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December 1, 2006
NEM Winter Executive Committee Meeting

Please mark your calendars for NEM's Winter 2007 Executive Committee Meeting. It will be held January 18-19, 2007, in Charleston, South Carolina. Many thanks to the South Carolina Research Authority for offering to host the meeting again this year.

FERC's Standards of Conduct Fail to Withstand D.C. Circuit Court Review

In Order 2004, FERC broadened its Standards of Conduct to include pipelines' relationships with non-marketing affiliates (processors, gatherers, producers, LDCs and traders) in addition to their marketing affiliates. FERC justified Order 2004 on both a theoretical threat of undue preferences as well as a claimed record of abuse. The D.C. Circuit Court reviewed FERC's extension of the Standards of Conduct and found that FERC "provided no evidence of a real problem with respect to pipelines' relationships with non-marketing affiliates. Indeed, Order 2004 does not include a single example of abuse by non-marketing affiliates. Nor does the record disclose complaints from competitors of pipelines' non-marketing affiliates." The D.C. Circuit held that Order 2004 was arbitrary and capricious as applied to natural gas pipelines and therefore vacated the Order with respect to them. On remand, FERC can decide not to proceed with rules in this area, develop a factual record to support the rule, or in the absence of a factual record, attempt to set out its best case for relying solely on a theoretical threat of abuse. The full text of the D.C. Circuit's Opinion is available on the NEM Website.

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Consumers Gas Rate Case

The Commission issued an Order on Consumers Energy's gas rates. NEM had submitted a proposal urging that Consumers use aggregate reconciliation, instead of pool by pool reconciliation. Alternatively, NEM recommended that a collaborative workgroup should be formed to consider this and other issues associated with the gas choice program. The Commission declined to adopt the aggregate reconciliation proposal finding it was not well-defined enough. The Commission did, however, note its "continuing support of the choice program and its willingness to entertain proposals to improve the choice program." The full text of the Order is available on the NEM Website.

New York
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Stakeholder Views on Utility Hedging and Price Transparency

The Commission requested comments on utility hedging practices and price transparency with respect to residential and small commercial customers.

The utilities expressed varying opinions about hedging activities. Notably, National Grid stated that, "the Commission should not mandate any further long-term purchases by the Company in the wholesale electrictity supply markets. The Company's objective is to establish retail markets so that ESCOs, and not distribution companies, are in the business of providing longer term, stable power supply options for the benefit of customers." Similarly, ConEd/O&R stated that, "the Commission should continue to encourage utilities to cease hedging for classes that have adequate market alternatives, i.e., competitive suppliers that offer fixed price or hedged alternatives. That broad guidance should also call for a moderate level of utility hedging to mitigate volatility that will provide some protection to customers while allowing reasonable exposure to price signals and encouraging continued retail migration."

Central Hudson argued for utility flexibility to develop supply and hedging portfolios that meet customer preferences. Central Hudson opposed, "any requirement that it enter into contracts exceeding 2-3 years in length, and then only if and when adequate potential customer advantages have been identified, and proper cost recovery has been provided." NFG supported a two-year time period for execution of long term portfolio strategies. Keyspan urged that utilities be permitted to determine optimal hedging strategies on an individualized basis rather than a Commission requirement as to a specific length of time for supply agreements.

Paul Tonko, Chair of the New York State Assembly Standing Committee on Energy recommended that utilities be required to provide "portfolio management services" to customers. His recommendation is based on Assembly Bill No. 10370. AB 10370 defines "portfolio management service" as "the provision of reliable electric capacity and power services derived from a mix of supply-side resources, including long-term contracts, for supply delivery dates greater than one year, short-term contracts, for supply delivery dates within one year, and purchases on the day-ahead and spot wholesale markets; demand-side resources; and other mechanisms which collectively reduce the volatility of wholesale electricity prices and minimize customer bills." Competitive bidding auctions can be employed. Tonko alleged that, "to date, the benefits of market restructuring for small customers can be measured almost solely on the value of short-term discounts to delivery bills and the avoidance of some sales taxes - neither of which are the result of 'market forces.'"

The Independent Power Producers of New York recommended that the Commission, "require electric utilities to competitively procure wholesale power to serve residual load through solicitations supervised by the Commission. Retail customers will be able to obtain the best possible price for electricity service when flexibility in structuring the electric utilities' supply portfolios is permitted through a well defined process that solicits bids from wholesale suppliers and allows for the largest number of bidders to participate." Comments of NRG, PSEG Energy Resources & Trade and Constellation Energy Commodities Group made similar recommendations.

The Consumer Protection Board (CPB) recommended that utilities be required to maintain a diverse portfolio to mitigate risk for consumers that includes readily available physical and financial hedges, term contracts up to three years in duration and spot market purchases. However, no more than 60% of supply requirements should be met with spot market purchases. CPB recommended that costs incurred in supply portfolio management be reflected in commodity charges and that supply contracts for public policy purposes (i.e., reliability, market power mitigation) be recovered in delivery rates.

PULP noted that residential customers demand for energy is relatively inelastic in the short term but not in the long term and so "this sector would be expected to make investments in energy efficiency and conservation in a medium and long term environment of rising prices. Hedging should be sufficient to eliminate all or virtually all price volatility for residential customers, but this protection should be short term and not modify the customer's medium and long term investment decisions."

The City of New York recommended that the utilities be required to implement an integrated portfolio management approach that achieves price stability through a combination of spot, short-term, medium-term and long-term purchases. In order to minimize impacts to the competitive market, a "market equivalent" portion of power supply service would be charged to commodity rates and a portfolio differential would be charged/credited to all customers through delivery rates.

The full texts of Stakeholder Comments Part 1 and Part 2 are available on the NEM Website.

NYSEG Standby Rate Conference and Filing

Pursuant to the Commission's recent Order on NYSEG's electric rates, NYSEG was directed to update its rates for standby service after full-service rates were established. Before making a standby rate filing, the utility was to share a proposed filing with Staff and interested parties. A conference will be held December 7, 2006, at 10:30 AM to review NYSEG's proposed filing. The conference will be take place in the 3rd Floor Hearing Room at the Commissionís Albany offices. The full text of NYSEG's Proposed Standby Rate Filing is available on the NEM Website.

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Commission Reviews Gas Emergency Curtailment Rules

The Commission is reviewing its rules pertaining to gas emergencies and procedures to identify and protect priority use. The proposed rules define a "gas supplier" to include natural gas companies, pipeline companies, as well as "any producer, gas broker, retail natural gas supplier, governmental aggregator, or person engaged in the business of supplying gas to gas companies, natural gas companies, pipeline companies or consumers within this state," and "any person that owns, operates, manages, controls or leases intrastate gas pipelines, storage fields or pools, or gas gathering lines."

The proposed rules would require, "In order to respond to shortages of gas, each gas supplier with tariffs on file with the Commission shall file with the Commission its curtailment plan which specifies the order of curtailments for all gas sales and transportation service to its consumers, and the interconnections and related capacities with other gas suppliers. Curtailment plans shall be established so as not to discriminate among consumers based upon the supplier of commodity." Before an energy emergency, the Commission could require gas suppliers to notify customers of an imminent gas shortage, issue periodic reports to notify cusotmers about supply conditions, implement measures to preserve priority use requirements, and submit reports to the Commission regarding pipeline supply entitlement and draw, gas in storage, storage withdrawal, interstate and intrastate deliveries, gas sendout and other information.

Upon declaration of an energy emergency, procedures for gas suppliers to achieve voluntary curtailment and mandatory curtailment would be in place. Comments on the proposed rules are due December 15, 2006, and reply comments are due January 16, 2007. The full text of the Proposed Rules and Procedural Order are available on the NEM Website.

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