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MARATHON POWER LLC d/b/a Marathon Energy, Petitioner, for a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules v. PUBLIC SERVICE COMMISSION of the State of New York, John B. Rhodes, in his official capacity as Chair of the Public Service Commission of the State of New York, Diane X. Burman, James S. Alesi, Tracey A. Edwards, and John B. Howard, in their official capacities as Commissioners of the Public Service Commission of the State of New York, and Michelle L. Phillips, in her official capacity as Secretary of the Public Service Commission of the State of New York, Respondents.
Petitioner is an approved energy service company (hereinafter ESCO) and provides residential and non-residential customers with natural gas and electricity supply services in utility territories across New York. In this CPLR article 78 proceeding, petitioner seeks review of, among other things, an Order Imposing Consequences issued by respondent Public Service Commission of the State of New York (hereinafter PSC). The matter is fully submitted and the Court heard oral argument with respect to the proceeding on February 19, 2021.
The PSC has statutory jurisdiction and supervisory power over, among other things, the sale of “gas (natural or manufactured or mixture of both) and electricity for light, heat or power” (Public Service Law § 5 [b]). Historically, the energy industry in New York was made up of regulated public utility monopolies. In the 1990s, the PSC issued a series of orders designed to transition the industry to a competitive market. The resulting scheme “allowed ESCOs access to the energy market by selling energy as a commodity using the utilities infrastructure. As a result, there are two components to supplying energy: the delivery of energy through the infrastructure owned and maintained by utilities; and the sale and supply of the commodity, i.e., gas or electric, by either a utility company or an ESCO” (Matter of Retail Energy Supply Assn. v. Public Serv. Commn. of the State of N.Y., 152 A.D.3d 1133, 1135, 59 N.Y.S.3d 590 [3d Dept. 2017] affd as modified 33 N.Y.3d 336, 103 N.Y.S.3d 1, 126 N.E.3d 1041 ). The PSC has the authority to regulate an ESCO's eligibility to access public utilities’ infrastructure (see Matter of National Energy Marketers Assn. v. New York State Pub. Serv. Commn., 33 N.Y.3d 336, 351, 103 N.Y.S.3d 1, 126 N.E.3d 1041 ; General Business Law § 349-d ). In 2002, the PSC adopted the Uniform Business Practices (hereinafter UBP) to regulate ESCO business and marketing practices. The UBP sets forth requirements for an ESCO to follow in order to maintain eligibility and also authorizes the PSC to determine and impose appropriate consequences for non-compliance with the UBP.
Petitioner received approval from the PSC to operate as an ESCO in 2011. Petitioner serves customers in the service territory of Consolidated Edison Company of New York, Inc. (hereinafter Con Edison), among other service territories. Petitioner's standard customer agreements provide for a fixed price option under which the customer is billed at the fixed price indicated in the agreement except in specified circumstances. The customer agreements provide, in relevant part: “If at some future date there is a change in law, rule, regulation, tariff, or regulatory structure that impacts any term, condition or provision of the agreement, including, but not limited to price, [petitioner] shall have the right to modify the Agreement. See section 17 - Regulatory Change for more information” (Petition, Exhibit C). In turn, Section 17 of the contract, entitled “Regulatory Changes,” states:
“This Agreement is subject to present and future legislation, orders, rules, regulations or decisions of a duly constituted governmental authority having jurisdiction over this Agreement or the services to be provided hereunder. If at some future date there is a change in any law, rule, regulation, tariff, or regulatory structure (“Regulatory Change”) that impacts any term, condition or provision of this Agreement including but not limited to price, [petitioner] shall have the right to modify this Agreement to reflect such Regulatory Change by providing 30 days’ written notice of such modification to the Customer” (id.).
In 2016, PSC instituted a proceeding against petitioner based upon allegations that petitioner had used deceptive business practices. On March 9, 2017, PSC issued an Order to Continue ESCO Eligibility with Contingencies, effective March 13, 2017 (see PR 327-335).1 The Order allowed petitioner to continue marketing to and enrolling residential and non-residential customers subject to several contingencies, including that it enroll and re-enroll customers “in a manner that is consistent with” the UBP (PR 334).
In April 2019, Con Edison issued to its retail suppliers revised Capacity and Energy Reconciliation Guidelines. The revisions adjusted the peak hour used in calculating customers’ Installed Capacity (ICAP) tags. Petitioner alleges that all energy customers are assigned an ICAP tag which requires the customer to “essentially purchase a portion of the generation capacity of a power plant in an amount equal to [its] highest anticipated demand for energy” (Petition ¶ 27). Petitioner alleges that the changes “significantly impacted customer usage costs within Zone J of Con Edison's service territory” and, as a result, petitioner “notified customers that their rates would be modified, consistent with the Regulatory Change section in their customer agreements, to reflect Con Edison's rule change” (Petition ¶ 29). Petitioner adjusted approximately 2,800 non-residential customers’ rates in response to the ICAP tag change.2
On May 29, 2019, PSC sent petitioner a Notice of Apparent Failure advising that it was investigating petitioner based upon complaints received from its customers, including complaints that petitioner had breached its fixed rate contracts. On March 19, 2020, PSC issued an Order to Show Cause directing petitioner to show cause why petitioner's eligibility to provide retail energy services as an ESCO should not be revoked, or other consequences imposed, based upon petitioner's alleged violation of its fixed rate contracts (see PR 159-168). The Order to Show Cause advised, among other things, that PSC staff had determined that “the change of the peak hour resulting from a well-known and predictable annual review process ․ should not be considered a modification to a rule, regulation or tariff” such that petitioner's unilateral modification of the terms of its fixed rate contracts, absent a change to a rule, regulation or tariff, was a breach of contract and a violation of the UBP, specifically sections 2.D.5.b., 2D.5.c., 2.D.5.m., 2.D.5.n., 10.C.4.b. and 10.C.4.d. (PR 164-165). The Order directed petitioner “explain why, based upon Staff's concerns and allegations described herein, [PSC] should not find that [petitioner] has failed to support its position that variability in the New York Control Area's peak demand hour constitutes a change in rule, regulation, or tariff” (PR 167). Petitioner submitted a response to the Order to Show Cause.
On June 11, 2020, the PSC issued an Order Imposing Consequences. The PSC rejected petitioner's interpretation of Con Edison's modification of ICAP tags as a “regulatory change” within the meaning of petitioner's customer agreements. The PSC interpreted the contract term “rule” as “a condition imposed by a body that has legislatively delegated authority to impose requirements that has the force and effect of law” and noted that Con Edison is a regulated entity and not an agency (PR 55). The PSC found:
“Con Edison altered the NYCA Peak Hour due to the application of existing, unchanged regulatory rules and tariffs against current market conditions. [Petitioner's] fixed rate agreement protects customers[’] rights to their respective negotiated fixed-rates in circumstances such as these, where market changes unrelated to any change in ‘law, regulation, rule, tariff, or regulatory structure’ led to [petitioner] facing increased costs for providing its services. After marketing to its customers that it, and not the customer, would absorb the costs of such market fluctuations — a commitment that likely allowed [petitioner] to secure a premium — [petitioner] failed to comply with its contractual obligations” (PR 56-57).
It determined that petitioner is properly subject to consequences because it failed to adhere to the fixed-rate policy in its agreements and also made “ ‘false and misleading representations’ regarding its rates when it assured customers [that it] would pay fixed rates in regard to the market fluctuations discussed herein but then altered customers[’] rates in contravention of those representations” (PR 57-58 [quoting UBP § 10.C.4.b.]). The PSC further found that petitioner violated its commitment pursuant to the Contingency Order that it would enroll or re-enroll customers consistent with the UBP. As a consequence for petitioner's non-compliance with the UBP, the PSC ordered that petitioner would be required to re-rate all customers “adversely affected” by their rate alterations (PR 58). The PSC rejected petitioner's contention that it should be permitted to backbill customers who were erroneously underbilled by petitioner.
Petitioner filed a Petition for Rehearing and Reconsideration. The PSC issued an Order Denying Rehearing and Reconsideration on September 17, 2020. Subsequently, upon petitioner's request and based upon several commitments made by petitioner, the PSC extended the deadlines for petitioner to re-rate customers and to provide proof of compliance to the PSC, with the time periods to commence after a Judgment is issued in petitioner's CPLR article 78 proceeding. Petitioner thereafter commenced this proceeding, seeking review of both the Order Imposing Consequences and the Order Denying Rehearing and Reconsideration. Petitioner seeks annulment of the Orders as well as injunctive relief prohibiting respondents from enforcing the terms of the Orders and from interpreting the terms of petitioner's sales agreements.
Petitioner first argues that the PSC acted in excess of its jurisdiction by issuing the two Orders because it “insert[ed] itself in a purely contractual matter between sophisticated private parties” (Petition ¶ 44). On this point, petitioner contends that, where all alleged UBP violations against it had been resolved, it was not appropriate for the PSC to render a determination interpreting the “Regulatory Changes” provision in petitioner's customer contracts; petitioner asserts that, although PSC Staff claimed that petitioner's alleged breach of its fixed rate contracts violated several sections of the UBP, none of those sections are implicated here. Petitioner further argues that, even assuming that the issue was the proper subject of PSC review, the PSC's finding that petitioner breached the contracts was affected by an error of law because, under the plain language of the contracts, petitioner was permitted to adjust the terms of the contract in response to the ICAP tag changes. Petitioner asserts that Con Edison's ICAP tag change was precisely the sort of “Regulatory Change” contemplated by petitioner's customer contracts. Petitioner also asserts that the Orders should be vacated, in any event, because they impose arbitrary, capricious and unfair consequences upon petitioner inasmuch as they require petitioner to re-rate customers who were adversely impacted but prohibit petitioner from billing customers who were previously undercharged. Petitioner argues that these consequences are arbitrary and capricious and an abuse of discretion because they deprive petitioner of its rights under its contracts and are a punitive and unwarranted penalty given petitioner's good faith conduct.
Where, as here, a petitioner challenges an administrative determination made where a hearing is not required, judicial review is limited to the issues of whether the challenged determination is rationally based, and whether it was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion (see CPLR 7803 ; Matter of Ward v. City of Long Beach, 20 N.Y.3d 1042, 1043, 962 N.Y.S.2d 587, 985 N.E.2d 898 ; Matter of Scherbyn v. Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 N.Y.2d 753, 758, 570 N.Y.S.2d 474, 573 N.E.2d 562 ; Matter of Bais Sarah Sch. for Girls v. New York State Educ. Dept., 99 A.D.3d 1148, 1150, 953 N.Y.S.2d 331 [3d Dept. 2012], lv denied 20 N.Y.3d 857, 2013 WL 149673 ). “[A] court may not substitute its judgment for that of the board or body it reviews unless the decision under review is arbitrary and unreasonable and constitutes an abuse of discretion” (Matter of Arrocha v. Board of Educ. of City of NY, 93 N.Y.2d 361, 363-364, 690 N.Y.S.2d 503, 712 N.E.2d 669  [internal citations and quotations omitted]; see Matter of Boatman v. New York State Dept. of Educ., 72 A.D.3d 1467, 1468, 900 N.Y.S.2d 174 [3d Dept. 2010]).
Upon careful review, the petition is denied. Initially, the Court is not persuaded by petitioner's contention that the PSC acted in excess of its jurisdiction by determining an issue of pure contract interpretation. Petitioner does not dispute that the PSC has the authority to regulate an ESCO's eligibility to access the public utility's infrastructure or that the PSC has jurisdiction to enforce the UBP requirements and impose consequences for an ESCO's non-compliance with the UBP (see Matter of National Energy Marketers Assn. v. New York State Pub. Serv. Commn., 33 N.Y.3d at 351, 103 N.Y.S.3d 1, 126 N.E.3d 1041). Moreover, it is beyond dispute that the PSC has a duty to “prevent[ ] extortionate competition and oppressive or discriminating charges” (id. at 336, 103 N.Y.S.3d 1, 126 N.E.3d 1041 [internal citation and quotation marks omitted]).
Here, the PSC commenced a proceeding against petitioner based upon, among other things, alleged violations of the UBP and, in the Order Imposing Consequences, specifically determined that petitioner violated provisions of the UBP inasmuch as it had “failed] to adhere to the policies ․ described in its Sales Agreement” in violation of UBP § 2.D.5.b. and made false and misleading representations regarding its rates, in violation of UBP § 10.C.4.b. Although the PSC interpreted the terms of petitioner's sales agreement in making these determinations, the Court does not find that the PSC exceeded its jurisdiction in doing so. Indeed, the UBP provides that an ESCO may be subject to consequences for “failure to adhere to the policies and procedures described in its Sales Agreement” (Petition, Exhibit P at 8 [UBP § 2.D.5.b.]). In order to determine whether an ESCO has complied with this provision, the PSC necessarily must, as it did here, interpret the terms of the sales agreement. As such, the Court rejects petitioner's arguments in this regard. Petitioner's position that the PSC was not, in fact, interpreting the contract in the context of alleged UBP violations is not supported by a plain reading of the PSC's Order Imposing Consequences, which, as discussed above, specifically found that petitioner violated the UBP.3
The Court also finds that petitioner has not demonstrated that the PSC's determination that petitioner breached its contracts with its customers by adjusting the fixed rates based upon Con Edison's modification of its ICAP tags is arbitrary and capricious, irrational or affected by an error of law. As noted above, petitioner's standard customer agreements allow petitioner to modify the terms of the agreement based upon “a change in law, rule, regulation, tariff, or regulatory structure” (Petition, Exhibit C). Here, petitioner's position is that Con Edison's modification of its ICAP tags — memorialized in a document entitled “Capacity and Energy Reconciliation Guidelines” which was issued to its retail suppliers — was a change in a “rule” as the term is used in the contract. In the Court's view, the PSC's rejection of this interpretation — and its finding, instead, that the guidelines issued by Con Edison are not “rules” within the meaning of the contract — is supported by a rational basis. Specifically, the PSC's interpretation of the term “rule” as “a condition imposed by a body that has legislatively delegated authority to impose requirements that has the force and effect of law” (PR 55) is supported by the fact that the clause in the customer agreement is entitled “Regulatory Changes,” which connotes a change imposed by a legislative body rather than a utility. The PSC's interpretation is also supported by the inclusion of the term “rule” with the terms “law,” “regulation,” “tariff” and “regulatory structure,” all of which indicate legislative rule making. The PSC's construction of the customer agreement is also supported by the fact that the “Regulatory Changes” section does not specifically mention or include modifications issued by a utility. Petitioners point to no specific language in the contract which demonstrates that the parties intended, as petitioner argues, that petitioner would be able to change its rates based upon any market change that was out of its control. As such, the Court rejects petitioner's challenge to the PSC's interpretation of the customer agreement.
Petitioner also challenge the consequences imposed by the PSC, arguing that the penalty is unfair and an abuse of discretion because it requires petitioner to re-rate customers that it overcharged but does not allow petitioner to bill customers who were undercharged. “An administrative penalty falls within the discretion of the reviewing agency and will not be disturbed unless it is so disproportionate to the offense that it shocks one's sense of fairness” (Matter of Epelboym v. Board of Regents of the State of N.Y., 174 A.D.3d 1182, 1183, 107 N.Y.S.3d 172 [3d Dept. 2019]; see Matter of Myer Funeral Serv. Corp. v. Zucker, 188 A.D.3d 1488, 1495, 136 N.Y.S.3d 509 [3d Dept. 2020]). The PSC has the authority, under the UBP, to determine “the appropriate consequence” for “a failure or non-compliance in one or more of the categories set forth in UBP Section 2.D.5.” and “may take into account the nature, the circumstances, including the scope of harm to individual customers, and the gravity of the failure or non-compliance, as well as the ESCO's history of previous violations” (Petition, Exhibit C, at 9 [UBP § 2.D.6.]).
Here, the consequence imposed by the PSC was to require petitioner to re-rate “all customers adversely affected” by petitioner's rate alterations (PR 58). The PSC rejected petitioner's argument that it should be permitted to backbill customers that it had under-billed as a part of the rate adjustment, finding:
“[Petitioner] cites no general legal principle that requires the Commission to require that innocent customers bear the financial costs of [petitioner's] misconduct. Moreover, we discern nothing in the relevant agreement terms that would allow [petitioner] to backbill customers in circumstances such as these. Accordingly, we find that [petitioner] has no right to backbill those customers who benefitted from [petitioner's] improper rate alterations” (PR 58-59).
Upon petitioner's petition for rehearing and reconsideration, the PSC noted that petitioner's request to backbill its customers would be procedurally unfair because it would “impose costs on customers who had never been provided an opportunity to be heard before the Commission” (PR 7). The PSC found that, in any event, no error of law had been committed in denying the request.
Upon review, the Court does not find that the consequence imposed by the PSC is so disproportionate to the offense that it shocks one's sense of fairness. According to petitioner's submissions, approximately 1,500 of its customers were adversely affected by the rate change, resulting in $1,500,000 in additional payments to petitioner. Given the PSC's finding that the rate change was improper, the Court finds that it was appropriate for the PSC to direct petitioner to re-rate those customers (those adversely impacted by petitioner's misconduct) to provide for a refund of the overpayments. The Court does not find that the PSC abused its discretion by denying petitioner's request to bill the customers (approximately 1,300) who benefitted from petitioner's improper rate adjustment. Although this determination allows the customers to benefit from petitioner's misconduct (via a price decrease), the Court does not find that it is unduly punitive or shocking to one's sense of fairness to burden petitioner with the cost of its misconduct. The Court is not persuaded that petitioner has demonstrated that the consequence imposed by the PSC is affected by an error of law based upon either its conclusory assertion that it has a clear contract right to payments from customers who paid less than the fixed rate, or its argument that the UBP does not prohibit backbilling in order to correct billing errors. As such, the Court finds petitioner's contentions of error without merit and declines to disturb the challenged determinations.
Accordingly, it is hereby
ORDERED AND ADJUDGED that the relief sought in the petition is in all respects denied and the petition is dismissed.
The foregoing constitutes the Judgment of the Court.
SO ORDERED AND ADJUDGED.
1. References preceded by “PR” are to the Public Record filed by respondents on the NYSCEF system with their answer. Respondents also filed a Combined Confidential and Public Record for the Court's in camera review.
2. According to petitioner's Chief Financial Officer, of the 2,800 customers whose rates were adjusted, approximately 1,500 customers saw their prices increase (resulting in $1,500,000 additional payments to petitioner) and approximately 1,300 customers saw their prices decrease (resulting in $500,000 in benefits to the customers).
3. Petitioner's position that there was “no UPB-related issue presented here” appears to be based, in part, upon its position that the UPB sections identified by PSC Staff are not implicated by the circumstances presented (Memorandum of Law in Support of Petition at 16). However, notwithstanding petitioner's opinion as to the applicability of the alleged UPB violations, the PSC nonetheless undisputably had jurisdiction to consider whether the violations occurred and, if so, to impose any consequences as a result.
James H. Ferreira, J.
Response sent, thank you
Docket No: 907436-20
Decided: May 05, 2021
Court: Supreme Court, Albany County, New York.
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