will have to meet a heavy burden

to demonstrate that its approach is reasonable.

We are also concerned with volatility in electric spot

markets and believe smaller-use customers should be afforded some

protection from that volatility, at least until advanced meters

and related demand response controls are installed that allow

these customers a real-time demand response to spot market price

spikes or until equivalent hedged services are generally offered

Case 97-G-0600, supra, Statement of Policy on Gas Purchasing

Practices (issued April 28, 1998).

Id., at pp. 4-5 (footnote omitted).

CASE 00-M-0504

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by ESCOs. At this time, however, the utilities continue to have

multi-year hedges from independent power producer contracts and

generating plant sales. We see no need now to call for

additional electricity hedges; as the utilities' existing

contracts expire, we expect utilities to review the need for

additional hedges and to use mitigation of customer bill

volatility as one of their commodity purchasing criteria.

There could be instances where a long term commodity

contract might be judiciously used in support of public policy

goals (system reliability, environmental considerations, fuel

diversity, or market power mitigation). Those instances will be

examined on a case-by-case basis as required. However, if it is

determined that a utility has entered into a long term contract

to retain market share or to otherwise impede the development of

a competitive market, the costs of those contracts may not be

recoverable from ratepayers.

Consistent with our gas purchasing policy, new supply

contracts should focus on mitigating price volatility. Over time

and commensurate with wholesale and retail market development, we

expect utility hedging to be eliminated, but it should not be

abandoned for a customer class until equivalent rate services and

plans are generally available to all customers in the class. In

addition, we decline to establish any firm timetables for this

effort, preferring the flexibility to design rate programs on an

individual utility basis, taking account of the unique state of

market development in each territory and the terms of the hedging

contracts held by each utility.

Based on the current state of the competitiveness of

the electric market, it is our view that, for the largest

commercial and industrial customers,

their commodity rates

should reflect spot markets and existing hedges should be allowed

to expire without being renewed. We will continue to monitor the

For purposes of determining which customers no longer need

hedge protections, it is our intent that this apply initially

to all customers served under a mandatory TOU rate. In the

future, we will consider lowering this threshold in utility

specific proceedings.

CASE 00-M-0504

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state of the market for other customer classes and as the markets

continue to mature, we expect that the hedges providing price

volatility protection for these customers will be allowed to

expire as well.

2. Long-Term Supply Contracts

In addition to supply contracts for portfolio purposes,

electric utility long-term commodity and/or capacity contracts

may be needed for reliability purposes or might be used in

support of other public policy goals (e.g., environmental

considerations, fuel diversity, or market power mitigation). The

above market costs of these contracts, assuming utility prudence,

should be reflected in delivery rather than commodity rates.

The January Notice (p. 5) also asked whether all

utilities' commodity purchases should be considered public

information as to price, terms, and conditions. The vast

majority of non-utility commenters advocated public disclosure of

contract terms to add transparency to marketplace transactions

and to level the playing field, while most utilities generally

opposed release of this information, arguing that it constitutes

trade secret data. Of course, for those utilities that do not

object to disclosing the contract information, we strongly

encourage them to do so.

However, for utilities that do object, trade secret

status will be determined on a document by document basis under

16 NYCRR, Part 6. Without an individual review, we cannot

determine whether or what portions of these contracts may qualify

for legal protection as trade secrets. We agree with the

comments that this information would be useful to the developing

market, and we direct Staff to work with the utilities and

interested parties to evaluate whether or not a system can be

established that would make appropriate information public on a

routine basis, weighing the benefit of disclosure of the

information against the resources that would be required to do

so.

CASE 00-M-0504

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3. Gas Pipeline Capacity

In its comments on the January Notice, Staff

recommended a reexamination of the Gas Policy Statement because,

with limited exceptions, ESCOs have not acquired capacity, long-

term commitments are required to persuade pipelines to build

incremental capacity, and there is a limited amount of short-term

capacity available. According to Staff:

Because there is uncertainty that the market

will provide the infrastructure improvements

needed for reliability purposes, at least in

the near term, some level of long-term

contracts may be an appropriate component of

a utility's portfolio to ensure construction

of incremental infrastructure needed to meet

expected core customer requirements. This

suggests that new natural gas pipeline

capacity contracts should be limited to those

needed for reliability and core customer

growth until the ESCOs step forward and

assume this role.

Many parties (including Calpine Corporation, Central Hudson,

Community Energy Inc., Constellation NewEnergy,

Inc./Constellation Power Source, Inc., Independent Power

Producers of New York, Inc., KeySpan, Mirant New York, Inc., MI,

NFGDC, Select Energy New York, Inc., and UGI) agreed with Staff

that some level of long-term gas contracts will be needed in the

near term to ensure that incremental infrastructure is built to

meet expected demand.

However, not all parties agreed with this conclusion.

For example, Hess believes that much of the backup capacity held

by utilities is unnecessary. According to Hess, this inefficient

use of these resources creates the appearance of a capacity

shortage, but Hess argues that this is more perception than

reality.

It further claims that allowing or requiring long-

term contracts creates an incentive for utilities to stay in the

commodity business, and such an incentive should not be created.

Staff's Initial Comments, pp. 24-25.

Hess's Initial Comments, p. 12.

CASE 00-M-0504

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Con Edison and Orange and Rockland noted that, as a

general rule, they are "opposed to use of utility long-term

contracts to ensure the construction of incremental merchant

infrastructure."

Con Edison and Orange and Rockland also noted

that long-term contracts expose customers to the risk of

overpayment followed by second-guessing if the contract price

ends up being above market. Niagara Mohawk, likewise, does not

believe that utilities should execute new electric long term

contracts.

NEM suggested that this concern is best addressed

through other forums. SCMC argues that this question puts the

cart before the horse and that the end state vision needs to be

clarified so that companies will be able to make strategic

decisions about investments in infrastructure.

Based on the record compiled in this case, we conclude

that, for now, utilities should ensure that adequate pipeline

capacity exists to serve the needs of their firm delivery

customers. Some level of long term contracts may be an

appropriate component of a utility's pipeline capacity portfolio

when it is required to ensure adequate infrastructure for the

core customer loads on its system. However, long term gas and

electric supply contracts held by utilities should be kept to the

minimum level necessary to provide reliable service, and non-

utility entities should increasingly be taking over this

responsibility from utilities.

The January Notice (p. 6) also asked if there is a need

for greater commitment regarding gas pipeline capacity from ESCOs

serving gas customers, asking specifically: (1) when a utility is

acquiring capacity for ESCO-served loads, should there be a

minimum commitment that marketers must take; and (2) if ESCOs are

providing their own capacity, should they be required to commit

to provide the utility with access to that capacity if they exit

the utility's retail access program?

Staff, in its responses to the January Notice, said

that obtaining access to pipeline capacity may be a barrier to

Con Edison's and Orange and Rockland's Initial Comments, p. 25.

CASE 00-M-0504

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further development of retail markets. Staff argued that if a

utility releases excess capacity that becomes available due to

increased migration, the ESCO should not have to make a specific

commitment when obtaining this capacity because it was not

acquired specifically for it, but there would likewise be no

assurance that the utility would have capacity available to be

released to the ESCO. In those instances where excess capacity

is not available but the utility acquires capacity to serve

marketer loads, marketers should provide a commitment to take the

capacity acquired for their loads. Staff further noted that it

is important that existing capacity remains available to serve

New York customers, and it recommended use of tariff provisions

requiring that agreements among utilities and ESCOs provide for

capacity to follow customer loads.

Most utilities agreed that a greater commitment is

required regarding gas pipeline capacity from ESCOs serving gas

customers. For example, Central Hudson opined that if the

Commission is going to require utilities to purchase capacity for

ESCO-served loads, the ESCOs should be subject to a minimum

commitment requirement. It further recommended that the ESCOs be

subject to a requirement that, for reliability purposes, they

would provide a utility with access to capacity in circumstances

not limited to the ESCO's exit from the utility's retail access

program.

KeySpan noted that if a utility acquires capacity for

ESCO-served loads, those ESCOs should be required to use that

capacity to serve their customers as long as they are doing

business in the utility's service territory. KeySpan went on to

say that "[i]f ESCOs providing their own capacity decide to exit

the utility's service territory or turn back substantial load,

the ESCOS should be obligated to offer the capacity to the

utility, but the utility should not be obligated to accept it."

Select favored a centralized approach to pipeline

control where the utilities or an ISO-like entity have

responsibility for capacity acquisition and management. SCMC

KeySpan's Initial Comments, p. 16.

CASE 00-M-0504

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called for establishment of an end-state vision before resolving

these questions.

For now, an ESCO should be free to contract with the

local distribution company (LDC) or directly with the pipeline

for capacity. In order to ensure reliability of service when an

ESCO provides capacity that it has acquired from the pipeline,

the utility should have the first right to purchase the ESCO's

capacity if the ESCO exits the utility's market.

With regard to minimum commitment for pipeline

capacity, the ESCO should either take assignment of LDC-

contracted capacity or contract directly for such capacity. If

the ESCO chooses to take capacity from the utility, and the

utility is holding or acquiring incremental capacity on the

ESCO's behalf, then there should be a commitment from the ESCO to

take capacity for a period consistent with the utility's capacity

purchase commitment. An ESCO providing its own capacity should

provide the LDC with access to the pipeline capacity using the

approach discussed above.

Staff, utilities, and interested parties should

continue to work through these issues as part of the on-going Gas

Reliability Collaborative, refining policies as market conditions

change.

4. Economic Development and Flexible Rate Contracts

The Judges recommended that individually negotiated

utility retail contracts for commodity be phased out over five

years based on their concern that utility offerings of discounted

commodity rates to large customers could impede the development

of a competitive commodity market. After the phase-out period,

utility economic development rates would be offered only for

transmission and distribution service.

We agree with the RD that discounts on commodity below

a utility's costs are not favored, and the role of ESCOs in

supporting economic development efforts should be expanded. In

the future and based on the record in this proceeding, utility-

offered economic development programs should focus on delivery

rates. While the record here supports the above conclusions, we

are also in the process of re-examining these policies in a

CASE 00-M-0504

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separate proceeding,

and will revisit these issues as required

by the record developed in that proceeding.

5. Utility Rates

The Judges recommended that utility rates be based

solely on utility costs and that no profit margin on commodity

sales be allowed.

Only in that way, they believed, could the

market operate efficiently and avoid the anomalies that would be

caused by the utility as a competitor charging prices set by

regulation rather than by market forces. Eliminating this

utility profit incentive would, according to the Judges, also

better align the utilities' interests with our goal of fostering

competitive markets. We agree.

Several of the parties commenting on the January Notice

expressed concerns with utilities providing fixed rates,

including a profit margin, as part of their offerings to retail

customers. ESCOs see a fixed rate offering as a value-added

service that they can provide to customers. These parties argue

that allowing utilities to provide this service, and to boost

their earnings by treating commodity service as a profit center,

creates a strong incentive for the utility to remain the monopoly

provider in the commodity business and undercuts ESCO efforts to

provide these services. We concur with these parties' concerns.

We do not propose any changes to existing rate plans regarding

commodity profit centers; however, in future rate proceedings,

utilities should not propose fixed rate commodity tariffs or

tariffs creating a profit center for commodity sales.

Generally, rates should increasingly reflect market

prices over time. As markets develop and utility multi-year

contracts expire, utility commodity rates should move toward a

short-term market price flow-through. We therefore agree with

the RD that in the final stage of a utility's offering of a

competitive service, the rates for that service should closely

Case 03-E-1761 – Proceeding to Reexamine Policies and Tariffs

for Flexible Rate Contract Service to Economic Development

Customers.

At this time, none of the gas utilities profit from the sale of

gas commodity.

CASE 00-M-0504

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track the unadjusted spot market price. As noted above, however,

customers should not be exposed solely to the spot market until

other hedged services are generally available.

Finally, the January Notice asked whether an incentive

mechanism is needed for utilities to minimize their commodity

costs. In general, the respondents saw no need for such an

incentive mechanism. Based on our experience and the responses

to the January Notice, we conclude that there is no need for an

incentive mechanism of this type. We do not propose any changes

to existing rate plans regarding such mechanisms, but, in future

proceedings, utilities and other parties should not propose such

mechanisms.

Electric Transmission Infrastructure

The Judges, agreeing with MI, recommended that

additional attention be focused on the need to reinforce electric

transmission capability. Adequate transmission capacity is

essential for reliability and market efficiency alike, and it is

an important aspect of the State Energy Plan. This issue is best

addressed elsewhere by the regular engineering and planning

studies performed by the transmission owners and the NYISO and

reviewed by this Department and other interested parties.

Other Issues

1. Rochester Single Retailer Experiment

The Judges concluded that, despite its apparent lack of

success, RG&E's experiment with a single-retailer program should

be allowed to continue. This issue became moot after the

Commission's decision in Cases 02-E-0198, et

al. (Rates, Charges,

Rules and Regulations of Rochester Gas and Electric Corporation

for Electric Service) to replace the single-retailer approach

with a multi-retailer model. It should be noted that in the long

term, as ESCOs become better established on a statewide basis,

use of a single retailer model, where the ESCO does the billing

and performs other customer care functions and provides both

delivery and commodity, may become more prevalent.

2. Aggregation

CASE 00-M-0504

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The Judges saw no need to require registration of

aggregators or to subject them to consumer protection obligations

(assuming that they do not take title to the commodity, do not

bill consumers, and simply act as agents). They nevertheless

recommended a voluntary, for-profit aggregator certification

process, including an agreement to abide by a code of conduct.

Aggregation has proven to be an attractive method for

putting the competitive market within the grasp of small-volume

and low-income users by reducing the cost to ESCOs of acquiring

new customers. Both in New York and elsewhere, government and

other affinity organizations have successfully used this approach

to negotiate energy contracts with ESCOs. We agree with Staff's

recommendation that efforts be made to foster governmental and

other affinity group aggregation by assisting interested groups.

We are not prepared at this time, however, to address

the Judges' recommendation of a voluntary aggregator registration

process. Staff should continue to monitor the development of the

market regarding the ESCO and direct customer categories we

initially defined as well as any new categories of competitors

such as aggregators and brokers. Staff should advise us if it

becomes apparent that a certification process or other actions

would benefit market development or further the public interest.

Other interested parties should work with our Staff on these

efforts.

CASE 00-M-0504

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CUSTOMER PROTECTIONS AND CONSUMER OUTREACH

Market Monitoring

One potential problem in moving from a regulated

monopoly to a competitive market is the ongoing dominance of the

former monopoly. The Judges recommended that we actively monitor

the dominant firms, including overseeing both the rules of

conduct designed to preclude improper, market-skewing

transactions between the utilities and their unregulated

affiliates, and the firms' compliance with those rules.

Utilities that act in the competitive arena and in a

manner that would otherwise run afoul of the antitrust laws

should not escape accountability for their actions on the basis

of the state action exemption from those laws.

We hold,

therefore, that any utility activities that impede the

development of the competitive market, or the development of

competition in potentially competitive markets (and are not

otherwise actively supervised), would not be consistent with our

policies and, therefore, are not eligible for the exemption.

Our orders since 1996 set forth our policies on competitive

markets, especially with regard to energy commodity, and those

policies require a level playing field for ESCOs, free of

antitrust abuses.

Given the inapplicability of the state action exemption

to anticompetitive conduct by utilities in markets for

competitive products and services, remedies for improper

anticompetitive conduct by dominant market players could be

obtained from enforcement of the antitrust laws. However,

antitrust enforcement can be a cumbersome process; and because

the dominant firms, for now, are those we traditionally have

regulated, it is reasonable for us to continue monitoring the

Cases 01-E-0359, et al., Petition of New York State Electric &

Gas Corporation for Approval of its Electric Price Protection

Plan, Order Adopting Provisions of Joint Proposal with

Modifications, (issued February 27, 2002), pp. 11-12.

See, United States v. Rochester Gas and Electric Corporation, 4

F. Supp. 2d 172 (W.D.N.Y., 1998); see also California Retail

Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S.

97 (1980).

CASE 00-M-0504

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market and the actions of the market participants to the extent

needed to promote fair competition, as recommended by the Judges.

We have gained considerable experience in doing so for the

telecommunications industry, and that experience is readily

transferable to energy markets. Among other things, Staff can

mediate or resolve conflicts between utility and ESCO

competitors, and Staff dispute resolution teams can intervene

promptly in the event matters arise requiring immediate

attention.

Consumer Protections

Due to their historic role as monopolies providing an

essential service, utilities are subject to the wide-ranging

residential consumer protection requirements set forth in HEFPA

(PSL Article 2) and our regulations thereunder (16 NYCRR

Part 11). HEFPA declares it:

. . . to be the policy of this state that the

continued provision of gas, electric and

steam service to residential customers

without unreasonable qualifications or

lengthy delays is necessary for the

preservation of the health and general

welfare and is in the public interest.

The statute also requires that gas and electric

utilities "shall provide residential service upon . . . request"

subject to limited conditions,

a requirement also known as the

"obligation to serve." These consumer protection requirements

together define the utilities' role as provider of last resort.

The Judges recommended that ESCOs also be required to

provide many of the HEFPA protections and to provide service

without undue discrimination. They recommended that the ESCOs be

regulated directly as providers of utility services, rather than

indirectly through the utilities' tariffs. The RD reasoned that

the obligation to serve was the equivalent of a legal requirement

PSL §30. Other consumer protection regulations (16 NYCRR

Part 13) apply to non-residential customers. Consumer

complaint provisions are set forth in 16 NYCRR Part 12.

PSL §31.

CASE 00-M-0504

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to sell to all consumers without undue discrimination, and that

with such a requirement applicable to all ESCOs, all providers

would then effectively be providers of last resort and the so-

called POLR issues would be moot.

Two significant changes have occurred since the

issuance of the RD regarding the provision of consumer

protections. First, we have begun resolving consumer complaints

regarding ESCOs.

Most of the ESCOs in this proceeding

recommended this approach based on the Commission Staff's

expertise in this area and the relative convenience and

efficiency of the Commission's process as compared to court-based

litigation. We also believe that consumer confidence in the

developing markets will be enhanced as a result of providing this

additional consumer protection benefit.

Second, the Legislature passed the Energy Consumer

Protection Act of 2002.

Under this Act, any entity selling or

facilitating the sale or furnishing of gas or electricity to

residential customers will be considered to be a utility for the

purposes of Article 2 of the Public Service Law. Except for the

obligation to serve, which the Legislature decided would remain

binding only on the traditional utilities, the new statute

requires ESCOs to provide HEFPA protections to all residential

customers. We currently have implemented the statute

and are

now finalizing related changes in EDI and the UBPs. Accordingly,

the Judges' recommendations in this area are moot.

A table showing the number of customer contacts to the

Commission, by ESCO, is available on the Department's website.

Ch 686, Laws of 2002.

Case 99-M-0631 –Consumer Billing Arrangements and

Case 03-M-0017 – Implementation of Chapter 686 of the Laws of

2003, Order Relating to Implementation of Chapter 686 of the

Laws of 2003 and Proration of Consolidated Bills, (issued

June 20, 2003).

CASE 00-M-0504

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Consumer Education and Outreach

We believe it is important to acknowledge, as we have

done on many previous occasions, the value of consumer education

in furthering the development of retail competitive markets.

Staff conducts a statewide "Your Energy, Your Choice" program

that provides customers with information about how to choose an

energy supplier. We have heard repeatedly, through surveys on

customer opinions and at events where we participate, that

customers consider Staff an unbiased source for information about

the services, products, prices, and terms available in the

competitive marketplace.

Consequently, we direct Staff to continue and expand

its educational efforts to provide this unbiased and neutral

market information to consumers. In addition, we encourage

utilities to include as part of their next rate plans enhanced

consumer education programs, and we encourage other stakeholders

to do their share. Staff is directed to take the lead role in

coordinating the efforts of the various stakeholders involved in

consumer education and outreach to maximize the effectiveness of

these efforts.

Staff is developing a simple and user-friendly method

to provide consumers critical market information, such as the

prices at which competitive services are being offered and the

terms and conditions of the offerings. This information is

expected to be available on the Department's websites

(www.dps.state.ny.us and www.askpsc.com) later this year. Staff

should work with willing utilities and interested parties to

develop additional creative ways for consumers to compare ESCO

and utility prices. We also conclude that utility outreach

programs on competition issues should involve coordination with

interested ESCOs, including collaborative meetings of interested

parties to design outreach campaigns. Those campaigns should

recognize the need for repeated consumer exposure to allow the

CASE 00-M-0504

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advertising message to be internalized.

An important part of

the message should be to inform customers of their opportunity to

choose non-utility options and that their rights and service

reliability will not be affected by making this choice.

Ultimately, the success of outreach and education

campaigns is a function of the quality of the utility's effort.

A consistently positive approach and attitude toward retail

choice will significantly contribute to success. To align

utility interests with these goals, incentives that reward

utilities for facilitating customer choice (including the

increased migration of customers to non-utility suppliers) will

be considered in our review of rate plans.

Provider of Last Resort (POLR)

After discussing the definitional and other

complexities of the POLR issue, the Judges expressed the view

that the obligation to serve comprises an obligation that service

be provided without discrimination on the basis of such

categories as age, sex, and race, or on the basis of economic

status. They recommended that all ESCOs be bound by that

requirement within the geographic area and with respect to the

customer classes (residential, commercial, industrial, etc.) they

elect to serve.

Were every supplier subject to that

obligation, they suggested, designating a single POLR would be

obviated.

Whether mandating the obligation to serve for all ESCOs

would be reasonable in the long term could be considered by some

to be an open question. Assuming we had the legal authority to

do so, we would be concerned that imposing such an obligation

could unduly constrain ESCOs and thereby impede development of

NYSEG's and RG&E's Voice Your Choice and Niagara Mohawk's

geographically concentrated gas retail access outreach and

education campaign (GEO-Campaign) are examples of a targeted

outreach campaign, aimed at getting a coordinated message from

the utilities and ESCOs regarding customers' ability to choose

during a focused time period.

New York adopted this approach for telephone competitors,

thereby avoiding POLR issues.

CASE 00-M-0504

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the market. In the recent HEFPA amendments, the Legislature

directly addressed this issue by exempting the ESCOs from the

requirement that they serve all customers who request service.

Thus, the RD's recommendations on this issue are moot.

For the present, utilities will retain the obligation

to serve. However, in the longer-term, when markets have

developed to the point that a large percentage of customers in a

class have migrated and numerous ESCOs are offering multiple

products to all customers, a provider of last resort may no

longer be needed.

PUBLIC BENEFIT PROGRAMS

Universal Service

Concluding that New York statutes and our regulatory

decisions over the years have established universal gas and

electric service as the State's de facto policy (subject to line

and main extension rules), the Judges recommended that we

explicitly adopt that policy. We see no need to do so, though

existing low-income programs, as well as the other practices

taken by the Judges as evidence of the policy, should continue.

Those policies have been successful in addressing the provision

of utility services to the public in a just and reasonable

manner, and we see no need to adopt the explicit statement of

policy. The RD's recommendation in this regard is denied.

The ESCOs have not been subject to the requirement that service

be provided without undue or unreasonable preference,

prejudice, or disadvantage (PSL § 65(3)).

As the RD noted (p. 51), there does not appear to be a need for

a provider of last resort for gas commodity for the larger

industrial classes, due to the fact that nearly 100% of

customers have migrated.

CASE 00-M-0504

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Low-Income Programs

1. Consensus Statement

The Judges reported the parties' success in adopting a

broad consensus statement on low-income programs during the

transition to the end-state and in the end-state itself.

They

recommended adoption of the substance of the statement (if not

its precise wording) as our low-income assistance policy.

The transition to competition requires the development

of innovative, market-driven mechanisms for meeting the needs of

low-income customers, and we commend the parties' efforts to do

so. The consensus statement includes much that is worthy of

endorsement; in particular, we note its recognition that

low-income needs must be addressed through a variety of

initiatives, that programs required in existing agreements should

be continued, that we must continually reconcile the conflicting

goals of funding low-income programs through utility rates while

still reducing prices overall, and that coordination among

program providers should be increased. Aggregation of low-income

customers who are then provided service by an ESCO has also

proven to be an effective strategy, and we encourage its expanded

use. We direct Staff to work with utilities and interested

parties to explore additional opportunities for low-income

aggregation programs.

In view of the need to maintain flexibility in the face

of a necessarily unpredictable future, we will stop short of

endorsing the consensus statement in all its particulars, and we

will continue to monitor market developments as they may impact

the access to reliable energy services by customers facing

financial difficulties.

2. Funding of Low-Income Programs

How low-income programs should be funded presents a

subset of the issues considered in the parties' consensus

statement. Among other things, the Judges recommended placing

The consensus statement appears at RD 98-99 and is reproduced

as Appendix E to this policy statement.

Cases 94-E-0952, et al., supra, Opinion No. 96-12 (issued

May 20, 1996), p. 28, n. 1.

CASE 00-M-0504

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primary emphasis on competition-based mechanisms such as

aggregation programs, with no immediate increase in the extent to

which low-income programs are funded through utility rates. They

also proposed creation of a gas systems benefit charge (SBC) to

parallel the existing electric SBC and remove that asymmetry

between the two energy sources; the electric SBC would be

adjusted to avoid any increase in the overall revenues collected

through the charge. They recommended as well the continued use

of multifaceted program offerings, including rate discounts where

appropriate, as part of a package of assistance designed to keep

low-income customers on the system.

Here, too, we see no need for sweeping policy

pronouncements. It is enough to reaffirm that low-income

programs require adequate funding and that we must continually

reassess the sources of that funding. With respect to the

creation of a gas systems benefit charge, we recognize that there

are important public benefit issues that warrant our attention.

We will not, however, decide our policy regarding such issues

here. Instead, that issue will be deferred for later

consideration, and we may choose to address the possible merits

and structure of a gas system benefit charge concurrent with our

future consideration of the electric system benefit charge.

Public Benefits and Competition Councils

The Judges recommended establishing a Public Benefits

Program Council and a Competition Council, each with specified

responsibilities. We see no need, however, for structures of

this sort. The issues that arise during the transition to

competitive markets, and there will be many, can be addressed

through on-going discussions among Staff and interested parties

and can be brought to our attention as needed. Adding an

additional level of review would likely be counterproductive.

These recommendations of the RD are denied.

CASE 00-M-0504

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COMMISSION AUTHORITY AND RELATED LEGAL ISSUES

The Judges reported in detail on the parties' debate

over our legal authority to take various steps discussed among

the parties during this proceeding. Because we are now simply

adopting a policy and vision statement that provides guidance for

future developments, but imposes none of the requirements whose

legality was debated among the parties, we need not resolve now

the legal issues beyond those views expressed here. We will

further consider issues of our jurisdiction if and when they

become pertinent as a practical matter.

SUMMARY

The Commission appreciates the efforts and input of the

many parties that have participated in this proceeding. We are

encouraged by the progress that the parties and our Staff have

made since the issuance of the RD in preparing the infrastructure

to make energy competition successful. Our policy of allowing

experimentation has resulted in a number of highly successful

approaches. The best of these practices can now be applied

statewide, and they have the potential to transform the New York

marketplace into the vibrant entity that we have envisioned since

we began the process of restructuring in the mid-1990's.

The infrastructure changes necessary to support

competition are now in place (e.g., divestiture of generation, a

reasonably competitive wholesale market, consumer protection

rules, EDI, and UBPs), and therefore we have the opportunity to

introduce new programs, some as proposed by the parties. In

addition, completing this competitive framework positions New

York to remain in the forefront of retail energy market

competition. We encourage all interested parties to work with

Staff

to develop innovative initiatives that will continue to

foster competition.

Given the numerous tasks we have assigned to Staff, we

recognize that prioritizing its efforts will be required.

CASE 00-M-0504

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The Commission orders:

1. The utilities (Consolidated Edison Company of New

York Inc., Orange and Rockland Utilities, Inc., Central Hudson

Gas & Electric Corporation, New York State Electric & Gas

Corporation, Rochester Gas and Electric Corporation, Niagara

Mohawk Power Corporation, National Fuel Gas Distribution

Corporation, KeySpan Energy New York, and KeySpan Energy Long

Island) shall prepare plans to foster the development of retail

energy markets in collaboration with Staff and other interested

parties, as discussed herein.

2. This proceeding is continued.

By the Commission,

(SIGNED) JACLYN A. BRILLING

Secretary

CASE 00-M-0504

APPENDIX A

APPEARANCES

CASE 00-M-0504

-i-

APPEARANCES

FOR THE ATTORNEY GENERAL:

Charlie Donaldson, Esq., Richard W. Golden, Esq., and

Enver Acevedo, Esq., 120 Broadway, New York, New York

10271.

FOR ASSOCIATION FOR ENERGY AFFORDABILITY AND PACE

ENERGY PROJECT (AEA):

David Hepinstall, 505 Eighth Avenue, Suite 1801, New

York, New York 10018 and John Williams (For Pace),

78 North Broadway, E-House, White Plains, New York

10603.

FOR CONSOLIDATED EDISON COMPANY OF NEW YORK AND

ORANGE AND ROCKLAND UTILITIES, INC.:

Marc Richter, Esq. and Sara Schoenwetter, Esq.,

4 Irving Place, Room 1815-S, New York, NY 10003

FOR CONSOLIDATED EDISON SOLUTIONS:

JoAnn F. Ryan, 701 Westchester Avenue, Suite 300 East,

White Plains, New York 10604

FOR CONSUMER PROTECTION BOARD (CPB):

James Warden, Esq., Five Empire State Plaza, Suite

2101, Albany, New York 10271

FOR DYNEGY MARKETING AND TRADE:

Brunenkant & Haskell, LLP (by Melissa L. Lauderdale,

Esq. and Mark R. Haskell, Esq.) 805 15th Street, N.W.,

Suite 1101, Washington, D.C. 20005

Matthew J. Picardi, Esq., 101 Merrimac Street, 2nd

Floor, Boston, MA 02114

CASE 00-M-0504

-ii-

APPEARANCES

FOR 1ST ROCHDALE:

Kudman, Trachten, Kessler, Tacopina & Newman, LLP (by

Phyllis Kessler, Esq.), The Empire State Building, 350

Fifth Avenue, Suite 4400, New York, New York 10118 and

Joel Blau, Esq., 32 Windsor Court, Delmar, New York

12054

FOR AMERADA HESS CORPORATION:

Martha Duggan and David Prestemon, 2800 Eisenhower

Avenue, 3rd Floor, Alexandria, VA 22314

FOR TXU ENERGY SERVICES:

Tim Merrill, Foster Plaza Ten, Suite 200, 680 Anderson

Drive, Pittsburgh, PA 15220

FOR SMARTENERGY, INC.:

Patrick G. Jeffrey, 300 Unicorn Park Drive, Woburn, MA

01801

FOR SMALL CUSTOMER MARKETER ASSOCIATION:

Usher Fogel, Esq., 92 Washington Avenue, Cedarhurst,

New York 11516

FOR BROOKLYN UNION GAS COMPANY d/b/a KEYSPAN ENERGY DELIVERY

NEW YORK AND KEYSPAN GAS EAST CORPORATION d/b/a KEYSPAN

ENERGY DELIVERY LONG ISLAND:

M. Margaret Fabic, Esq., and Cynthia R. Clark, Esq.,

One MetroTech Center, Brooklyn, New York 11201-2505.

FOR MULTIPLE INTERVENORS:

Couch White, LLP (by Michael Mager, Esq.), 540

Broadway, P.O. Box 22222, Albany, New York 12201

FOR NATIONAL FUEL GAS DISTRIBUTION CORPORATION:

Michael Reville, Esq., 10 Lafayette Square, Buffalo,

New York 14203

CASE 00-M-0504

-iii-

APPEARANCES

FOR NATIONAL ENERGY MARKETERS' ASSOCIATION:

Craig G. Goodman, Esq., 3333 K Street, NW, Suite 425,

Washington, DC 20007

FOR NEW YORK ENERGY SERVICE PROVIDERS ASSOCIATION:

Read and Laniado, LLP (by Kevin R. Brocks, Esq.),

25 Eagle Street, Albany, New York 12207

FOR NEW YORK STATE ELECTRIC AND GAS CORPORATION:

Huber Lawrence & Abell (by Amy A. Davis, Esq.,

John Trojanowski, Esq., and Eric Nelson), 605 Third

Avenue, New York, NY 10158

FOR NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY:

Roger D. Avent, Esq., William Reinhart,

Richard Gerardi, and Karen Villeneuve, Corporate Plaza

West, 286 Washington Avenue Ext., Albany, New

York 12203

FOR NIAGARA MOHAWK POWER CORPORATION:

Lisa Bradley, Esq., Theresa A. Flaim, and

John J. Ziegler, 300 Erie Boulevard West, Syracuse, New

York 13202.

FOR PUBLIC UTILITY LAW PROJECT:

Gerald A. Norlander, Esq., Charles J. Brennan, Esq.,

and Ben Wiles, Esq., 90 State Street, Suite 601,

Albany, New York 12207

FOR ROCHESTER GAS & ELECTRIC CORPORATION:

Jeffrey R. Clark, Esq., 89 East Avenue, Rochester,

New York 14649

FOR DEPARTMENT OF PUBLIC SERVICE STAFF:

Saul Rigberg, Esq., Three Empire State Plaza, Albany,

New York 12223-1350.

CASE 00-M-0504

-iv-

APPEARANCES

FOR TEXAS EASTERN TRANSMISSION CORPORATION:

Kirkpatrick & Lockhart, LLP (by James P. Melia, Esq.),

240 North Third Street, Harrisburg, Pennsylvania 17101.

FOR UTILITY WORKERS OF AMERICA, AFL-CIO, LOCAL 1-2 AND

INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS, LOCAL 97:

Koda Consulting (by Richard J. Koda), 409 Main Street,

Suite 12, Ridgefield, CT 06877-4511.

FOR WESTCHESTER COUNTY:

Stewart M. Glass, Esq., 600 Michaelian Office Building,

148 Martine Avenue, White Plains, New York 10601.

CASE 00-M-0504

APPENDIX B

STRAW PROPOSAL 2

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APPENDIX B

COMPETITIVE MARKETS CASE 00M0504

STRAW PROPOSAL 2

February 26, 2001

This proposal does not necessarily represent Staff’s or the

Department’s position nor are we bound by it in any way.

I. Vision:

• Ensuring the provision of safe, adequate, and reliable electric and

gas service at lower overall costs to consumers is the primary goal

of developing competitive markets.

• Competitive markets should be relied upon for providing all products

and services that result in more choices and value for customers.

• The utility delivery function will continue to be a monopoly

service. The remaining utility functions, including retailing and

customer care services, will be or have potential for becoming

competitively provided by non-utility companies. In the long run, and

depending on how the market develops, the utility’s function is

expected to be delivery service.

• Regulation should continue for the remaining monopoly functions, and

should facilitate the development of workably competitive markets,

monitor the functioning of those markets, establish consumer

protections for all consumers, and address the needs of consumers

who are not served by the competitive markets. Regulatory oversight

should be relaxed as markets become more competitive.

Implementation:

There are several steps in getting to this long-term vision.

UNBUNDLING

• Fully unbundling retailing services will enhance the development of

competitive retail markets. The Commission immediately should

institute a proceeding to address generic policy issues related to

unbundling with a goal of establishing an appropriate level of

uniformity in calculating back-out credits.

MARKET PRICE PASS-THROUGH

Large Customers

• Gas

- Most large volume natural gas customers have already switched

from the utility to marketers for commodity service. The large

customers that still purchase bundled gas service from utilities

generally pay a market-based price.

-3-

• Electric

- Utilities should be required to offer their largest electric

customers (i.e.

, those with interval metering) rate options

reflecting the straight pass-through of hourly market electricity

prices.

In the long run, such pricing options will need to be

coupled with appropriate customer outreach and education programs

and further supported by market offerings to customers of load

management and other price-responsive program packages that will

enable customers to better manage their operations in a market-

based pricing environment.

" Small Customers

• Gas

- The Commission has already required gas utilities to take action

to mitigate price volatility.

• Electric

- A purchasing practices policy statement for electric utilities

should be established, similar to that already in place for gas.

- At this time, electric utilities should manage their supply

portfolios to, among other things, reduce customer exposure to

price volatility. This can be phased-out as the competitive

market develops.

- Once criteria (a) and (b) listed below under Preconditions,

Timing/Process, have been met, utility rates that are more

reflective of a straight pass-through of market-based prices for

commodity, capacity and other ancillary services should be

extended to the incumbent’s smaller commercial and residential

customers. Such utility pricing options will need to be coupled

with appropriate customer outreach and education programs.

UTILITIES EXIT COMMODITY FUNCTION (MODEL 2) ONCE PRECONDITIONS

ARE MET

- The most direct way to establish a robust competitive market is

for utilities to cease buying and selling commodity (see the

Commission's November 1998 Natural Gas Policy Statement wherein

the Commission envisioned gas utilities exiting the merchant

See Case 00-E-2054, In the Matter of a Status Report on the

Demand/Supply Component of the Department’s Electric price and

Reliability Task Force Including Recommendations for Specific

Utility Actions on the Demand-Side, Order Requiring Filings and

Reports on Utility Demand Response programs (issued December 20,

2000).

See Case 97-G-0600, In the Matter of the Commission’s Request for Gas

Distribution Companies to Reduce Gas Cost Volatility and Provide

Alternative Pricing Mechanisms, Statement of Policy Regarding Gas

Purchasing Practices (issued April 28, 1998).

-4-

function in three to seven years). Electric and Gas utilities are

expected to be out of the commodity function, i.e.

, buying and

selling electricity and gas, for all customers.

Before the complete exit, however, the Commission needs to be

assured that the preconditions identified below have been met.

These criteria may be satisfied at different times for gas and

electricity and for large and small customers.

PRECONDITIONS, TIMING, AND PROCESS

" Preconditions - Before utilities exit the merchant function the

Commission needs to be assured that the following criteria have been

met:

(a) “Workably competitive wholesale markets” exist;

(b) New York State registered ESCOs/marketers are collectively able

and willing to provide reliable service to the appropriate market;

service to all consumers who need service but are unable to secure

it in the competitive markets (see POLR and Low-Income sections

below);

(d) There is general public acceptance of energy market restructuring

and a reasonable expectation that greater levels of customer

migration to competitive providers will create additional

opportunities for all customers to save and to benefits; and

(e) Potential legal impediments are addressed.

" Timing/Process - The timing for utilities to exit the commodity function

will depend on how well the above conditions are satisfied. A multi-

stakeholder “Competition Council” should be established to monitor

the status of wholesale and retail competition, and to report to the

Commission when the above criteria have been met. The specific

measures to determine that these criteria have been met will be

established with input from all parties. The following framework is

suggested:

• within three months after an order in this proceeding - parties

decide on metrics for determining when the above preconditions

(a) - (e) have been achieved;

• twelve months after an order in this proceeding - review the

status of the wholesale market to ensure that specific criteria are

met;

• twenty-four months after an order in this proceeding - review

the status of retail issues [pre-conditions (b), (c) and (d), above]

to ensure that specific criteria are met;

• twenty-five to forty-eight months after an order in this

proceeding (assuming that the 12 and 24 month reviews were

successful) conduct a coordinated statewide outreach campaign

educating customers that the utility is exiting the commodity

business, coordinated outreach could be conducted sooner to educate

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consumers on other emerging competitive issues, depending on the

need;

• Forty-eight months after an order in this proceeding -

utilities are expected to exit the commodity business.

UTILITIES EXITING RETAIL FUNCTIONS (MODEL3)

• The opening of some retail functions (billing and electric metering)

to competitive markets is currently in progress. Before the

utilities cease providing retailing functions (Model 3), however,

the Commission must be assured that competing ESCOs/marketers have

the infrastructure to provide the retail services. This issue should

be revisited within the next few years to assess the ability of the

marketplace to provide these services. However, individual utilities

should not be precluded from voluntarily seeking to exit the retail

function sooner, as long as there is a showing that the marketplace

is ready and capable of providing these services (some of the yard

sticks to gauge whether the marketplace is ready might.-4-include

percentage of customer/load migration experienced to date, number of

ESCO/marketer choices available to serve customers, customer

satisfaction with ESCOs/marketers, collective ESCO/marketer

infrastructure in place to handle retail functions for millions of

consumers).

II. Consumer Protections:

• Development and implementation, including enforcement, of modified

consumer protection rules appropriate to meeting the needs of

consumers in a competitive marketplace is essential for the well-

being of all New Yorkers. Changes may be needed to HEFPA and Non-

Residential rules, and the modified rules should be aligned with

other existing statutory requirements.

• All service providers in New York are expected to abide by a

standard basic level of consumer protection rules. The parties

should develop these standard rules. Specific areas to be considered

include disclosure requirements, service quality standards, fair

trade practices (e.g.

, anti-slamming, anti-redlining), and complaint

resolution. More consumer protections may be needed during the

transition phase (e.g.

, limitations on prepayments, marketing codes

of conduct). Experience would allow for the refinement and

modification of those protections, to achieve an appropriate balance

between the strengthening of consumer trust that they create, and

the costs they impose on marketplace participants. Once there is a

vibrant competitive retail market, some of the protections may be

relaxed.

• The Commission should investigate and resolve customer complaints

against ESCOs. This could be accomplished through alternative

dispute resolution and other mediation techniques.

-6-

III. Customer Migration Strategy:

• Ideally, full customer migration to competitors should happen

voluntarily. This has occurred for large gas customers and may in

fact occur for large electric customers. Voluntary migration should

and will be strongly promoted through customer education and

customer choice.

• ESCO/marketer price mechanisms and value-added services should give

consumers new options over current utility offerings. In addition,

utility price signals (e.g.

, utility recovery of some stranded costs

via commodity charges) could also help facilitate customer

migration.

IV. Provider of Last Resort:

• The POLR entity or entities will have the responsibility of

satisfying “obligation to serve” and attendant consumer protections.

As long as the utilities provide commodity service to some classes

of customers, they will continue to be the POLR for commodity

service to customers in those classes. During the transition,

however, utilities should be encouraged to outsource POLR functions

(i.e.

, implement POLR pilots). Once the utilities fully exit the

commodity function, other entities will discharge this

responsibility. The POLR entity could be different for electric and

gas industries and different by customer group, and should be

approved by the Commission. The utilities may also bid for providing

POLR service. The preferred approach is the one where one or more

entities provide POLR service on a regional or statewide basis, with

the “obligation to serve” not imposed on all ESCOs. It is expected

that in the end-state, the POLR will serve “transient or gap”

customers only, and not necessarily have a large customer base.

• A pre-requisite for establishing the new POLR entity or entities is

the continuity of the obligation to serve. Reliability must be

ensured. The solution must address the term of obligation and what

will happen if one or more entities are unable to fulfill POLR

obligations during, or at the end of, the term.

• With regard to POLR pricing to consumers, price offerings could

include both fixed and variable prices as options. The variable

price could be formula-based, approved by the Commission.

• Assuming all ESCOs do not have the obligation to serve, a

competitive process involving issuance of an RFP should be used to

select the POLR entities. The term should be at least a one-year

period with possible provision for extensions to two or three years.

Bidders should be able to bid across utility territories, by fuel

type and/or service class, to allow serving multiple areas or the

entire state. Evaluation of RFPs must consider the technical and

financial competence of the bidders and terms of the proposed

service offerings. Renewable energy sources could also be considered

in the selection process. A process is needed to provide guidance on

how, if at all, the terms could be changed during the term. If

suitable bidders are not found, the PSC can designate an entity (a

governmental body, NYPA, incumbent utility, etc.) as the POLR or

-7-

solicit a qualified bidder under negotiated terms. An interim POLR

could be designated by the PSC in case of default.

• POLR oversight is expected to involve pricing, service quality,

consumer protections, economic viability and a process for back up

in the event of POLR failure. This will require the collection of

data regarding complaints and other compliance measures. It will

also involve a process for monitoring and problem resolution, as

well as provision for enforcement and disqualification as conditions

and qualifications may change over time. Some limited number of

service standards (addressing reliability, safety etc.) should be

developed that qualifying bidders would be subject to. A publicly

available report card on POLR performance is recommended and should

be periodically issued by the Commission. POLR oversight role

should be expanded to include other stakeholders besides the PSC

(e.g.

, consumer groups and other representatives of the community)

on a voluntary basis in an advisory role, working with Department

staff, subject to the Commission's decision making authority.

V. Low Income Programs:

• The energy burden on low-income customers should not be worsened as

a result of the development of competitive markets. The continuing

needs of low-income customers both in the end-state and during the

transition to the end-state must be addressed through low-income

programs and other initiatives. Appropriate funding resources should

be assured to address the needs of low-income consumers.

• Market-based solutions, where possible, should be developed to

address the needs of low-income customers.

• In the long run, the financial support needed to assist low-income

customers should be derived from broad-based public funding. For the

transitional period, however, surcharges on bottleneck functions

(e.g.

, pipes and wires) would be a reasonable alternative mechanism

for achieving these benefits, the loss of which would not be in the

public interest. Such cost recovery mechanisms are reasonable

because low income programs help to at least partially avoid

collection related and working capital costs on unpaid bills that

are borne by all customers, as well as collateral costs to

government social service agencies.

• A basic level of reasonably affordable service must be maintained

for low-income customers. Coordinated program initiatives that

include programs implemented by utilities as well as alternative

providers should be developed. The sources of program funding should

be considered in program design and implementation. Some of the

components to be considered part of a coordinated statewide

low-income program could include the following:

• Targeted energy efficiency and weatherization measures - to

reduce usage and overall energy costs for payment-troubled

low-income consumers and address the concern that low-income

households tend to live in poorly maintained housing stock.

• Energy education and budget counseling programs - to help

customers manage energy affordability problems.

-8-

• Forgiveness of arrears linked to improved prospective payment

behavior - to improve revenues from low-income customers.

• A “lifeline” discounted rate (without distorting economic price

signals) - to reduce energy burden. Such a discount should be

applied to delivery rates, in order to maintain customer

entitlement whether the customer stays with the utility for sales

service or migrates to a competitive supplier.

• Market-based solutions, such as aggregation programs - that allow

low-income customers an opportunity to enjoy the benefits of a

competitive market, as well as providing a savings to counties,

municipalities, or other entities that seek to aggregate low

income customer load.

• Reducing overall energy rates to achieve lower consumer prices

and funding low-income programs through energy delivery rates are

competing goals that need to be continually reconciled. The

future sources of funding for low-income programs need to be

examined on an on-going basis.

VI. Public Benefit Programs:

• A competitive market may not necessarily provide all energy

efficiency, renewables and R&D programs that are in the public

interest because demand for these activities in a competitive market

is driven by the benefits derived by the purchaser rather than the

benefits to society as a whole. These programs provide important

environmental benefits that are difficult to obtain through markets.

Ideally, the financial support needed for these programs should be

derived from broad-based public funding.

• Energy Efficiency/Renewables/R&D programs (fuel-neutral) could be

funded from a competitively neutral Public Benefits Charge assessed

on all electric delivery rate customers until the market meets the

societal needs that the programs are designed to address or broad

based funding approaches can be implemented.

• Such energy efficiency/renewables/ R&D programs could be implemented

by a single entity to be designated by the Commission (e.g.

, New

York State Energy Research and Development Authority) as program

administrator.

• A multi-stakeholder forum could be established to assist with

defining needs and objectives, setting fund requirements, reviewing

compliance and other standards for participation, as well as

periodically assessing whether the market is meeting the societal

needs that the program is designed to address.

• The Public Service Commission will administer a process that will

aid in its determination of the amount and oversight of the

collection of the funds as part of its regulation of the T&D

companies.

-9-

• Gas customers should continue to fund utility-based R&D as per

existing Commission orders.

VII. Aggregation:

• We expect that clarity and commonality in language will facilitate

the transition to competition. As a first step, we offer the

following definitions. Once consensus is reached on definitions, the

parties should develop necessary business practices and list

requirements for new entities.

Aggregator means any person or firm joining two or more customers into

a single purchasing unit to negotiate the purchase of electricity

and/or natural gas from ESCO/marketers. Aggregators may not sell

or take title to electricity or natural gas. ESCO/marketers are

not aggregators.

Broker means a firm that acts as an agent or “middle man” in the sale

and purchase of electricity or natural gas in the wholesale

market, but never owns the electricity or gas.

ESCO means an entity that can perform energy and customer service

functions in any competitive environment, including buying and

reselling of electricity and natural gas and assistance in the

efficiency of its use. [modifications from the PSC definition]

Marketer means an entity that can perform energy and customer service

functions in any competitive environment, including buying and

reselling of electricity and natural gas and assistance in the

efficiency of its use.

Registered Aggregator means any non-profit, public interest organization,

governmental entity or private firm that provides one or more of

the following: conducts outreach and education to small use

customers; acts as procurement agent for targeted end-users,

negotiating pricing, terms and conditions with ESCO/marketers and

offers the package to the customers; renders bills on behalf of

the ESCO/marketer; and maintains on-going customer service

relationships with the aggregated customers. Registration with

the PSC is voluntary. The PSC Web site will list registered

aggregators.

Restricted ESCO/marketer means a firm or governmental entity that takes

title to electricity or natural gas on behalf of two or more

service end points (defined customers or for its own use), which

are defined when registering with the Department of Public

Service such that others are precluded from joining or

participating. Restricted ESCO/marketers are not listed on the

PSC Web site.

Case 99-G-1369, Petition of New York Gas Group for Permission to

Establish a Voluntary State Funding Mechanism to Support Medium and

Long Term Gas Research and Development (R&D) Programs, Untitled

Order (issued February 14, 2000).

-10-

Sales Agents means a separate person or firm that matches buyers and

retail sellers of electricity or gas, playing no role beyond

customer acquisition.

• We expect the marketplace will provide consumer information about

ESCO offerings and performance of ESCOs and aggregators in an

unbiased manner. Access to information on ESCO/marketer offerings

also will continue to be provided on the PSC Web Site.

VIII. Additional Transition Measures:

• Uniformity in ESCO, customer, utility business interaction practices

should continue to be pursued, i.e.

, continue to improve the UBP.

• Any economic development or flex rates offered by incumbent

utilities to large customers in the future should be competitively

neutral, should cover the incumbent’s marginal cost plus a

contribution to fixed costs and preferably should be administered as

discounts to standard delivery service rates.

CASE 00-M-0504

APPENDIX C

COMMENTS SUMMARY

-2-

APPENDIX C

CASE 00-M-0504 Comments Summary

Amerada Hess Corporation (Hess)

Auctions: Hess would support wholesale auctions if they are used only for residential customers

that stay with the utility or with the provider of last resort. Hess does not support retail

auctions since this does not allow the ESCO to build a long-term relationship with the

customer.

Capacity: Hess urges a reduction of the proportion of backup capacity held by utilities. It urges

the Commission to set a reliability standard and allow the ESCOs to determine how best to

meet that standard. Hess does not object to a mechanism by which capacity could follow the

customer in the event that the ESCO exits the retail program. However, Hess does not agree

that the capacity should necessarily go to the utility.

Consumer Outreach and Education: Hess believes that there is some value in a coordinated

marketing and education approach. However, ESCOs marketing to the larger customers

should not be hampered by a statewide program.

Contract Disclosure: Hess advocates making commodity information regularly available since

it helps ESCOs plan their pricing strategies and is an intermediate step toward the utility

exiting from the merchant function.

End-State Vision: Hess believes the Commission's ultimate goal should be the exit of the

utilities from the merchant function. This will require establishment of a clearly defined end

state that eliminates the utilities from provision of commodity service for both gas and

electricity.

Hedges: Hess notes that utilities should not be allowed to hedge. However, in the short term if

hedges are necessary, they should be assigned to smaller customers rather than larger ones.

Costs should be recovered in a manner that ensures that retail access customers do not cover

costs associated with service to sales customers.

Incentives: Hess does not believe utilities should get an incentive to reduce commodity costs.

Price: Hess is in favor of guidelines that provide uniform price computations and the

requirement that utilities install interval meters for all large commercial and industrial

customers. In addition, Hess does not believe utilities should be permitted to offer fixed price

products. As an interim step, Hess recommends that monthly forward prices be utilized by

the utilities for their electric commodity offerings, with the eventual goal being a switch to

hourly pricing.

Calpine Corporation (Calpine)

Auctions: Overall, Calpine believes that the cost savings possible through preserving contract

flexibility outweigh the efficiency gains of an auction.

-3-

Hedges: Calpine recommends hedging smaller customers rather than larger customers, for

longer periods. Retail customer flexibility would be increased if the resource adequacy

component of service (generating capacity purchases) were unbundled from the price hedging

services (energy and ancillary services).

Price: Calpine notes that the only way to ensure that prices are competitively determined is to

time purchases of capacity consistent with the lead time for new entry. There is no substitute

for determination of competitive prices through the market; in the case of generating unit

capacity services, this will require longer lead time procurement by load serving entities.

Central Hudson Gas and Electric Corporation (CHG&E)

Aggregation: CHG&E supports the encouragement of customer aggregation, particularly for

low-income customers.

Auctions: CHG&E recommends that an RFP process be encouraged, but not required by the

Commission.

Capacity: CHG&E states that if utilities are required to purchase capacity for ESCOs, there

should be minimum purchase requirements and utilities should get full recovery of all

capacity-related costs.

Customer Outreach and Education: CHG&E recommends voluntary coordination and would

offer its services to all ESCOs toward this goal.

Hedges: CHG&E believes that utilities should be allowed to hedge at their own discretion. It

supports the selective use of long term contracts to blend into a portfolio.

Incentives: CHG&E does not believe incentives to reduce commodity costs are necessary and,

in fact, may be counterproductive.

Price: CHG&E recommends guaranteed savings off the utility's full service price to encourage

migration, with ESCOs guaranteeing the discount at their expense. Any gain or loss resulting

from migration should be included in commodity rates. CHG&E supports hourly day-ahead

prices for large customers and maintaining hedged services for smaller customers.

Switch and Save Program: The company currently offers purchase of receivables 'without

recourse' to ESCOS and is reluctant to reverse course and convert to 'with recourse'.

Utility Role: CHG&E has proposed that it is now appropriate to eliminate itself as a supply

option for its largest electric customers, except as a POLR supplier, and has outlined a plan to

do so.

Centrica/Direct Energy (CDE)

Auctions: CDE recommends auctioning blocks of mass market customers with a single retail

price for all customers who do not select an ESCO. Auctioned customers would get a one-

year fixed price with an assigned ESCO unless they choose another ESCO. At the end of the

-4-

one year term, customers that have not affirmatively switched to an ESCO remain with the

ESCO that was assigned to them and get market prices. CDE believes this method creates an

ESCO incentive to keep prices and service options competitive. Commercial and Industrial

customers should get a market price pass through, with no hedged portfolios. CDE opposes

wholesale auctions because it believes they only benefit generators and could slow utility exit

from the marketing function.

Hedges: CDE does not recommend the use of long-term contracts, particularly by utilities.

Further, if there are any cost/revenue mismatches because of hedges, no commodity costs

should be contained in distribution rates.

Price: As a first step, commodity and retail services should be structurally separated (like Texas

and the United Kingdom) so that utility commodity charge is not subsidized.

Community Energy (CE)

Customer Outreach and Education: CE recommends creation of a "Green Power Marketing

Committee" consisting of Staff, utilities, and green power suppliers to work on collaborative

public education efforts and develop common statewide green power themes to increase green

power choice awareness. CE believes it is necessary to track and reconcile generation supply

against customer purchases through environmental disclosure.

Hedges: CE states that it is important to develop new wind generation facilities and other

renewable facilities and to make green power supply available to consumers, thereby meeting

market and policy goals. CE contends that it is important to explore innovative ways for

utilities to support purchase power agreements.

Price: CE believes retail customers should be allowed to actively choose green products.

Con Edison Solutions (CES)

Auctions: CES supports wholesale procurement for mass market customers as the best way for

utilities to firm up supply costs for customers who remain with the utility. CES recommends

that auction rules and results (CES prefers New Jersey's BGS style auctions) be public

information, with the information released at an appropriate time.

Customer Outreach and Education: CES believes the Commission should focus on increasing

customer awareness. It does not believe it is practical to coordinate utility and/or ESCO

marketing campaigns due to differences in campaigns and business strategies.

Hedges: CES believes there is no need for prospective hedges. Utilities should hedge as little as

possible (limited to mass market customers) and pass though market prices. Short term (1 and

2 year) contracts are workable but, due to a lack of liquidity, 3 year terms are not appropriate.

Price: Utilities should pass through real time market prices to the largest customers, specifically

hourly rates wherever possible. Pre-existing supply contracts or owned generation should be

reflected in delivery rates.

-5-

Switch and Save Program: CES notes that purchase of receivables resolves uncollectible

concerns. These programs are highly effective at increasing awareness, facilitating migration,

and reducing acquisition costs. Utilities should consider incorporating some form of purchase

of receivables model into their single bill offering.

Consolidated Edison Company, Inc. /Orange &Rockland Utilities, Inc. (Con Ed/O&R)

Aggregation: Con Ed/O&R are not aware of any specific barriers to aggregation although it

believes that there are some legal obstacles that have been encountered in considering

implementation of a low-income aggregation program.

Auctions: Con Ed/O&R would support a trial auction for electric customers, similar to the New

Jersey BGS model or recently authorized D.C. auctions, as a transition measure. However,

Con Ed/O&R cautions that auction outcomes in highly constrained load pocket areas like

New York City are usually uncertain, and the Commission may have to guarantee recoveries.

Accordingly, the Commission should not decide to proceed in a generic way. It does not

believe there is a need for auctions for gas customers because the gas market is already

transparent.

Capacity: Con Ed/O&R contend that if ESCOs are willing to enter into capacity contracts, it

reduces the need for utilities to do so. It is willing to continue its requirement to obtain

capacity, but believes that ESCOs must have a corresponding capacity obligation.

Contract Disclosure: Con Ed/O&R state that revealing prices would increase bid prices;

accepted bids would automatically become floor prices under which no new bidder would

offer, knowing the utility had accepted that price already.

Customer Outreach and Education: Con Ed/O&R believe that no facilitated coordination is

necessary.

Hedges: Con Ed/O&R believe utilities should continue to hedge for residential and small

commercial customers, but would not object to guidelines outlined in the Commission's Gas

Policy Statement on the basis that the Commission extends presumption of prudence if it

follows guidelines. In general Con Ed/O&R are opposed to long term contracts since

financial markets are the best arbiter of merchant project need. Con Ed/O&R believe other

efforts may make more sense, including streamlining and expediting the Article X process. It

recommends that the Commission review this issue on a utility-by-utility basis to determine

impacts. Further, Con Ed/O&R believe that any future utility long term contracts should have

Commission pre-approval and utilities should be rewarded for the higher risk of entering into

contracts.

Incentives: Con Ed/O&R recommend that the Commission provide meaningful and achievable

utility incentives, where migration goals and recovery of costs and lost revenues are aligned.

The utility must fully recover unavoidable costs and lost revenues associated with migration.

If the Commission develops alternative incentive mechanisms that do not have arbitrary

effects, those should be resolved within individual utility rate cases.

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Price: Con Ed/O&R recommend that any gains and losses from hedging full service customers

should be reflected in the commodity charge as a non-bypassable delivery charge or credit,

applicable to both full service and retail access customers, instead of the delivery charge,

because utilities should not have to absorb the financial risk of migration. For Con Edison

electric, these costs are currently reflected in delivery charges, but the company believes this

should be changed.

Switch and Save Program: Con Ed/O&R are interested in this program if it proves feasible but

does not believe it should be assumed that results will be the same in another service territory.

It does not believe that any aspect of the program should be imposed on any other utility, in

particular purchase of receivables. The issues should be resolved on a utility-by-utility basis

in proceedings, where utilities can be granted appropriate protections.

Constellation NewEnergy, Inc. (Constellation)

Auctions: Constellation believes that mass market customers should be supplied by utility via a

competitive solicitation process, either through an RFP process or in an auction, with a

minimum of 6 month terms and a maximum of three year terms, with monthly adjustments.

Constellation prefers an RFP process to procure wholesale full requirements to obtain a fixed

price offering.

Aggregation: Constellation believes that the benefits of aggregation are best assessed by the

marketplace. Since larger customers are already effectively aggregating, it sees provider of

last resort (POLR) service functions as an aggregation service for small customers. However,

Constellation believes that mandatory aggregation is unnecessary and creates additional risk

and uncertainty for wholesale suppliers, raising the cost of POLR service.

Contract Disclosure: Constellation states that prices bid by potential wholesale suppliers are

competitively sensitive and should be kept confidential.

Customer Outreach and Education: Constellation believes that there is a need for accessible

customer data from the utility and that the Commission should participate in and facilitate the

education campaigns of utilities. However, there should be no increase in requirements upon

ESCOs and the Commission should not be in charge of ESCO programs and marketing.

Hedges: Constellation believes contract lengths should be limited to specific rate classes, with

mass market customers receiving limited fixed price service and others getting real time

pricing service.

Incentives: Constellation states that there should be no incentive mechanism for utilities to

participate in the commodity business.

Price: Constellation notes that residential and small commercial customers need stable fixed

prices. It believes that the tariff price to beat should be the real time price or an index of spot

market prices, there should be no utility multiple pricing options and existing back-out credits

should be kept until unbundling is completed

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Consumer Protection Board (CPB)

Capacity: CPB notes that if the utility is the provider of last resort and is required to maintain a

certain level of capacity, it should be able to recover any losses incurred due to customer

attrition. If marketers, however, can effectively compete with the utility, the utility should

bear that risk as a market participant, and ratepayers should not compensate the utility for

commodity not supplied.

Customer Outreach and Education: CPB recommends effective coordination of utility and

Commission programs, funded through regulated rates and limited to the effective,

productive, and efficient delivery of information. It notes that there should be no coordination

with marketing campaigns of individual ESCOs, but there should be a coordination of overall

industry efforts to increase consumer awareness.

End-State Vision: The Commission should resolve the unbundling case and standardize

programs and policies affecting ESCOs and competition throughout the state.

Hedges: CPB states that some price hedging is necessary for the mass market and long term

contracts (as part of a balanced portfolio) are vital to the interest of consumers and should be

part of utilities’ overall supply portfolio. ESCOs should also enter into long-term bilateral

contracts for supply.

Incentives: CPB contends that incentives to reduce commodity costs are not needed because of

current Commission oversight obligations.

Switch and Save Program: CPB recommends that this program be replicated in other service

territories, including guaranteed savings over utility commodity service for an initial period,

unlimited switching, and utility consolidated billing.

Department of Public Service Staff (Staff)

Aggregation: Staff recommends that the Commission undertake a pilot program with an

interested utility that would allow customers the opportunity to opt into aggregation pools

(either residential or small business) for electric and/or natural gas commodity service.

ESCOs would be selected though competitive bidding to supply the pools. Staff further

recommends that the Commission foster affinity group aggregation by matching interested

groups with ESCOs that serve the entire state.

Auctions: Staff recommends that the Commission require utilities to use an auction process to

switch blocks of large as well as mass market customers to ESCO commodity service. Under

a retail opt-in program conducted by the utility, customers may choose to participate in a

program switching them to the winning ESCOs to supply their power. Once willing

participants are identified, a bidding process would be established, with the intent of

switching those customers to the winning ESCO(s). Under this scenario, the utility could

maintain the billing services and purchase ESCOs’ accounts receivable if the utility and

ESCO agree to that arrangement. Details of the auction process should be worked out by each

utility with input from parties.

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Back-Out Credits: Staff recommends eliminating, wherever feasible, the use of electric spot

market price-based commodity back-out credits in cases where a utility's actual electricity

sales service rate is not a pass-through of market prices, but is, instead, a hedged or otherwise

different price.

Billing: Staff recommends adoption of a more standardized unbundled bill format with content

that provides consumers plain language information to assist them in making competitive

choices. As part of that process, Staff recommends the unbundling of the utility retail sales

service bill to separately reflect prices paid for each service provided by the utility. Utility

consolidated bills for combined ESCO and utility services should be similarly unbundled and

structured.

Capacity: Staff recommends that a tariff provision requiring that agreements among utilities and

ESCOs provide for capacity to follow customer loads. If the utility is acquiring capacity

specifically for ESCO-served loads on its system, the ESCOs must commit to take that

capacity. If a utility releases excess capacity that becomes available due to increased

migration, an ESCO should not have to make a specific commitment in obtaining this

capacity because the capacity was not acquired specifically for it. The Commission has

allowed the utility, in areas where capacity is tight, to purchase incremental pipeline capacity

and make capacity available to ESCOs at its average cost of capacity. That program is ending

and Staff recommends that it be reexamined. If ESCOs provide their own capacity, it is

critical that the utility have access to that capacity in the event the ESCO either defaults or

decides to exit the market.

Consumer Outreach and Education: Staff recommends that the Commission facilitate the

alignment of utility, Department, and ESCO marketing and outreach efforts on a regular basis.

Utility-sponsored marketing and customer education campaigns beyond the coordinated

efforts should also be encouraged. Implementation of Market Match and Market Expo

programs to encourage exchange of customer information between customers and ESCOs is

recommended. Staff also supports a focused effort to create an "apples to apples" price and

service comparison information guide to assist customers in deciding whether to select an

ESCO or remain with their utility. In addition, Staff recommends defined enrollment periods

preceded by strong, tightly coordinated marketing campaigns to stimulate mass market

customer awareness and interest in retail access subscription.

Contract Disclosure: Staff notes that, on a going forward basis, information on the status of

utility portfolios, provided periodically, would be of enormous benefit to ESCOs and the

marketplace in general. However, some of the utility supply contracts may contain terms and

conditions that contain sensitive information. Such contract terms should be afforded trade

secret status if it is demonstrated that its public disclosure could unduly harm customer or

supplier interests.

Customer Enrollment: New York has required that the utility customer account number be

used to identify a customer being switched to an ESCO. Staff recommends that, in situations

where the consumer is physically present, a process that accepts a wet signature from the

customer requesting the utility to provide the account number and enroll the customer should

be acceptable.

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End-State Vision: Staff urges the development and Commission adoption of a single vision and

model for the future competitive marketplace in New York, referencing target dates for

moving the individual utility franchises toward a more unified statewide market.

ESCO Purchase of Utility Services: Staff believes that the ability of ESCOs to buy some of the

utility's services on a wholesale basis for resale would be valuable. It would allow ESCOs to

gradually build the “back office” functions necessary to provide all these services and

continue to collect revenues to write down the capital investments it has made, thereby

reducing its stranded costs.

Hedges: For the medium to largest standard tariff service C&I electricity customers, Staff

recommends that utilities not offer any new hedged commodity service but, instead, move

toward passing through spot market prices. For residential and small C&I (mass market)

customers, Staff recommends that electric utilities offer a more stable pricing scheme for the

next several years through the construction of a balanced utility portfolio, consisting of supply

purchases in the spot market, short term and long term markets, and financial hedges. Staff

does not recommend that electric utilities be precluded from fulfilling a portion of their

portfolios with longer term contracts; some level of long-term electric contracts of varying

expiration dates would be an appropriate component of a diversified portfolio. Non-uniform

contract expiration dates present a better opportunity for the utility to manage its portfolio to

accommodate changes, such as migration, in the future.

Incentives: Staff believes that the Commission's normal review and oversight of utility

portfolios should be sufficient to ensure that utility commodity costs are minimized and

portfolios are appropriately structured. Staff advocates the continued use of regulatory

incentives linked directly to migration level targets as an integral part of all electric and

natural gas rate plans of all utilities. The incentives should be based on the demonstrated

achievement of reasonable targets and provide sufficient utility motivation to achieve those

targets.

Price: Staff contends that delivery rates should be independent of utility commodity purchases

and purchasing practices. Wherever possible, utilities' commodity rates should reflect the

entire "price to beat," including any adders or unbundled procurement rates, structured so as

to affect delivery rates only minimally. The cost of any newly entered supply hedges should

be reflected in the commodity price to more accurately reveal the utility's real price. All

losses and gains due to migration forecast errors that cannot be easily reflected in an annually

set “price to beat”

could be deferred and recovered in future commodity prices to the extent

the utilities cannot mitigate their impacts.

Switch and Save Program: Staff believes that O&R's program is a model for the near-term

expansion of competitive offerings for residential and small commercial customers (mass

markets) in New York. Staff notes that the relative success of this program compels

consideration of its broader application statewide.

Unbundling: Staff recommends the prompt unbundling of all utility services to more clearly

reveal the "price to beat" for those services. In addition, having utility consolidated bills,

which contain both utility and ESCO charges, reflect the same design and format as the

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unbundled bills would provide consumers with an increased ability to shop for the services

they want and need.

Green Mountain Energy (Green Mountain)

Auctions: Green Mountain recommends a competitive bid process to auction blocks of

customers to qualified ESCOs, where customers opt-out of the program if they do not wish to

participate. Green Mountain strongly urges avoidance of wholesale commodity auctions like

the New Jersey BGS program because it eliminates relationships between ESCOs and end-use

customers.

Customer Outreach and Education: Green Mountain contends that coordination among the

stakeholders is essential, but should occur when there are services and offerings readily

available to consumers. Green Mountain recommends creation of a committee comprised of

representatives of the Department, utilities, ESCOs, and consumer groups to facilitate this

goal.

End-State Vision: Green Mountain sees the creation of market structure rules that include utility

consolidated billing, purchase of receivables, limitations on utility affiliates, no utility initial

service requirement for new-connecting customers, semi-annual adjustment of the price to

beat to reflect market prices, and structuring of default service so it is not an alternative to

competitive service offerings. The Commission's vision statement should emphasize

competitive pricing, regulatory flexibility, and cleaner electricity. In addition, there should be

a single green power provider for each utility, similar to Oregon's "Portfolio Options"

program.

Hedges: Green Mountain believes that utility portfolio development strengthens market power

of incumbents at the expense of retail competition, and ultimately customers.

Incentives: Green Mountain recommends that the Commission examine incentives to encourage

municipalities to join in energy aggregation programs.

Price: Green Mountain would like to see a price to beat set on a semi-annual basis.

Switch and Save Program: Green Mountain notes that this program is a step in the right

direction, but the mandatory rate discount for the first two months of service, combined with

supplier switching, could result in gaming.

Independent Power Producers of NY (IPPNY)

Auctions: IPPNY recommends initiation of a collaborative wholesale competitive solicitation

process and favors the New Jersey BGS auction model. IPPNY believes marketers should

compete to serve utility's load on a multi-month, annual, and/or multi-year basis.

Contract Disclosure: IPPNY contends that utilities should publish information regarding the

percentage of their load that is hedged and how much is available to be served by a

competitive solicitation process. It believes the Commission should work with utilities to

publish load hedging.

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Hedges: IPPNY notes that hedges should be discussed when designing the competitive

solicitation. The design should accommodate longer term contracts to support development of

new generation and continued investment in needed existing generation and apply a mix of

short and long-term wholesale supply contracts. It does not recommend prohibiting long term

contracts. IPPNY recommends that the Commission should examine wholesale competitive

procurement issues in a process that is transparent, built on stakeholder participation, and is

uniformly applicable to all current load servers.

KeySpan Energy Delivery NY/LI (KeySpan)

Auctions: KeySpan contends that auctions are worth exploring but initially recommends a

wholesale approach followed by retail auctions after it is decided that utilities should

completely exit the merchant function. KeySpan supports the New Jersey BGS auction model.

Capacity: If the utility acquires capacity for ESCOs, KeySpan believes that the ESCOs should

agree to serve customers as long as they are in the service area. In addition, ESCOs should

offer the utility the right of first refusal on capacity, consistent with FERC capacity release

rules.

Customer Outreach and Education: KeySpan recommends that the Commission facilitate

coordination of education campaigns to the extent necessary to ensure consistent and

constructive messages.

Hedges: KeySpan discourages the elimination of hedges from utility portfolios.

Incentives: KeySpan believes the Commission should retain existing incentive mechanisms and

create other incentives to reward utilities for participating in an auction program where the

utility purchases commodity at market prices. In addition, it believes the Commission should

ensure that utilities are disinterested in whether customers migrate to competitive suppliers

and that utilities must be permitted to recover revenue lost to customer migration regardless of

their financial positions.

Price: KeySpan believes that utilities should charge market prices through their GACs to permit

ESCOs that can buy commodity at better than market prices to offer savings to customers and

returns for their investors. At a minimum, the Commission could take steps to make the price

customers pay distribution utilities for commodity more reflective of the costs of providing

that service. A move toward aligning utility costs with market prices would indicate that the

differential be reflected in delivery rates.

Switch and Save Program: KeySpan believes this program is merely a stopgap measure to prop

up the existing inadequate business model and impose costs and risks on customers without

any corresponding benefit.

Mirant New York, Inc. (Mirant)

Auctions: Mirant sees a need for a collaborative to develop the framework for a standardized

wholesale competitive auction process. Mirant recommends that auctions be utilized

throughout the State, along the lines of New Jersey's BGS auction, to transition customers

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away from incumbents to competitive suppliers. However, the process must have clearly

defined terms and conditions and be as uniform as possible

Hedges: Mirant believes longer term contracts are needed to secure capital investment.

Multiple Intervenors (MI)

Aggregation: MI contends that neither the Commission nor utilities should undertake

aggregation and that it is more appropriately conducted by ESCOs and customers. However,

MI believes the Commission can and should remove certain barriers to market-initiated

aggregation efforts by providing access to customer's own load data and implementing, or

improving upon, automated imbalance trading. Further, aggregated customers should not be

subject to balancing penalties or adjustments if the group can balance itself internally.

Auctions: MI views auctions as a fundamental shift from prior policies to transition utilities out

of the merchant function. Rather, auctions must be subject to Commission prudence reviews

and costs recovered only from customers that remain with the utility.

Billing: MI recommends a single bill option, at a fair cost to ESCOs, as the universal standard

across the State.

Capacity: MI states that the obligation to provide capacity should lie with ESCOs. If the utility

acquires capacity for marketer-served loads, the cost should be the responsibility of the

specific marketers and customers utilizing such capacity. In addition, pipeline capacity should

be tied to the load it serves. Dedicated capacity should not be added generically but on an

individual contract basis.

Customer Outreach and Education: MI recommends Commission and utility customer

outreach and education programs, the scope and content of which should be reviewed in a

public forum. ESCOs and customer groups should help develop the proposed campaigns. The

Commission should continue to encourage the use of Market Expos as a means of facilitating

the efforts of utility education campaigns and ESCOs’ marketing campaigns.

End-State Vision: MI wants a vision statement that reemphasizes a commitment to lower prices,

increased choices, and education. The end-state vision should include utilities exiting the

merchant function (subject to important considerations). However, utilities should not exit

retail commodity markets unless such markets truly are competitive. It believes larger

commercial and industrial customers should have the option, but not the obligation, to select

utility commodity service.

Hedges: MI believes that the utility should be able to enter into long term contracts when it can:

1) demonstrate that the supply purchased under contract is no more than needed to meet

requirements of the utility's customers; 2) where the need for new generation meets rising

demand; and 3) it is necessary to ensure generation is constructed. Where utilities enter into

new (or more recent) wholesale electricity contracts for the purpose of providing commodity

service to remaining full requirements customers, only those customers should be responsible

for the costs of such contracts. Utilities have an obligation to minimize their commodity costs

to the extent practicable.

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Price: MI notes that customers should be exposed to market price volatility to a greater extent

and recommends the continued promotion of real time prices. It does not want to create or

exacerbate interclass subsidies -- each customer class should be responsible for own real time

pricing costs (e.g., installation of interval meters). MI believes retail access credits should

continue until markets develop further.

Switch and Save Program: MI contents that purchase of receivables (POR) without recourse

should be implemented but utility delivery customers should not be placed at increased

financial risk for ESCO uncollectibles. POR should be at a negotiated discount and the utility

should not seek compensation from delivery customers if the discount is inadequate.

National Energy Marketers Association (NEM)

Aggregation: NEM states that there is a cost associated with customer aggregation, particularly

when it is an opt-in program. A model with an accurate full cost commodity price to beat is

one of the most efficient means to eliminate significant costs associated with customer

aggregation.

Auctions: NEM rejects auctions, considering it a method for utilities to provide stable prices

without having to internalize the risks and costs of trading and hedging activities.

Capacity: NEM recommends a market-based framework to ensure the availability of capacity.

ESCOs should have the option to purchase capacity up to the level needed to serve migrated

customers, with the ability to obtain more capacity.

Contract Disclosure: NEM does not believe utilities should be allowed to hedge, but any

contract they have should be public.

Customer Outreach and Education: NEM recommends that the Commission facilitate

coordination of Commission and utility education campaigns with ESCO campaigns, with

ESCO participation on a voluntary basis.

Hedges: NEM believes the Commission should establish a date certain for each class of

customer upon which utilities will no longer provide commodity and related functions.

Utilities should not offer hedged prices and should not be permitted to trade, swap, hedge,

speculate, or gamble with ratepayer funds. It does not want to see use of long term wholesale

contracts to serve default customers.

Incentives: NEM states that utilities should not get incentives to retain default service customers

and any revenues received in excess of commodity costs should benefit all customers via

lower stranded costs or distribution rates. Utilities may require regulatory or tax incentives to

properly and timely establish a commodity price to beat during the transition period, fully exit

the merchant function and focus deployment of their resources on maintaining and operating a

reliable delivery network. The Commission should provide incentives for reliability,

infrastructure upgrades, resolution of customer complaints, accuracy and speed of info

sharing, and/or reductions in the cost of credit achieved both during and after the transition.

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Price: NEM states that proper pricing of the commodity price to beat is critical. The utility

should not provide risk-free hedged or cross-subsidized commodity prices to beat. Further,

utility pricing of commodity to large commercial and industrial customers should be based on

an hourly time-of-day rate. Small commercial and residential customers should start with a

monthly adjusted, market-based rate to which should be added utility's stranded costs

associated with providing commodity products service and technologies currently in the

bundled rate. All costs related to commodity-related functions should be removed from

delivery service charges and placed in the commodity charge.

Switch and Save Program: NEM wants to see this program implemented as a statewide model

and require purchase of receivables.

National Fuel Gas Corporation (NFG)

Auctions: NFG is not optimistic about the potential benefits from retail auction processes and is

unable to discern the benefits of wholesale auctions over current RFP processes.

Capacity: NFG does not believe that retail competition and reliability can be achieved when the

utility holds upstream capacity and releases it to the ESCOs, with capacity following the

customer. NFG believes that mandatory capacity release programs should be implemented to

ensure reliability and long term planning by the utility.

Contract Disclosure: NFG objects to contract disclosure because to do so would reduce

negotiating strength, diminish competition by setting an artificial target for ESCOs retail

prices, and would be anti-competitive.

End-State Vision: NFG believes the state's competition movement has advanced as far as it

should and that utilities should not exit the merchant function. It states that choice itself has

no intrinsic value and reliability, and just and reasonable rates may be jeopardized. It believes

competition in natural gas service is artificial, unlike the telecommunications market in which

there are technological advances.

Hedges: NFG states that ESCOs lack the financial wherewithal to compete in the long term

capacity market. The Commission's bias against long term contracting is placing utilities at a

disadvantage compared to gas fired power generators and utilities from other states and short

term contracts increase volatility and do not enhance reliability or reduce energy prices.

ESCOs should be obligated to provide utilities with the right to capacity.

Incentives: NFG does not believe incentives are necessary. Further, it states that there is no

evidence that the utility's commodity costs are higher than usual.

Price: NFG believes that increased choice undermines reliable service and ESCOs have

produced few if any new and innovative offerings. The utility should recover its gas costs and

gains on sales that should be netted against losses to enable full recovery for the utility if the

Commission wants to avoid discouraging longer-term commitments.

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New York State Electric and Gas Corporation/Rochester Gas and Electric Corporation

(NYSEG/RG&E)

Consumer Outreach and Education: In light of the level of coordination already occurring in

its territory, NYSEG/RG&E believes no further Commission facilitation is necessary.

Contract Disclosure: NYSEG/RG&E believe public disclosure of prices terms and conditions

of utility wholesale contracts should not be permitted.

Price: NYSEG/RG&E states that utilities will, necessarily, remain a dominant supplier to mass

market customers and should keep their "appropriately priced" fixed offerings. Retail electric

price should reflect all costs; failure to reflect the full price of retail commodity service in

rates would harm competition by providing below market-price signals or by arbitrarily

defining a different product for suppliers to provide competitively.

Switch and Save Program: NYSEG believes its Voice Your Choice program is the best

approach and aspects of it should be applied to other utility territories.

Niagara Mohawk Power Corporation (NMPC)

Aggregation: NMPC has not had success with low-income aggregation, but would be willing to

discuss feasibility of a renewed initiative

Capacity: NMPC believes that the Commission should consider an approach where the utility,

as part of its monopoly function, ensures pipeline capacity availability for the distribution

network. ESCOs could take assignment of utility capacity, contract directly, or provide

utilities with access to their capacity.

Contract Disclosure: NMPC believes the back-out rate or price to beat should be public, but

wholesale contracts should be subject to reasonable confidentiality requirements since

suppliers will not bid as aggressively or may not participate at all if bids are public.

Customer Outreach and Education: Consistent press releases and events, customer messages,

and bill inserts can reach customers at a much lower cost than an advertising campaign.

However, NMPC does not want to disrupt its current program.

End-State Vision: The Commission should continue to carefully monitor developing retail

markets and proceed incrementally. It should continue to work to ensure that there is an

appropriate dividing line between state and federal jurisdictions and to see that consistent

policies are in place.

Hedges: NMPC believes that the Commission should not require utilities to enter long term

contracts for power supplies. It recommends using policy and regulatory changes and tax

incentives to foster capital investment.

Incentives: NMPC believes that an incentive would give a utility an economic interest in the

sale of commodity and hurt ESCOs in its territory.

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Price: NMPC is interested in seeing marketers provide fixed price gas service offers to

customers. NMPC believes that full reconciliation of commodity costs is necessary to ensure

that the distribution company has no economic interest in making commodity sales to its

delivery customers and does not become a market participant.

Switch and Save Program: NMPC states it already undertakes Market Match and Market Expo

programs with success and should continue to employ these programs. NMPC would

implement a limited time purchase of receivables program if there is a discount involved and

the utility is able to recover bad debt.

Utility Role: NMPC made several proposals, including an auction process its remaining SC-3

electric customers and a program that would assist gas ESCOs in offering a fixed or capped

price to gas customers.

North American Energy (NAE)

Capacity: NAE notes that the only way to guarantee capacity is to tie it to the customer.

Customer Outreach and Education: NAE believes marketing is proprietary and marketers

should not be lumped into one group.

Contract Disclosure: NAE notes that transparency of purchases or methodology employed in

purchases would be very beneficial to competitive markets.

Hedges: NAE states that it does not seem prudent or fair to marketers to allow utility recovery

from losses when providing a hedge. Any loss or gain from the sale of these assets should add

to or reduce delivery rates for all customers. Recovery should be broad based and applied to

delivery charges.

Incentives: NAE believes that giving an incentive to utilities will only prolong migration and

that utilities will protect the profit center created by providing incentives.

Switch and Save Program: NAE recommends purchase of receivables (POR) without recourse.

Pace Energy Project/National Resource Defense Council (Pace/NRDC)

Auctions: Pace/NRDC supports competitive bidding for utility supply and the "harvesting" of

energy efficiency resources.

Contract Disclosure: Pace/NRDC recommends full disclosure with evidentiary hearings of

utility portfolios.

Hedges: Pace/NRDC advocates active aggressive portfolio management by the utility for default

service, with Commission oversight. Portfolios should include spot, long and short-term

contracts, financial hedges, DG, renewables, supply-side measures, and efficiency resources,

both owned by the portfolio manager and secured through contracts. It does not see a need to

reduce the utilities' dominant share of the mass markets. Pace/NRDC believes the

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Commission should remain vigilant to utility supply portfolios that over-commit to long-term

contracts at the expense of more flexible alternatives.

Price: Pace/NRDC believes that the gains or losses from changes in supply associated with

customer migration away from or back to the incumbent utility should be evaluated through a

prudence analysis with rate treatment, if any, afforded only after an evaluation of the

foreeseeability of the migration and the steps the utility could have taken to plan for these

changes in customer load. The utility’s cost recovery should be independent of total electricity

delivered

Public Utility Law Project (PULP)

Aggregation: PULP notes that the most effective aggregation is when the utility provides

supply through a modern, cost of service regulatory regime. The small business market sector

could make it work, but overall system benefits to such segmentation are unclear.

Contract Disclosure: PULP believes that after all the transactions are completed, all terms of

the utility (and ESCO) wholesale purchases should be made public.

Customer Outreach and Education: PULP contends that there is a need to better understand

how campaigns contribute to "safe, adequate and reliable service" and "just and reasonable

rates". It believes that the focus should instead be on development of a level playing field

between the utility and ESCOs and the goal of universal and affordable service.

End-State Vision: The Commission should expand utility pricing options (fixed rates, variable

rates, green power, TOU, etc.) and customer choice should be focused on large commercial

and industrial customers.

Hedges: PULP believes portfolios should be differentiated between residential and large

commercial and industrial customers and should be used to stabilize residential prices. PULP

predicts that incumbents will be serving residential loads for some time. It is less concerned

with the process for obtaining a portfolio of varied elements and more concerned about

prudence of the utility's actions in planning and developing portfolios. PULP recommends

that utilities select different sources for different blocks of customer load. It notes that long

term contracting tools are necessary and in their absence acceptable retail competition may be

impossible to achieve.

Incentives: PULP states that prudence analysis and standards provide the clearest incentive to

the utility to minimize its commodity costs.

Price: PULP states that low income and residential customers are not being offered significant

choices and that utility offerings should include standard terms and conditions for fixed rates

and voluntary options (i.e. green power, variable rates, and fixed and variable time of use

offerings). It recommends focusing choice efforts on large commercial and industrial

customers because they are more sophisticated, with all switching costs paid for by these

classes.

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Select Energy Corporation (Select)

Auctions: Select recommends developing a pilot auction that ensures that there will be several

winners and that can be used while the market matures. It recommends direct assignment of

individual large customers to ESCOs, with a firm sunset date after which there is no more

utility role for large customers. The identity of winning bidders should be kept confidential

for a minimum time period to allow them to contract for necessary supplies and hedges.

Larger customers should be auctioned to marketers in such a way that they are free to

negotiate new contracts, following the initial auction term, with a new supplier or enter into

amended arrangements with their assigned supplier.

Billing: Select wants utilities to be required to offer purchase of receivables without recourse and

consolidated billing under a “Bill Ready” model. It believes that the utility should be

accountable for load forecasting, gas balancing, enrollments, drops, and load history

requirements.

Capacity: Select favors a centralized approach to pipeline capacity control where either utilities

or an ISO-like entity acquires and manages capacity. Select also recommends that capacity

follow the customer.

Customer Outreach and Education: Select would like to see an increase in outreach and

education efforts regarding customer awareness and greater customer list availability. It is in

favor of potential incentives for ESCOs to conduct marketing campaigns that coincide with

the Department’s and the utilities’ education campaigns.

Hedges: Select recommends that hedges be assigned only to smaller customers to temper price

volatility. Retained hedge costs should be allocated to delivery functions to avoid skewing

the competitive market’s ability to compete for provider of last resort (POLR) service. It

envisions auctioning off retained hedges to ESCOs who in turn win the right to serve mass

market POLR customers. It does not support utilities having “managed portfolios”. As the

market matures, groups of smaller customers, rather than their load, can be auctioned to the

marketplace. In any case, utilities should not be directed to enter into long term contracts

where other methods may be more effective. In regions where supply reserve is low, utilities

should contract long-term for a portion of generation output. Once the generation is built, it

can be moved to ESCOs via an auction process.

Incentives: Select recommends establishing utility incentives to encourage accountability,

requiring utilities to exit the merchant function, creating a “best practices” collaborative, and

expanding consolidating billing programs and purchase of receivables without recourse to

other service territories. Further, it recommends providing incentives for utilities to achieve

the lowest reasonable price for provider of last resort service to meet or exceed certain targets,

which should not be counted against the utility’s allowable rate of return), and incorporating

incentives into the “backout rate”.

Price: Select has resigned itself that mass market customers are not ready to accept widely

varying market prices. It believes the "market-based" part of a utility's retail commodity tariff

service should reflect all elements of market cost, and adjustments should be kept to a

minimum to make for easy comparison between the market and ESCO offers. Further, Select

-19-

believes that retail commodity rates must also include all costs required to offer a retail

product such as billing, collections, labor, and a fair allocation of overhead cost.

Switch and Save Program: Select considers the consolidated billing program, with purchase of

accounts receivable at a discount, to be the most significant element of O&R's program.

Select recommends that this billing option be expanded to other utility service territories.

Small Customer Marketer Coalition (SCMC)

Auctions: SCMC is generally not in favor of auctions and would rather see market-based supply

procurement for utilities.

Capacity: SCMC notes that if utilities exit the commodity function, ESCOs will obtain

financing but it is unfair and unreasonable in the current ambiguous environment to ask

ESCOs to acquire capacity without knowledge of the final market state.

Contract Disclosure: SCMC is concerned about potential problems for ESCOs that have built

their own marketing networks that would be asked to engage in a more open competitive

bidding exercise. It believes that there should be transparency to the maximum extent

possible.

Customer Outreach and Education: SCMC recommends implementation of additional

programs on an optional basis, targeted to smaller customers; each entity should tailor its

message to minimize duplication and increase the message's effectiveness.

Hedges: SCMC contends that utilities should be prevented from engaging in hedging and long

term price programs. There should be no utility portfolio management, especially for the

largest customers. If such activity is permitted, any cost differences should be reflected

and/or recovered in a manner that will not distort real time price signals or place retail access

customers at a competitive disadvantage.

Incentives: SCMC does not believe there is a need for utility incentives since the utility is

already obligated to be prudent

Price: SCMC believes that commodity should be provided by the competitive markets and the

utilities that remain in the commodity market should face the same risks as the private sector.

Switch and Save Program: SCMC believes this program is beneficial when a utility directs the

customers to the ESCO. Further, consolidated billing is very important to the effectiveness of

this program but a dual-bill option should also be offered. It believes that purchase of

receivables without recourse does no harm to the utility and should be practiced across the

state.

Strategic Energy L.L.C. (Strategic)

Aggregation: Strategic advocates use of opt-out aggregation programs for customers that have

not already switched to an ESCO.

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Auctions: Strategic supports the Texas Price to Beat approach as the end state model for New

York default service.

Billing: Strategic would like to see Con Edison's bills designed in such a way that they help

customers understand what they can save with an alternate supplier.

Capacity: Strategic opines that the current New York capacity market is counterproductive

because it sends the wrong price signals to potential investors. Strategic advocates an easing

of price mitigation and collateral costs in the state's wholesale markets. It argues that

duplicative collateral obligations are a significant financial burden for ESCOs. Strategic

recommends that there be a net settlement of firm bilateral contracts to bring its costs to do

business in New York more in line with costs in other states.

Customer Outreach and Education: Strategic recommends use of collaborative customer

education between staff, utilities, and ESCOs. Further, customer lists should be made

available to the ESCOs.

End-State Vision: Strategic contends that the end state for electric deregulation in New York

should require the utility to exit the merchant function. The distribution utility should

compete for customers with over 100kW demand only through an affiliate.

Incentives: Strategic believes utilities should receive incentives that diminish the attractiveness

of remaining in the merchant function.

Price: Strategic states that New York needs increased price transparency in the wholesale market

and that the benefits of competition can best be achieved in New York if default service is

awarded to any qualified supplier, not just the distribution utility. Strategic suggests that all

customers should be allowed to manage the volatility of the market by using price protection

products offered by ESCOs or participating in demand response programs. Time-of-use

metering advances should be applied to small end users, beginning with a pilot program.

During the transition to a fully competitive market, Strategic believes that utilities should not

offer any fixed or hedge product to customers over 100kW.

UGI Energy (UGI)

Aggregation: UGI believes that when there is price transparency, aggregation occurs naturally.

Therefore, the Commission should not allow utilities to aggregate commercial or industrial

customers for ESCOs since aggregating is the responsibility of the ESCO that wants to serve

those customers.

Auctions: UGI favors the New Jersey auction model and opposes utility auctions because it

believes it is simply another form of customer aggregation and fixed utility pricing.

Capacity: UGI notes that utilities should be permitted to contract for and recover cost of

upstream storage and transportation capacity on a long term basis. Utilities should get

recovery for the capacity they hold but only after using best efforts to mitigate capacity costs

by selling unused capacity. If a utility suffers from stranded commodity costs as the result of

the movement of marketers to competitive transportation, the recovery of such costs should be

-21-

spread equally among all of the utility's customers and should not be recovered through exit

fees or migration riders. Capacity release should be an option but not a mandate for ESCOs.

Contract Disclosure: UGI favors disclosure, stating that there is no reason why information

related to utility commodity purchases should not be public information.

Customer Outreach and Education: UGI believes that marketing to and education of

customers is the responsibility of the ESCOs. Further, ESCOs should not be required to

coordinate their campaigns with utilities.

End-State Vision: The Commission should develop and adopt changes to uniformly establish

fair programs across state. Programs should eliminate cross subsidization and charge the same

delivery charges for both utility and ESCO sales, with the only difference in the rates charged

being the commodity charge, including interstate delivery, which would be charged by either

the utility or ESCO.

Incentives: UGI contends that utilities already have an incentive to reduce operation and

maintenance expenses between rate cases to over-recover costs. Providing an incentive to the

utility regarding commodity sales would be counter to the Commission's objectives.

Hedges: UGI notes that long term contracts encourage investment and utilities with regulated

cost recovery mechanisms are in the best position to make long-term capacity commitments.

Capacity release permits pipelines to reallocate long term capacity entitlements to third party

suppliers as the market evolves.

Price: UGI recommends no utility fixed price options because it hurts competition and creates

uncertainty and instability in the competitive market.

Case 00-M-0504 - Reply Comments Summary

Central Hudson Gas and Electric Corporation (CHG&E)

Billing: CHG&E believes that the proposed sample energy bill format needs more work to

incorporate all of the unbundled components and should be addressed in a separate

proceeding. CHG&E contends that it is in the best position to perform back office functions

and can better integrate such functions with its OMS, productivity, and emergency response

systems.

Hedging: CHG&E contends that the utility should have a blended portfolio but not totally exit

the merchant function at this time. It would like to see CHG&E service eliminated as a supply

option, except for Provider of Last Resort (POLR) functions.

Price: CHG&E wants the POLR energy rate to be hourly prices charged by the NYISO, grossed

up for line losses plus separate charges for capacity and allowances for working capital costs

and bad debts. Any development of “wholesale” pricing should follow cost-based ratemaking

principals.

Centrica/Direct Energy (CDE)

Aggregation: CDE believes that the opt-out method results in higher migration.

Auctions: It supports retail auctions but only for mass market customers. Auctions should

produce diversity of retail supply and be available only to customers who have not already

chosen an ESCO.

Hedging: CDE contends that Staff is too focused on portfolio and utility commodity

procurement practices and should focus on utility exit of the merchant function.

City of New York (City)

Contract Disclosure: The City believes that public access should be facilitated with appropriate

protection for legitimate confidentiality concerns. There should be some protections for

contract confidentiality.

End-State Vision: The City contends that no policies should be undertaken that risk substituting

means for the ends sought.

Hedges: The City states that long term contracts should be part of a utility's blended portfolio

but the Commission should initiate a separate proceeding to determine the circumstances and

conditions in which long term contracts are permitted and. It should also initiate a proceeding

for an RFP process regarding long term capacity procurement. Long term contracts should be

staples of ESCO portfolios.

Consolidated Edison Corporation/Orange &Rockland Utilities, Inc. (Con Ed/O&R, the

companies)

-2-

Auctions: Wholesale auctions should not be mandated but the companies are willing to explore

the issue. However, it is premature to call for retail auctions and the Commission should not

force mass market customers to ESCOs.

Billing: The companies believe that ESCOs should develop their own services.

Capacity: Con Ed/O&R believe that the makeup of a gas supply portfolio is a utility- specific

matter and reliability would be jeopardized if the utility lost direct control of storage assets. It

contends that ESCOs can subscribe to new storage in the marketplace and an ISO-like entity

should be established for the gas capacity market to ensure equal access.

Contract Disclosure: There should be no general rule for price disclosure and the Commission

should rule on this matter in specific rate cases.

Customer Confidentiality: Con Ed/O&R believe that utilities should not be required to provide

customer lists to ESCOs without explicit customer consent.

End-State Vision: Con Ed/O&R believe the Commission should continue its current flexible

approach to the development of competition and allow for individual utility plans tailored to

each service territory. Uniformity should be limited to basic rules governing competition

(UBP and EDI).

Hedges: Con Ed/O&R recommend that hedging continue, even long term hedges (which they

define as 3-4 years duration). The companies stress that there is a need to ensure that a utility

is not at financial risk when migrating customers. Further, the companies believe that utilities

should not be required to enter into contracts for reliability unless the Commission has

specifically authorized the price and terms. Con Ed/O&R reject the idea of a generic

proceeding on utility procurement practices since the NYISO should determine what market

changes are needed to encourage new infrastructure.

Outreach and Education Campaigns: Con Ed/O&R contend that formal facilitation would

create administrative hurdles and impede timely rollout of campaigns.

Switch and Save Program: Con Ed/O&R recommend tailoring a non-mandated purchase of

receivables program to fit the utility's circumstances affecting stakeholders in each territory.

Con Ed Solutions (Solutions)

Auctions: Solutions notes that a retail auction of large customers is unnecessary and could

undermine current ESCO investment for enrolling large customers, creating incentives for

suppliers to drop more costly customers. Instead, Solutions believes the PSC should look at

mandatory real time pricing programs like those used in New Jersey.

Billing: Solutions does not want the current rate-ready bill replaced with a bill ready

consolidated bill because it believes it increases error risk and is not suited for handling mass

market customers. If marketers want to offer more complex billing, they can do so under a

two bill model.

-3-

End-State Vision: Solutions notes that utilities should focus their efforts on developing and

enhancing non-commodity/regulated products and services.

Hedges: Solutions recommends no long term contracts for utilities. In addition, Solutions does

not recommend flowing the impact of utility hedges through a commodity charge because

deferring gains and losses is likely to create additional stranded costs for the utility. It believes

ESCOs should not be required, provided with incentives, or otherwise encouraged to enter

into long term contracts because they are not cost effective relative to the short term market.

The decision should be left up to each individual ESCO and its business model.

Price: While Solutions believes it is preferable to have all customers see market prices, the

utility fixed price offer to smaller customers could be workable only if the price is truly fixed

and includes all cost and risk elements (which Solutions believes would be the case if the

price were determined through a wholesale auction process). In addition, Solutions

recommends that customers migrate to hourly pricing based on real time pricing instead of

day-ahead market prices.

Independent Power Producers of NY (IPPNY)

Auctions: IPPNY recommends utilizing a spot market pass-through and a New Jersey BGS type

auction to encourage large commercial and industrial customer choice. It recommends

implementation of a standardized, statewide wholesale competitive procurement process

where wholesale suppliers will compete to serve a utility's retail load on a multi-month,

annual and multi-year basis. IPPNY contends that the PSC should institute a collaborative

proceeding with pre-defined time frame to design and implement a standardized wholesale

procurement process.

End-State Vision: IPPNY states that the status quo is untenable and that the Commission must

act to develop markets.

Hedges: IPPNY states that more customers must be exposed to market signals and residential

and small commercial and industrial customers should have some level of price volatility

protection. Further, it believes there should be some level of long term contracts with varying

expiration dates.

KeySpan Energy Corporation (KeySpan)

Auctions: KeySpan contends that the New Jersey BGS auction model is worth exploring in New

York.

Billing: KeySpan states that there is no hue and cry to open non-commodity services to

competition and programming requirements to reformat customer bills for this purpose are

extensive, time consuming, and expensive.

Capacity: KeySpan believes that the utility must retain responsibility for capacity infrastructure.

To protect reliability, the Commission must permit utilities to procure capacity long term on

-4-

an as-needed basis. As long as there is sufficient capacity in place to meet customer demand,

KeySpan is indifferent about whether it or an ESCO is using it to serve customers.

Incentives: KeySpan recommends that there be no utility disincentives to customer migration. It

expressed interest in migration incentives, but believes it is better to minimize risk to the

utility from migration, which could cause it to incur stranded costs.

Price: KeySpan contends that the utility's commodity prices must reflect market prices to

diminish the role of the utility as the least-cost commodity provider. ESCOs cannot compete

with utility GACs. Unless utilities price commodity at market prices, their presence in the

market will be a barrier to small customer migration.

Multiple Intervenors (MI)

Auctions: MI states that the Commission should neither require nor encourage the utility to

procure commodity supplies for contestable customers through an auction process.

Customer Confidentiality: MI does not want to see a scaling back of the confidential treatment

accorded to customer data as part of this proceeding.

End-State Vision: MI believes the Commission's goal should be to adopt a framework for New

York's competitive energy markets that will result in customers realizing lower prices and

increased choices. Further, it should be mindful of existing or proposed multi-year rate plans

and reject electric revenue decoupling mechanisms.

Hedges: MI contends that new utility hedges should be optional for all customer classes and

costs associated with any long term utility commodity contracts should be recovered solely

from the utility's hedged commodity customers.

Incentives: MI states that no positive incentives should be provided to the utility to promote

migration.

National Fuel Gas Corporation (NFG)

Capacity: NFG recommends mandatory utility capacity assignment to ESCOs where, when the

ESCO exits the market, the utility may exercise its capacity recall rights. The utility may re-

release the same capacity to the new ESCO serving the former ESCO's customers.

End-State Vision: NFG recommends incremental modifications to the utility's current choice

programs, together with a clearly defined end-state with the utility as a merchant, especially if

the utility is the provider of last resort (POLR). NFG does not want to see a framework

adopted that discourages utilities from acquiring and maintaining assets to serve the POLR

merchant role over the long term.

New York State Electric and Gas Corporation/Rochester Gas and Electric Corporation

(NYSEG/RG&E, the companies)

-5-

End-State Vision: The companies do not object to general policy guidelines, but do not want to

see a "one size fits all" model. They recommend that the Commission proceed with caution

when making changes and implement flexible policies. Further, NYSEG and RG&E assert

that there are limitations on the Commission's authority absent explicit legislative changes to

the Public Service Law. They believe that the terms and conditions of existing multi-year rate

plans should not be undermined and/or disturbed.

Hedges: In addition to raising potential anti-trust issues, NYSEG/RG&E believe it is costly and

unnecessary for the Commission to oversee utility hedging decisions.

Price: The companies do not want to see utility fixed price options eliminated.

Niagara Mohawk Power Corporation (NMPC)

Aggregation: NMPC believes that the Commission should allow opt-out aggregation programs

when the terms and conditions of the service are Commission-approved and the customers can

exit the program at any time.

Auctions: NMPC does not need auctions in the near term because it is well hedged. Long term,

NMPC supports its customer aggregation proposal. NMPC recommends that larger

customers be transferred to market prices in advance of smaller customers.

Billing: There should be no further unbundling of bills beyond what NMPC has done because

doing more would only confuse customers.

Capacity: NMPC notes that utilities should have the obligation to ensure that adequate pipeline

capacity exists for all of its delivery customers. ESCOs can contact the utility or the pipeline

directly for capacity, but the utility should have first right to purchase ESCO's capacity should

it exit the New York marketplace.

Contract Disclosure: NMPC believes that confidentiality is appropriate in the short term to

allow wholesalers to arrange hedges and in the long term to assure active wholesaler

participation in the bidding process.

End-State Vision: NMPC wants to exit the merchant function. It believes that current rate plans

should be honored and any new approaches to commodity, either wholesale or retail, should

be implemented consistently with existing rate plans. The Commission should continue to

exercise jurisdiction over retail delivery, create consistent market rules, and work to develop

policies and actions that facilitate retail markets.

Hedges: NMPC contends that utilities should not execute long term wholesale contracts for

supply and there should be no mandate that they do so. NMPC notes that ESCOs are the most

appropriate party to structure long term portfolios for their customers.

Pricing: NMPC believes that all commodity costs should be recovered through commodity

charges. Fixed costs associated with long term commitments by utilities should be recovered

from customers whether or not the capacity associated with those contracts is needed by

customers.

-6-

Switch and Save Program: NMPC is willing to work collaboratively on this issue.

Small Customer Marketer Coalition (SCMC)

Auctions: SCMC notes that proponents of the auction process have the obligation to show that

introduction of a wholesale procurement approach will not undermine having many ESCOs in

the service territory. It rejects the idea of creating a new marketplace with just a few ESCOs.

End-State Vision: SCMC believes the Commission needs to adopt an end state vision in which

the utility exits merchant function.

Price: SCMC notes that utility fixed rate offerings further solidify the utility's dominant market

position, and the Commission should direct utilities to exit the merchant function.

Strategic Power Management (SPM)

Aggregation: SPM contends that there should be a balance between expanding the competitive

market and customer privacy concerns, but recommends more relaxed standards for

commercial and industrial customers, including opt-out programs.

End-State Vision: SPM believes that the Commission should issue a final order as quickly as

possible so that all market participants can share the Commission's vision and make business

plans accordingly.

Hedges: SPM does not believe it is feasible over the next few years to move the utility out of the

commodity business. It recommends that the Commission avoid long term utility supply

procurement and scrutinize all long term utility contracts to ensure that, at the very minimum,

it is the only way to provide just and reasonable rates to full service utility customers.

Incentives: SPM contends that a utility's negative attitude toward retail access can make ESCO

entry burdensome, and recommends that the Commission provide enhanced shareholder

returns for increased migration.

Price: SPM believes there should be no additional fixed price utility commodity service and that

customers that stay with the utility must be exposed to market prices. A market-based supply

charge is essential to stimulate customers who default to full utility service to at least consider

other offers. SPM states that interval metered customers should be exposed to NYISO hourly

day-ahead market prices as a default.

Switch and Save Program: SPM notes that the key to purchase of receivables (POR) is a single

bill option rendered by the utility and POR without recourse.

Texas Eastern Transmission, L.P. (TE)

Capacity: TE believes commitments by ESCOs for capacity should be long term and assignment

between parties must be accomplished within FERC gas tariff provisions. TE recommends

-7-

that the Commission provide incentives for suppliers to obtain capacity that is contractually

dedicated to markets on a firm primary basis.

Hedges: TE recommends continued reliance on long term contracts, as part of a balanced supply

portfolio, to ensure commitments by interstate pipeline and financial community to invest in

infrastructure.

UGI Energy (UGI)

End-State Vision: UGI recommends that the PSC refine unmanageable programs in slow

markets rather than completely revise existing regulations.

Price: UGI contends that utility fixed price offers only hurt competition; the utility's pricing

should be market-based.

APPENDIX D

SWITCH AND SAVE

Orange and Rockland's Switch and Save Program has proven to be the most successful

model yet tried in New York State for moving mass market customers to non-utility entities.

Orange and Rockland launched the program in August 2000. As of March 1, 2004, 31,363

electric service and 18,648 gas service customers had enrolled in retail choice through the Switch

and Save program.

The program's objectives are to minimize the complexity of switching for customers,

minimize acquisition costs for ESCOs, and increase customer participation in Orange and

Rockland's retail choice programs. Participating ESCOs agree to offer customers enrolling in

Switch and Save a 7% discount on commodity service for a two-month period and to take all

customers that are assigned to them. The discount is provided by the ESCO, and serves as a low-

cost marketing tool. Customers can sign up by contacting Orange and Rockland specifically

about the program or they can be referred to the program after being informed about the program

by a customer representative whenever a customer calls Orange and Rockland for any type of

transaction (e.g. new service call, billing inquiry, etc.). In addition, Orange and Rockland

promotes the program through media advertising, bill inserts, its speakers' bureau, the internet,

and special events.

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Enrolling customers are assigned by Orange and Rockland to ESCOs on a random,

daily basis, with each ESCO receiving an equal number of accounts by service type (electric

only, gas only, or electric and gas combination service) and rate classification. Customers in the

program are not permitted to select a specific ESCO.

Once a customer is enrolled, a notification

letter is sent to the customers within 24 hours of enrollment that provides the name of the

assigned ESCO, the start date, and contact information. During the introductory period the

ESCO is required to contact the customer to discuss terms for extending the relationship beyond

the two-month introductory period. After the two-month introductory period, the price of energy

is set by mutual agreement between the ESCO and the customer. The customer is also given

notification about a rescission period during which the customer may cancel participation in the

program.

For ESCOs participating in the program, Orange and Rockland purchases their

accounts receivable without recourse, which simplifies ESCOs operations and can reduce up-

front costs of doing business in the service territory. Accounts enrolled in the program are billed

by Orange and Rockland.

Customers wishing to select a specific ESCO can do so outside of the Switch and Save

program by contacting the ESCO directly.

-3-

This program has succeeded because it provides advantages for all of the participants.

For customers, it offers an up-front savings and switching is easy to do. For ESCOs, Orange and

Rockland takes care of administrative details and makes it easy to acquire customers at very low

cost. For the utility, the model encourages migration during the normal course of business and

makes it easy for customers to migrate, thus making it possible to move large numbers of

customers with relatively little effort.

CASE 00-M-0504

APPENDIX E

CONSENSUS STATEMENT

ON LOW INCOME PROGRAMS

Consensus Statement on Low Income Programs

Movement to End-State

1. The needs of low-income customers during the movement to

the end-state will continue to need to be addressed

through low-income programs and other initiatives.

2. Since the needs of low-income customers are diverse,

they need to be addressed through a variety of

initiatives.

3. The needs of both gas and electric customers should be

considered in the design of low-income programs.

4. Utility low-income programs should continue as required

in existing settlement agreements.

5. Lowering utility rates so that consumers can receive

lower prices and funding low-income programs through

rates are competing goals that need to be continually

reconciled.

6. Utility rates may fund low-income programs for the near

term. In the future, the sources of funding for

low-income programs need to be examined on an on-going

basis.

7. Low-income programs, while appropriately recognizing the

diversity of needs, could benefit from increased

cost-effective coordination among community, government,

private, utility and non-profit low-income program

providers.

End-State

1. Even in the end-state, some low-income consumers in New

York State may spend a greater portion of their income

on energy costs (i.e., have a greater energy burden)

than other residential consumers.

2. The needs of low-income consumers need to be addressed

in the end-state.

3. The needs of both gas and electric consumers should be

considered in the design of low-income programs.

4. If a Model 3 scenario is adopted in which utilities have

no retail relationship with the consumer, other retail

service providers and/or other non-utility entities will

have to assume responsibility for the operation of

low-income programs previously provided by the

utilities.

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5. Appropriate resources should be provided to address the

needs of low-income consumers in the end-state.

6. Low-income programs, while appropriately recognizing the

diversity of needs, could benefit from increased

cost-effective coordination among community, government,

private, utility, and non-profit low-income program

providers.