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National Energy Marketers Association v. New York State Public Service Commission

Supreme Court, Albany County

June 30, 2017

National Energy Marketers Association; Bluerock Energy, Inc.; Residents Energy, LLC; and Verde Energy USA New York, LLC, Plaintiffs/Petitioners,
New York State Public Service Commission, Defendant/Respondent. Retail Energy Supply Association, Plaintiff/Petitioner,
New York State Public Service Commission, et al. Defendants/Respondents

          Barclay Damon, LLP Attorneys for Plaintiff/Petitioner Retail Energy Supply Association David G. Burch, Jr., Esq., of counsel

          Boies, Schiller & Flexner, LLP Attorney for Plaintiff/Petitioner National Energy Supply Association Jason Cyrulnik, of Counsel

          Paul Agresta, Esq., General Counsel Attorney for Public Service Commission Defendant/Respondent Jonathan D. Feinberg, Esq., Solicitor, of counsel

          Hon. Eric T. Schneiderman Attorney General of the State of New York Attorney for Amici Curiae Office of the Attorney General Judith Vale, Esq., Assistant Solicitor General, of counsel Andrew Rhys Davies, Esq., Assistant Solicitor General, of counsel

          Henry F. Zwack Acting Supreme Court Justice

         In the these two proceedings pending before the Court is an Order to Show Cause ("OTSC"), supported by Verified Petitions/Complaints filed by National Energy Marketers Association, BlueRock Energy, Inc., Residents Energy, LLC and Verde Energy USA New York, LLC (collectively "NEMA:) and Retail Energy Supply Association ("RESA"), seeking a temporary restraining order and a permanent injunction. The parties seek nullification of what has come to be known as the "Low Income Moratorium, " first issued by the Public Service Commission ("PSC") on July 15, 2016 and re-issued on September 15, 2016 as an "Emergency Order". In response to both petitions, the September 28, 2016 OTSC by the court (O'Connor, J.) included a temporary restraining order ("TRO") preventing the implementation of any of the provisions of the moratorium until further order of this Court. The petitioners also moved for "emergency discovery, " which Judge O'Connor reserved upon and which remains pending before this Court.

         Also pending is an Order to Show Cause dated February 9, 2017 seeking contempt for what petitioners describe as the PSC's "blatant disregard of the temporary restraining order." The OTSC alleges that the PSC's issuance on December 16, 2016 of the Prohibition on Service to Low-Income Customers by Energy Service Companies -- and which petitioners' refer to as the "Third Moratorium Order"-- was a clear violation of the September 2016 TRO. Respondents cross-moved on February 14, 2017 to vacate the TRO.

         The Office of the Attorney General and the Utility Intervention Unit of the State of New York has made applications to file an amicus curiae brief in both actions before the Court, and which are opposed by RESA. The Court grants these applications, and has considered the Attorney General' briefs in making the further determinations.

         For the reasons that follow, the Court denies and dismisses NEMA's First Amended Verified Petition and Complaint, together with denying and dismissing NEMA's application for temporary restraining order, preliminary injunction, and expedited discovery; and also denies and dismisses RESA's Verified Petition and Complaint, together with denying and dismissing RESA' application for a temporary restraining order, preliminary injunction, and expedited discovery; and also denies and dismisses petitioners' application for contempt. The Court grants respondent's cross motion to vacate the temporary restraining order.

         The July 15, 2016 Order- Order Regarding the Provision of Service to Low-Income Customers by Energy Service Companies- imposed a moratorium on Energy Services Companies ("ESCOs") enrollment and renewal of low-income customers, specifically those who participate in low-income assistance programs. The PSC found that the moratorium was "necessary to ensure that the financial benefits provided to [low-income consumers] through utility low-income assistance programs are not absorbed by ESCOs who in turn, provide gas and electricity at comparatively higher prices, without any corresponding value" to financially vulnerable consumers. The order required ESCOs to block low-income customers from enrolling with them, and to de-enroll existing low-income customers at the expiration of their contracts [1].

         The petitions/complaints by NEMA and RESA argue that the PSC failed to comply with the notice provisions of State Actions and Proceedings Act (" SAPA") when enacting the July 15, 2016 Moratorium. They assert that the PSC, after considering their petitions for a rehearing, nonetheless entered an "Emergency Order" on September 15, 2016- Order on Rehearing and Providing Clarification - which re-enacted the July Order on an emergency basis pursuant to SAPA 202(6), while issuing a new SAPA notice on October 5, 2016, the Notice of "Emergency/Proposed Rule Making." According to petitioners, enactment of the September 15, 2016 Order did not constitute an "emergency."

         Petitioners argue that the October Notice, which doubled as both support for the Commissions's emergency rule making of September 15, 2016 and "A Notice of Proposed Rule Making" also failed to comply with SAPA, as did the subsequent determination made by the PSC on December 16, 2016-- the Order Adopting a Prohibition on Service to Low Income Customers by Energy Service Companies. Thereafter, NEMA filed its First Amended Petition and Complaint, renewing its arguments regarding the SAPA deficiencies in the first two Moratoriums, and adding that the Prohibition suffered from the same faulty procedure. Petitioners assert that the October notice provided 45 days for public comment, but did not comply with the requirement that a public hearing be scheduled. Petitioners assert that there was no meaningful process to cure the substantive and procedural deficiencies underlying its prior attempts to enact the moratorium-such as a hearing or collaborative-that no true emergency justified the use of the emergency powers under SAPA, and that the PSC's determination was unreasonable, arbitrary and capricious. While continuing to contest noncompliance with SAPA, petitioners also cited the PSC's reliance on a deficient evidentiary record void of verifiable data such as ESCO rates, utility rates and different products offered; its violations of customer privacy rights; its constitutional violations; and the arbitrary and capricious manner in which the PSC sought to implement the Moratorium.

         Concluding that the ESCOs overcharged customers by $819 million between January, 2014 and June, 2016, with low-income ESCO customers paying $96 million more over the same period, the PSC adopted the Order Adopting a Prohibition on the Service to Low-Income Customers By Energy Service Companies. The order ("Prohibition") which petitioners refer to as the "Third Moratorium, " --provides, in pertinent part, that "[f]or new enrollments, the prohibition will be implemented through a rejection by the utility, through an electronic data interchange (EDI) transaction, if the prospective customer is an APP. [2] Beginning 60 days after the effective date of the Order, utilities will be required to place a block on all APP accounts. In the event the APP is enrolled with an ESCO at any time after the prohibition is in effect, that enrollment shall be void." The Prohibition requires ESCOs to notify their low income customers that they will be de-enrolled at the expiration of their existing agreement.

         In the First Amended Verified Petition and Complaint, six causes of action have been asserted. [3] The First Cause of Action asserts that respondent has acted in excess of it's jurisdiction and it's determination is arbitrary and capricious. The Second Cause of Action is for declaratory and injunctive relief, the Third Cause of Action asserts denial of due process, as does the Fourth Cause of Action. Petitioners Fifth Cause of Action asserts denial of constitutional protections (5th and 14th Amendments to the U.S. Constitution and Article 1, Section 7 of the State Constitution), taking without compensation, violation of the contracts clause and denial of equal protection. Petitioners argue that the Moratorium Orders-including the Prohibition-- fail to comply with State Environmental Quality Review Act ("SEQRA") [4]; are fundamentally flawed and without basis; and that they were ordered before the noticed evidentiary processes and thereby based upon inaccurate pricing comparisons. Petitioners also argue that the Moratorium Orders violate the privacy rights of low income customers. Petitioners assert that the PSC does not have authority to make these rule changes, including changes which will interfere with contractual relations and violate established law. [5]

         In its First Amended Verified Answer, the PSC raises three objections in points of law. The first is that petitioners lack standing to assert the privacy rights of their low-income customers. Second, respondents assert that the proper procedural vehicle for the relief sought by petitioners is by way of Article 78 and this is not a hybrid action. Thirdly, respondent asserts that petitioners have failed to exhaust their administrative remedies by not raising before the PSC any of the challenges to: (1) the lack of energy related value added services for ESCO low-income customers; (2) the diminution of the value of the public assistance funds to low-income customers; (3) comparisons of utility and ESCO bills to determine that ESCO low-income customers were being overcharged. Respondent also asserts that petitioners have failed to offer their own product and pricing information, instead offering only bullet points criticizing respondent's data.

         Turning first to respondents' objection that the proper procedural vehicle for the relief petitioners seek is an Article 78, and that this not a hybrid action, the court agrees. Challenges to a legislative act - having general applicability, indefinite duration and formal adoption - can only be made in a declaratory action (Matter of Frontier Ins. Co. v Town Bd. of Thompson, 252 A.D.2d 928');">252 A.D.2d 928 [3d Dept 1998]). Challenges to the procedures in which an act is adopted, such as administrative determinations, are the proper subject of Article 78 proceedings (Consolidated Edison Co. of NY v Town of Redhook, 60 N.Y.2d 99');">60 N.Y.2d 99 [1983]). These proceedings challenge the administrative action of the PSC, and while the actions are alleged to have Constitutional implications, this does not make it a hybrid proceeding.

         When the issue before the Court concerns the exercise of discretion by an administrative agency, it "cannot interfere unless there is no rational basis for the exercise of discretion or the action complained of is arbitrary and capricious" (Matter of Pell v Board of Educ. of Union Free School Dist. No.1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 N.Y.2d 222, 231 [1974]). Here, the Court is also mindful when reviewing decisions of the PSC that "(a)dministrative agencies are endowed by experience with greater expertise" (Matter of Estrella v Bradford, 146 Misc.2d 48, 52 [Sup Ct, Albany County 1989]) and on issues of fact and policy it is appropriate to defer to the agency (Matter of New York State Elec. & Gas Corp. v Public Serv. Commn. of State of NY, 194 Misc.2d 467, 470 [Sup Ct, Albany County 2002]) and "whose judgment in such matters will be set aside only it if can be shown that rational basis and reasonable support in the record are lacking (New York Tel. Co. v Public Serv. Commn., 98 A.D.2d 535, 538 [3d Dept 1984]). Stated differently, PSC's determinations are entitled to substantial deference and must be affirmed unless they lack "any reasonable support in the record for the action taken" (Matter of Campo Corp. v Feinberg, 279 A.D. 302, 307 [3d Dept 1952]. "[A] court, in dealing with a determination which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency" (Matter of National Fuel Gas Distrib. Corp. v Public Serv. Commn. of the State of NY, 16 N.Y.3d 360, 368 [2011], quoting Matter of Scherbyn v Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 N.Y.2d 753, 758 [1991]). "[A]n agency's order must be upheld, if at all, on the same basis articulated in the order by the agency itself" (Fed. Power Comm'n v Texaco, 417 U.S. 380, 397 [1974]) and not by the agency's post order actions.

         Addressing petitioner's argument that the PSC has no authority to regulate ESCO with respect to consumer pricing requirements, the Court notes that it has already determined that the PSC has such authority, and petitioners are collaterally estopped from arguing otherwise. Collateral estoppel "precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party..." (Matter of Heritage Hills Sewage Works Corp. v Town Bd. of Town of Somers, 245 A.D.2d 450');">245 A.D.2d 450 [2d Dept 1997]). [6] To reiterate the Court's previous determination: "Clearly, the Public Service Commission has the authority to establish public utility rates, in fact, it has been "recognized as the very broadest of powers" (Public Service Law 66[12][f] ; Matter of Kessel v Public Serv. Commn. of State of NY, 136 A.D.2d 86, 92[3d Dept 1988]). The Public Service Law is replete with other references to this exact authority. PSL 5 refers to the Commission's broad statutory grant of authority over the sale of natural gas and electricity; PSL Art. 4, 65.1 provides in pertinent part that "All charges made or demanded by any such gas corporation, electric corporation or municipality for gas, electricity or any service rendered or to be rendered, shall be just and reasonable and not more than that allowed by law or order of the commission." This Court further concluded that "It is the duty of the Commission to prevent the imposition upon the public of unfair rates, and the creation of a rate base which is not justified" (Matter of New York State Elec. & Gas Corp. v Public Serv. Commn. of State of NY, 245 AD 131, 134 [3d Dept 1935]). PSL 53 clearly provides that Article 2 of the PSL applies to "any entity that, in any manner, sells or facilitates the sale or furnishing of gas or electricity to residential customers."

         The notion that ESCOs, direct offshoots of the PSC's activity of unbundling rates, and whose conduct is prescribed by the Uniform Business Practices ("UBP") adopted by the PSC, have somehow morphed into a separate energy sector with independent rights, simply has no basis in law To the extent that ESCOs believe that their regulation must be minimized because of this also has no basis in law. Just as when the utilities argued that the PSC did not have the authority to direct "retail wheeling of electricity by electric utilities, " the court determined that the PSL "could not be restrictively read" (Energy Assn of NY State v. Public Serv. Commn. of State of NY, 169 Misc.2d 924, 933-934 [Sup Ct, 1996], citing to Matter of New York Tel. Co. v Public Serv. Commn., 72 N.Y.2d 419. 427-428 [1988]).

         As for petitioner's constitutional arguments, the Court finds no violations of the contract, due process or takings clause with respect to the implementation of the Prohibition. As to the Contracts Clause, the Prohibition involves only the making of new contracts with low- income customers, and present contracts clearly remain place. As to the Equal Protection claim, the Prohibition reasonably reflects the different situation of low-income customers and ratepayer subsidies. The Fifth Amendment's takings clause, applicable to New York through the 14th Amendment, "prohibits governments from taking private property for public use without just compensation" and implicit in this definition is that a property interest must actually exist before it can be taken (Palazzo v Rhode Island, 533 U.S. 606, 617 [2001]). The "[p]roperty interests are not created by the Constitution, but rather by existing rules or understandings that stem from an independent source such as state law" (Matter of Medicon Diagnostics Labs v Perales, 74 N.Y.2d 539, 545 [1989], internal citations and quotations omitted). A property interest protected by the 14th Amendment does not accrue when an agency, as here the PSC, "retains significant discretion over the entities' participation in a government program" (Matter of Loyal Tire & Auto Ctr. v New York State Thruway Auth., 227 A.D.2d 82, 86 [3d Dept 1997]). The Court must look to the "relevant statute, regulation or contract establishing the eligibility for the government benefit at issue... (and if) the statute or regulation, or contract in issue vests in the state significant discretion over the continued conferral of the benefit it will be the rare case" that a property interest is created (Kelly Kare, Ltd. v O'Rourke, 930 F.2d 170, 175 [2d Cir 1991]).

         Clearly, a utility does not have a property interest in a customer (Matter of Energy Assn., 169 Misc.2d at 935). Similarly, "while customers of utilities are entitled to just and reasonable rates, they don't acquire any interest in the property of the utility" (Matter of Multiple Intervenors v Public Serv. Commn., 95 A.D.2d 876, 877 [3d Dept 1983], internal citations ...

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