City Bar Committee Issues Report on Electricity Regulation in New York

The Energy Committee of the Association of the Bar for the City of New York (ABCNY) issued a report on Electric Regulation in the State of New York on February 8, 2006. The report attempts to take stock of the electricity restructuring experiment of the New York Public Service Commission (PSC). This was accomplished by “rate/restructuring” agreements with most of the major investor owned utilities, who agreed to sell their power plants in exchange for being allowed to form new holding companies. The ABCNY Energy Committee previously issued a report on electricity restructuring in 1998. Their 1998 Committee report mainly catalogs what the PSC and utilities agreed to do in their “rate/restructuring” plans.

Until now, the ABCNY Energy Committee made no report assessing the electric industry restructuring, even though serious flaws were obvious years ago. See, e.g., Disconnected Policymakers (Electricity Journal 2001) ;Deregulation of Electricity Isn’t Working out as Hoped (Buffalo News 2001); Power Politics: A Failed Energy Plan Catches Up to New York (N.Y. Times 2001); The Perfect Storm (NY Assembly 2002); and other articles and reports at PULP’s archive web site, and at PULP’s current web page on New York Utility Energy Issues.

Notably, the ABCNY Energy Committee watched without comment as the PSC attempted to eliminate the consumer protections of the Home Energy Fair Practices Act (“HEFPA”) with repect to energy purchased from “ESCOs”. After flagrant consumer abuse occurred, that deregulation effort eventually was rebuffed by the state legislature with the enactment of the Energy Consumer Protection Act of 2002. Non-residential customers of ESCOs, however, do not have the protection of HEFPA or the PSC rules for dispute resolution and protection, and many small businesses have been victimized by ESCOs promising better rates than the traditional utility only to find they are locked into more expensive boilerplate contracts for long durations with high early termination fees.

Despite the well recognized dysfunction of the wholesale and retail energy markets in the aftermath of the PSC/utility restructuring, the ABCNY Energy Committee cites a 2006 New York PSC Staff report which claims the agency’s restructuring to have been a success. An academic review of that unsigned report has found it to be unconvincing and its methodology flawed. See APPA Study Debunks NY PSC Report on Electric Restructuring. Rates in the areas that most completely adopted the PSC model increased and became more volatile. Rates of New York utilities that — contrary to the recommendations of the PSC Staff — retained their power plants, or sold them more slowly and entered into long term energy buyback contracts when they sold their plants, remained stable and predictable, while rates of those utilities who relied more heavily on NYISO wholesale spot market purchases increased and became unpredictable. The PSC Staff report left out data on major rate increases in 2005 for the utilities with more volatile rates, and appears to have left out data on LIPA increases affecting most of Long Island, which rose due to rising prices for energy purchased from divested generating plants at FERC market rates. By leaving off major increases in 2005 (the data was available when the PSC issued its report in 2006) and by averaging typical bills of the higher priced utilities (i.e. Con Edison) with the bills of upstate utilities such as RG&E and NYSEG, whose lower, stable rates (maintained despite opposition from the PSC and PSC Staff) the real effects of what occurs when the PSC Staff model is implemented are masked. The Staff report also is based on just two snapshots for typical bills in each year. Although most utilities have stable rates, the rates of Con Edison and other utilities that have most fully followed the PSC preferences have become volatile from month to month, with major price spikes occurring in months other than January and July data used in the PSC staff repport. The ABCNY Energy Committee report fails to go beneath the surface and uncritically accepts the unjustified conclusion of the PSC Staff report.

The Committee Report does little more than address two issues: the failure of the PSC’s deregulatory approach to result in the construction of new power plants sufficient to meet growing demand, and the absence of meaningful public energy planning and implementation process. Currently, the energy planning function has been abdicated by the state to utilities and the NYISO, a private utility which has no real power to implement a plan, and which is not directly accountable to New Yorkers.

The report acknowledges, belatedly, the failure of a largely deregulated merchant power generation sector to bring adequate supplies of power, when new power plants are generally considered to be necessary for reliability and reasonable prices, particularly in downstate areas:

the only truly merchant plant built in New York City since 1999 has been KeySpan-Ravenswood’s 250 megawatt (“MW”) project. Orion Power also invested approximately $25 million in restarting a retired unit at the Astoria Generating Station. Otherwise, all major new plants have been either built by the New York Power Authority (“NYPA”) or under long-term contract to the Consolidated Edison Company of New York, Inc. (“Con Edison”) or the Long Island Power Authority. Outside New York City, however, plants have been constructed on a merchant basis.

To that, one might add, the owner of the largest merchant power plant constructed outside of New York City went bankrupt, and other merchant power plants have been shut down by owners who deny having any obligation to serve. The Power Authority of the State of New York has become the de facto builder of last resort due to the failed reliance on markets and the private sector to increase supply needed for reliability.

It is often assumed that price relief will flow from construction of new plants (or from conservation or demand response measures), but if the merchant power sector maintains its ability to withhold power from the market, by physically shutting down, mothballing plants, or by bidding strategies, price relief may be illusory even if new plants are built.

The courses of action proposed by the Committee are narrow, and continue the main elements of the PSC deregulation agenda. To achieve more power plant construction, a new NYISO capacity market is proposed, for long term capacity. (As Robert Kuttner has observed in Everything for Sale, the Virtues and Limits of Markets, the deregulators’ solution to market failures is always the same — a new market). A long term capacity market would involve making large payments to owners of existing power plants in the hope that this largess will attract new companies (and the investment banking industry) to invest and build new plants, but with no requirement that anyone actually build any plant. Billions have been paid to power plant owners through past and current NYISO capacity markets with no discernible effect. A similar capacity market plan of the New England ISO (“NEISO”) drew major resistance in New England.
The cost of the proposed long term capacity payments is paid, ultimately, by consumers. The capacity market proposal, if adopted, could raise New York’s high electricity rates further, without assuring that future power needs will be met, resulting in opposition as it did in New England. Maine is considering leaving the New England ISO and joining a Canada grid group due to high capacity payments that will add $335 million to Maine customer bills in the next five years, and attorneys general of Massachusetts and Connecticut are opposing New England ISO capacity markets in litigation. Also, attorneys general of Connecticut and Rhode Island have joined in challenges to FERC’s market rate regime in a pending FERC rule making proceeding on market rates.

Perhaps in recognition that yet another capacity market approach will not work, the ABCNY Energy Committee Report proposes that new generation be attracted by having utilities who sold their power plants, or a public authority such as the New York Power Authority, enter into long term agreements to purchase power and capacity from a new power plant, or otherwise to guarantee a stream of payments to enable a merchant power plant developer to attract investment capital. For an interesting discussion of long term financing contracts, see the recent comments of New York City in a PSC proceeding that is considering energy purchasing practices.

The stream of long term contract payments needed to assure financing of the new plants would be collected, ultimately, from consumers. The ABCNY proposal represents a major departure from the Enron model adopted in 1996 by the PSC, in which the assumption of risk by the merchant power sector was touted as a consumer advantage, because consumers would no longer be saddled by capital cost overruns of large central station power plants built by the old utilities. The Committee proposal puts risk back on consumers, who will be required to pay for the output of the plant at rates high enough to rapidly recover the capital cost, but with no assurance that the customers will receive long term benefits. Essentially the utility consumer will provide the security demanded by lenders, and the consumer will pay for the power supply contract via the distribution utility.

When plants were built by the old utilities, the cost was amortized over the lifetime of the plant, and as the plant depreciated, the cost of energy could go down, because customers would pay cost based rates set by the state PSC. When plants are built by the merchant sector with utility or public power guaranteed contracts, the capital cost of the plant may be rapidly amortized long before the lifetime of the plant expires, but once the contract obligation needed to obtain financing expires, the merchant power plant owner may sell the output at the market price set in wholesale spot markets by the most expensive plants, so the producer rather than the consumer will receive the value of low production costs.

There is nothing inherently wrong with long term contracts. New York once had a law (it expired along with the Article X siting law) which required utilities to attempt to purchase power rather than build new power plants if that was the least cost solution. Long term contracts could be a good idea, but only if they ultimately benefit the consumers who essentially would assume the risk of stranded costs (i.e., that during the term of the contract, less expensive energy could become available through new transmission lines or less costly new plants). What is missing in the ABCNY Committee Report is any benchmark test — that a long term power supply agreement used to induce construction of a merchant plant must be more cost effective in the long run, over the life of the plant, than if the plant were built by a state regulated utility or by the Power Authority.

Other states that restructured also lost control over the cost of power, once state regulated, because when it is unbundled from a vertically integrated state regulated utility it must be purchased at wholesale rates, under a FERC system of market rates that is not based on the actual cost of production. Other states (Connecticut, Virginia, and others) are now moving to allow distribution utilities to build power plants again, whose rates would again be under state jurisdiction and control. New York utilities still have that option, because the state legislature never changed the laws to prevent distribution utilities from building power plants. Also, public power entities such as NYPA and LIPA have been quite proactive in recent years to address the failure of the deregulated markets to deliver power needed to maintain reliability. The ABCNY report does not consider the obvious option of plants built by state regulated utilities or public power entities, and instead perpetuates deregulation dogma with talk of new capacity markets and transfer of investment risk to ratepayers or the general public without assurance of benefits.

Competition is a means to an end, not an end in itself. That end is defined by New York, in its public service law, as safe and adequate service to consumers upon demand at reasonable rates.The continued adherence to marketizer solutions in the absence of evidence they work anywhere – for the benefit of consumers – reflects the ABCNY Energy Committee “agenda”. The Committee agenda promotes a deregulation – competition model and focuses mainly on shareholder concerns, as follows:

Agenda includes increasing the competition in the energy marketplace, utility shareholder equity and environmental issues. The Committee also deals with nuclear power issues and international energy projects.

An examination of the roster of the ABCNY Energy Committee (at the end of the Committee report) shows that the Committee is predominantly comprised of attorneys who represent the very utilities and merchant power entities who supported and continue to support the PSC restructuring experiment, with some environmentalists, but no attorneys from consumer groups.

The ABCNY Committee Report says it is occasioned by “[t]he election of a new Governor, following a twelve-year administration by a Governor who supported the Commission’s restructuring initiative * * * [presenting] an appropriate opportunity to examine the regulation of New York’s electric utility industry.”

The Committee held its tongue and did not issue reports when failure of the deregulation approach was obvious for years. The Committee did not signal the now apparent supply crisis, and did not previously publish a report describing corrective measures. Instead, the Committee remained silent until the election of a new Governor who has already indicated openness to long term contract solutions such as those described in the ABCNY report. In describing its long term contracting solutions the Committee has done little to identify fully the complex scope of the public interests that would need to be addressed through those contracts. The report excellently represents the corporate and self interests of the merchant generators and utilities. These interests will be important actors as New York works through the long agenda of energy needs left behind by the last set of energy policymakers in Albany. Regrettably, it leaves unaddressed the consumer and public interests which must be heard and accommodated before a new set of new energy ventures are undertaken.

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