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<title>February 2004: New York To Update Flex Rate Contract Guidelines</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<p ALIGN="left"><u><b>February 2004</b></u><font size="6"><b><br>
New York To Update Flex Rate Contract Guidelines<br>
</b></font><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
200</em>4/0</font><font size="2">2/13)</font></p>
<p align="left">The New York Public Service Commission (the “Commission”)
has instituted a new proceeding to update its flex rate contract negotiation
guidelines to reflect changes in the electric industry. Case 03-E-1761,
Proceeding on Motion of the Commission to Reexamine Policies and Tariffs for
Flexible Rate Contract Service to Economic Development Customers, Order
Instituting Proceeding (January 12, 2004) (the “Order”). Under flex rate
contracting, a utility may negotiate contracts with business customers “at
rates and conditions outside the scope of a utility’s standard tariff
classifications” when the business customer is considering alternatives to
utility service, such as “on-site generation, relocation out-of-state, or
ceasing operations.” Flex contracts are allowed because of the concern that
“if the customer is lost, all of the contributions it makes toward meeting
both marginal costs and system common costs will also be lost.” The
Commission established the current flex rate contract guidelines in 1994.
Since then, the electric industry has been restructured. “[N]ew wholesale
electric market structures have been created, electric rates have been
redesigned and unbundled, and new retail energy supply options have become
available.” These new industry conditions have led to numerous disputes
between utilities and their existing flex rate customers and have impeded
the negotiation of new flex rate contracts. The Commission maintains that
“flex rate contracts remain a valuable tool for promoting economic
development through the retention and attraction of business customers” and
has decided to develop new “policies and procedures that will best advance
continued use of flex rate contracts to promote economic development” in
light of the electric industry’s new structure.</p><center>
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<p align="justify">Under current guidelines, any lost revenues “arising out of the discount
from tariffed rates provided for in a contract [must be] shared between
shareholders and ratepayers.” The discount price must be “set at the level
most advantageous to utility customers as a whole.” The guidelines require
the utility to charge its flex rate customers a minimum “floor price” of 1
cent per kWh “above the marginal cost of serving the customer.” The floor
price is required “to ensure that all flex rate customers [make] some
contribution toward meeting utility common costs.” This minimum bill
provision has been the source of numerous disputes between utilities and
their flex rate customers since 2000. <br>
<br>
As the Commission explains, the New York Independent System Operator (“NYISO”)
commenced management of wholesale energy markets at the end of 1999,
including day-ahead pricing. Soon thereafter, “unexpected increases in the
cost of generation fuels, and other factors, began to force prices upward in
NYISO’s new wholesale energy markets.” The utilities responded by
implementing the minimum bill provisions in their flex rate contracts, and
“flex rate customers, for the first time, [began] to experience price
volatility in their monthly bills.” Numerous proceedings before the
Commission and the courts concerning implementation of these provisions
ensued. <br>
<br>
Against this backdrop, the Commission has identified several policy and
implementation issues to be considered in the development of new flex rate
contract guidelines. Among other things, the Commission will consider: (1)
whether prospective flex rate contracts should be limited to delivery rates
or should include energy commodity service; (2) what would be the
appropriate floor price; (3) the extent to which marginal costs should be
based on the “location and load pattern of the individual customer”; (4)
whether to allow flex rate customers to opt for standard tariff service if
the tariff price falls below the flex rate contract price; (5) how to
calculate lost revenues and how to share revenue losses between the
utility’s shareholders and its other customers; and (6) how to incentivize
utilities to enter flex rate contracts. The Order requires specified
utilities to collaborate with other interested parties to develop a joint
proposal that addresses these and other issues. The joint proposal must be
submitted to the Commission within six months.</p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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