Demand For Upstate Wind Heightens As Rate Shock Hits Downstate New York

Co-written by Natara Feller

New York’s new capacity zone (“NCZ”) conundrum discussed in an April 11, 2014 post, entitled: Hudson Valley & NYC Brace As Imminent Changes to New York’s Energy Markets Approach, is now being fought at Federal Circuit Court. The New York Public Service Commission (NY PSC) and Central Hudson Gas and Electric (CHG&E) have challenged the Federal Energy Regulatory Commission’s (FERC’s) approval of the new capacity zone, which is expected to significantly impact ratepayers in the Lower Hudson Valley. Rising temperatures can bring shockingly high electric prices, however, with an increase of $280 million per year in electric rates and $70 million of that coming just this summer in the Lower Hudson Valley, utility bills may burn much worse than any prolonged summer sun exposure. So sit back in your beach chair and unwind with us as we unravel the story of the Hudson Valley’s energy future.

As discussed in the Tribune’s previous post, the primary issue at hand is reliability: there is transmission congestion caused by inadequate transmission capacity. In other words, New York’s current electrical infrastructure cannot adequately supply the Lower Hudson Valley with reliable electric power. There are two competing solutions:

  1. The first is New York’s Energy Highway Blueprint, which is a massive planned transmission upgrade that promises to bring more upstate power downstate and assuage reliability concerns. The plan calls for “at least 1,000 megawatts of new alternating current (AC) transmission capacity to relieve congestion” with construction hoped to begin in 2018. This initiative was created by a task force under Governor Cuomo and is being implemented by the NY PSC. Further, as we noted in our last post, wind power is becoming an increasingly more significant generation resource in upstate New York.
  2. The second solution is to have ratepayers front the money for new generation in the Hudson Valley. This is currently happening with the new capacity zone created by the New York Independent System Operator (NYISO) and approved by FERC in its August 13, 2013 (“August Order”) and January 28, 2014 (“January Order”) Orders . The new capacity zone essentially creates a capacity market boundary surrounding the Lower Hudson Valley and NYC and cuts this area off from the rest of the state. Within this boundary, all the energy capacity for the region must exist either in the form of generation or in the form of transmission lines carrying energy into the region. By limiting the capacity market in this way, competitiveness in the Lower Hudson Valley’s capacity market increases and such competitiveness is supposed attract new electric generation project proposals and development, thereby increasing reliability. As many have noted, this will primarily give incumbent generators a massive windfall rather than provide new opportunities for other types of generation resources.

These competing solutions highlight the jurisdictional roles that FERC, the PSC and NYISO play in regulating energy. FERC is responsible for regulating wholesale sales of electricity (sales for resale) and the transmission of electricity. NYISO is a creature of the federal government. It is a voluntarily created not for profit corporation that operates the transmission grid in New York, and is tasked with implementing FERC’s regulations while ensuring a safe, reliable, and fair wholesale energy market. The NY PSC is responsible for siting transmission, siting generation, retail sales (sales directly to end users) and the distribution of electricity. Distribution refers to your local power lines while transmission refers to the large high voltage power lines that carry energy to distribution systems. So, in this instance, the federal government and the State are using their respective authority to fix a problem with conflicting solutions.

After FERC approved the new capacity zone, NYISO began to back-peddle and, along with the NYPSC and the New York Transmission Owners, requested a rehearing of the January Order. The requests for rehearing focused on the central argument that the short term impacts of the new capacity zone are unjust and unreasonable, with the NY PSC citing a $280 million increase on Lower Hudson Valley consumers’ electric rates per year. As noted by the NY PSC, rates are expected to increase by $70 million during the 2014 summer months alone, which is hitting ratepayers right after the polar vortex price spikes.

As mentioned in the previous post, on March 24th, FERC issued a Tolling Order regarding the parties’ Request for Rehearing of FERC’s January 28, 2014 Order approving the new capacity zone (a tolling order is a mechanism that FERC uses to buy itself time before issuing a final Order). FERC did not address the rehearing requests but afforded additional time for consideration, leaving the issue open and without closure. Many parties in the region submitted comments on the matter after FERC issued its tolling order, including Ulster County legislator Manna Jo Greene, who noted that “There is a strong and broad consensus here in the Hudson Valley that the FERC should immediately postpone the proposed New Capacity Zone, or reverse their earlier decision and withdraw it entirely.” However, by not responding either way, the new capacity zone was immediately implemented effective May 1, which is where we left off in our previous post.

The Battle at Federal Circuit Court

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When this sort of danger strikes who are you going to call? The NYPSC and the CHG&E (expecting someone else?) each filed separate, now consolidated, petitions at the Federal Court of Appeals for the Second Circuit seeking immediate reprieve for New Yorkers who face immediate and sudden “rate shock”. CHG&E petitioned for judicial review of the FERC August and January Orders that seem to have triggered this impending doom, arguing that FERC’s orders are arbitrary, capricious, and contrary to law and FERC’s prior orders, regulations, and policies. CHGE v. FERC, (2d Cir.), Petition for Review (May 30, 2014).

NYPSC argued that the “FERC failed to rationally evaluate” the Energy Highway Blueprint, which seeks to alleviate New York’s transmission constraints.   Moreover, the NY PSC claimed that all revenue from the capacity auction in the new capacity zone for the near term will go to incumbent electric generation owners who know that the state’s transmission lines are on the way in 2016 – 2018. This could create a situation where no new generation would actually be developed because generators know that prices are soon going to fall, but consumers would still have to pay higher rates to send a false price signal. Thus, the new capacity zone would have no value.

NYPSC went further than CHG&E by requesting that the Second Circuit issue an emergency stay on FERC’s January and August Orders. In addition, the NYPSC filed a Petition for a Writ of Mandamus requesting that the court compel FERC to issue a final order to bring closure on the parties’ Requests for Rehearings of FERC’s August and January Orders.

NYPSC argued first that “FERC has imposed dramatic electricity cost increases on the Lower Hudson Valley by establishing a new capacity zone in New York’s electricity capacity markets.” In Re People of the State of New York, (2d Cir.), Petition for Writ of Mandamus, p. 1 (May 12, 2014).

Next, the NYPSC claimed that FERC continued to deny New Yorkers of any relief for biding its time and not issuing a final order. Every month a series of capacity auctions occur in each of the state’s capacity zones. The longer FERC took to issue its Order, more and more costly capacity auction prices resulted. Importantly, the NYPSC noted that the harm caused by the ongoing capacity auctions is irreversible because even if ruled against, FERC will not order a refund of the auction proceeds.

At long last, on May 27, 2014, FERC denied the parties’ Request for Rehearing. FERC stated that the failure to create a new capacity zone when one is needed will not ensure viability in New York’s capacity market nor will it ensure reliability of the State’s currently vulnerable electric grid. FERC noted that the State needs to combat this longstanding problem and that “decision making based on avoiding price increases in the short-term could threaten reliability and price stability in the long term.” 147 FERC ¶61,148, Order Denying Clarification and Rehearing, Dkt. ER14-500-001 (May 27, 2014). FERC claimed that the Energy Highway Blueprint will bring lower prices to the region upon its completion, however, the capacity market cannot wait for this resolve, and that prices in the short-term may increase. On May 27th, FERC also filed an Opposition Brief at the Second Circuit refuting NY PSC and CHG&E’s Petitions.

On June 4, 2014, the NY PSC’s Petition for Writ of Mandamus, which was meant to compel FERC to make a final decision on the capacity zone, was declared moot by the Second Circuit because FERC had issued its rehearing denial on May 27. The Second Circuit also denied the emergency motion for a stay of the capacity auctions with little to say on the matter.

Full judicial review and argument on the merits shall convene during the week of September 8, 2014. Until then, Lower Hudson Valley residents should keep the sun block handy because it is going to be a hot summer. Stay tuned for an update once this heat cools off.

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Benjamin Falber is a project manager on the energy storage team at NYSERDA.

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