On July 25, the Supreme Court for the County of Albany, New York (the Court) issued a decision vacating key directives of the New York Public Service Commission (PSC) in its Order Resetting Retail Energy Markets and Establishing Further Process issued on February 23 (the PSC Reset Order).[1] The PSC Reset Order, which was surprising and deeply alarming to energy service companies (ESCOs) that have been competing with regulated utilities to sell power to New York residential and small commercial (mass market) customers, had three directives that together would have effectively and prospectively shut down ESCOs' business opportunities with most of those customers. In vacating the PSC's directives, the Court found that the PSC Reset Order violated due process rights and was arbitrary and capricious, leaving open the potential for future directives, but only if arrived at through due process and reasoned decision-making.
Background
New York was the latest in a series of states to open proceedings to revisit consumer protections applicable to competitive retail suppliers. These proceedings have typically been triggered by an increase in customer complaints, partly caused by more customers choosing to participate in competitive supply and also by customers on variable rates being exposed to price increases. Normally, these proceedings span months or even years, with multiple opportunities for stakeholder input. The New York proceeding, however, was a unique one. After launching a proceeding similar to those in other states to revisit ESCO eligibility criteria and modify consumer protections applicable to ESCOs, the PSC, following a limited hearing, went well beyond proposals that had been reviewed in the proceeding – or what had been considered in any other state proceeding – and issued the following three sweeping directives to ESCOs:
- ESCOs could serve new mass market customers only if the contracts with those customers either (i) guaranteed customer cost savings in comparison to utility rates, or (ii) guaranteed that the energy delivered to mass market customers consisted of at least 30 percent renewable energy, made up of power produced from biomass, biogas, hydroelectric, solar energy and/or wind energy facilities;
- ESCOs would be required to receive affirmative consent from existing mass market customers prior to renewing that customer from a fixed rate or guaranteed savings contract onto a contract providing renewable energy but not guaranteed savings; and
- ESCOs intending to renew or enroll mass market customers would be required to make a compliance filing with the PSC certifying that any enrollments would comply with the PSC Reset Order.
The ESCOs' response to the PSC Reset Order was swift and direct. They saw the order as effectively eliminating their competitive markets except in two very narrow circumstances. On March 3, nine days following the PSC Reset Order, a group of ESCOs (the petitioners) joined together and filed a request for a temporary restraining order (TRO) that would prevent the enforcement of the PSC Reset Order. Without the TRO, that Order would have become effective on March 4, only 10 calendar days after its issuance, immediately and directly affecting more than 100 competitive retail suppliers operating in the state and more than one million mass market customers.
On March 4, the day after receiving the ESCOs' (petitioners') request, the Court granted the requested TRO.
The Court's Decision
In its subsequent decision on July 25 vacating the PSC Reset Order, the Court found, as an initial matter, that the PSC has jurisdiction over both the full cost-of-service regulated market and the competitive retail energy market. That jurisdiction extends both to the public utility and ESCO rates and the rules for switching between the two markets. The Court nevertheless concluded the PSC Reset Order must be vacated for two reasons: (1) it denied the petitioners their procedural due process rights, and (2) it was irrational, arbitrary, and capricious. In finding that the PSC Reset Order denied the petitioners their procedural due process rights, the Court cited the fact that the Order went well beyond the PSC's Staff notice that was issued prior to the PSC Reset Order in August 2015. The Court concluded that neither the Staff notice nor any of the comments filed with the PSC in response to that notice "would give petitioners any inkling of the type of change which resulted from the Reset Order." Thus, the petitioners were not given sufficient notice and opportunity to respond to the provisions that appeared in the PSC Reset Order.
In finding that the PSC Reset Order was irrational, arbitrary, and capricious, the Court noted that the Order bears little rational relationship to the hearings, comments, or Staff reports in the PSC proceeding. The Court concluded that "[g]iven the very sweeping and comprehensive changes to the [Uniform Business Practices], meant to improve the retail energy market, and the recommendation by the majority of commentators that further study be given to energy-related value added services, the PSC Reset Order appears to be irrational, arbitrary and capricious." The Court also concluded that the "immediate transition" – the 10-day period by which the PSC Reset Order was to be implemented – is irrational, arbitrary, and capricious, finding "the implementation of the PSC Reset Order in a time span of 10 days is not only unduly burdensome, it is impossible."
What's Next?
The PSC has until 30 days from the day the Court's decision was served on the petitioners to petition the New York Court of Appeals to rehear the matter. However, an appeal would not stay the execution of the Court's judgment, so the PSC Reset Order will not be implemented until and unless a final and unappealable decision is issued reversing the Court's decision vacating the directives in that Order.
The Court's decision certainly leaves open the possibility that the PSC could, in the future, propose changes similar to those that it directed in the PSC Reset Order, but would need to do so through rulemaking channels that provide ESCOs and other interested parties with sufficient advanced notice and opportunities for comment prior to the issuance of any final rule changes and full consideration of the record that is developed. This type of action by the PSC would likely be acceptable to the Court as indicated both in its finding of PSC jurisdiction, and also in its finding that a notice and opportunity for comment issued by the PSC after the PSC Reset Order should have been issued before the Order to provide a meaningful opportunity for ESCOs to participate in the fashioning of the provisions set forth in the PSC Reset Order. However, given the strong reaction by retail suppliers to the shutting down of such a significant market, it is unclear whether the PSC will raise such a proposal again and, if it does, what form such a proposal would ultimately take.
Footnotes
[1] Day Pitney LLP published an alert, New York Significantly Restricts Competitive Retail Electricity Supply, on February 25, and a Law360 article, NY Retail Electricity Order Is Likely To Face Opposition, on February 29 (subscription), discussing the PSC Reset Order and its impact on the retail supply market in New York. The Law360 article also includes a further update discussing a notice issued by the PSC a week after the PSC Reset Order.
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