Excelsior! Con Edison Residential Rates Spike (Again)

Typical Bill Reports
The New York Public Service Commission (PSC) for many years has published a series of reports on typical utility customer bills for each major customer class. These reports show what a typical electric bill would be at various levels of usage and permit comparison of prices of the major electric utilities. The reports provide a “snapshot” over time of typical bills for the months of January and July.

Reflecting the New York state motto “Excelsior!” (ever upwards) the most recent typical bill report shows once again that Consolidated Edison Company of New York (Con Edison) has the highest prices of the major investor owned utilities in New York State, and, perhaps, the nation:

(click on chart to enlarge)

The Effects of Restructuring and Con Edison Reliance on NYISO Wholesale Spot Markets for Energy Supply
The chart also illustrates how Con Edison rates began to increase and destabilize beginning with the first summer of operation of the NYISO wholesale electricity spot markets in 2000. See Con Ed Bills Spike 43%: Hike Despite Cool July; and PULP Testimony to Westchester County on Summer 2000 Con Edison Price Spikes.

Con Edison agreed to divest nearly all of its New York City area power plants in voluntary restructuring agreements with the PSC in 1997. Its long term buy-back contracts with the new owners of its divested power plants were designed to expire when the NYISO spot markets were initiated. The idea at the time, promoted by Enron and adopted by the PSC as its vision, was to allow the wholesale sellers to charge what the market would bear (regardless of their costs of production) and eventually to allow the retail utility simply to flow through spot market energy prices to retail customers, without the retail utility attempting to control price levels and volatility by producing electricity at its own plants or by purchasing outside the spot markets to assemble a portfolio of wholesale supply contracts for long term, medium, and short term energy needs.

The PSC “vision” in 1996 was that a new group of middlemen- including traders like Enron – would eventually supply energy to all customers, while Con Edison’s role as a producer and seller of electric energy for its customers would diminish or end. See Disconnected Policymakers. Enron went bankrupt in 2001, no state has followed the lead of New York since then, a number of states that implemented the restructuring model have turned away from it, and others are experiencing electric restructuring remorse as their electricity rates soar and their electricity intensive industries close down operations.

In November, 1999, the NYISO began operations, and in May 2000, the PSC allowed Con Edison to flow through month to month price changes, which are often dramatic. At the time, the New York Times reported:

In April [2000], the regulatory commission authorized Con Ed to pass along to users its cost of buying electricity on the new spot market. By contrast, upstate utilities, including New York State Electric & Gas, which covers parts of northern Westchester County and Putnam County, provide energy to residential customers at fixed prices that do not fluctuate with spot market prices.

The commission’s critics say that by eliminating Con Ed’s risk when buying electricity on short notice (and shifting that risk to its customers) the commission gave the utility little incentive to try to make long-term deals with suppliers that could result in lower prices. Con Ed is allowed to recover part of the savings it gets when it makes such deals and buys electricity at below-market prices, but it can also lose money if it makes the wrong prediction and gets stuck with electricity that costs more than the market price.

Con Ed officials say they have been forced to buy on the spot market because a shortage of power plants has meant that the long-term deals needed to meet the surging demand have not been available.

Deregulation and Weather Fail to Cool Electric Rates, NY Times, August 22, 2000.

Con Edison had enthusiastically adopted the restructuring “vision” of the 1996 PSC, and reshaped itself into an Enron-like utility holding company, with new affiliates engaged in energy trading, power production at plants built in other states, a retail energy seller, and a now-defunct telecom company. See Con Edison Subsidiaries. In its June 30, 2007 SEC 10-Q report, at page 43, Con Edison’s Income Statement indicates that $1.26 billion was invested in its power production affiliate (Con Edison Development) and that $241 million was invested in its energy trading affiliate (Con Edison Energy).

There was no net income from these holding company affiliate ventures, which represent about 6% of the company’s total assets. Con Edison’s main income remains from its regulated subsidiaries. In May 2007 Con Edison of New York filed for a major increase in rates – 17% – to fund new investment in its regulated operations. See Con Edison Asks PSC for 17% Increase in Residential Electric Rates: Low Income Customers Would Pay Even More

Con Edison still provides energy to nearly all residential and small commercial customers in its service territory. It still has legacy long-term contracts and residual generating plants, and so it has only partially implemented the 1996 restructuring “vision.” Con Edison is increasingly dependent upon purchases of energy from a small number of sellers at the NYISO, at spot market rates, and it may be planning to become even more dependent on the spot market for future energy purchasing. Con Edison’s Exhibits 45 and 48 in the 2008 rate case (Adobe pages 19 and 22) indicate that in 2006, Con Edison acquired 24.6% of the energy supply for its customers through spot market purchases, and that it plans to acquire 49% of its customers’ needs from the spot market by 2011, approximately doubling its reliance on the spot market.

Heavy reliance on next day and next hour purchasing was criticized by FERC after the California electricity spot market rate manipulation of 2000 – 2001. Basically, FERC acknowledged that market rates it had allowed in the spot markets are unreasonable, and said no one should heavily depend upon them, just as no consumer would buy all household food and necessities at a convenience store:

we would expect any responsible retail supplier to rely on a portfolio of resources and to turn to the spot market only to engage in economy transactions or to meet portions of its load that could not be predicted well in advance or which were not
anticipated due to resource outages greater than are covered by prudent reserves.

San Diego Gas & Electric Company, FERC Docket No. EL00-95-000, p. 10 (Aug. 23, 2000).
See also, NYISO Costs Skyrocket, Benefits Questioned.

Some maintain that retail utilities can buy at the spot markets and control for price and volatility through purchase of exotic financial derivative contracts, in which one party pays the other when spot market prices exceed or fall below certain designated points. Con Edison’s 2008 rate case exhibit indicates that in 2006 the company incurred net hedging costs of $169,335,578. One can only wonder, when looking at the chart of 2006 prices, what bills would have been without “hedging.”

Customers of Other New York Utilities Fared Better with Less Reliance on NYISO Spot Markets
In contrast to Con Edison, the chart above shows that the major investor owned utility with the lowest rates in New York state is now RG&E. That utility did not embrace the Enron model and did not divest its power plants (except for its interest in the Ginna nuclear plant, which was sold with a long term buy-back contract).

In contrast, the utility that previously had the lowest rates, Central Hudson, eventually agreed with the PSC to sell its power plants. Unlike Con Edison, and despite PSC resistance, Central Hudson entered into energy buyback agreements with the new owners that kept rates low for several years after divesting the power plants. The idea was to stabilize retail prices during a “transition” period until wholesale and retail markets developed. According to a 2002 article

The short-term future for Central Hudson consumers is price stability — an achievement of which the company is proud, and that it pioneered by being the first to persuade the PSC to allow power supply deals with Dynegy Inc. and Constellation Nuclear, the buyers of its plant interests.

”Importantly, this agreement also means that we can promise price stability during the next few years while the deregulated energy markets mature here in New York — and that is priceless,’‘ Senior Vice President Arthur Upright said last August.

Now, Central Hudson is hoping that maturation occurs before its favorable deal with Dynegy runs out after 2004.

After 2004, however, due to expiration of the initial energy buy-back contracts,Central Hudson began to flow more of the impact of NYISO wholesale market rates through to its customers. A 2005 article describes what happened:

If you’re a customer of Central Hudson Gas & Electric Corp., you might want to grab a stiff drink before opening your next bill.

The utility’s electric customers can expect to pay about 15 percent more this July than they did a year ago, even if they use the same amount of power.

The higher bills are largely the result of Central Hudson’s growing reliance on the state’s deregulated power market. When Central Hudson sold its power plants to Dynegy Inc. in 2000, the companies signed a four-year contract allowing Central Hudson to buy varying amounts of power at fixed prices for four years.

That contract expired in October, leaving the utility at the whim of the state’s power market, where prices are higher and more volatile than its customers are used to.

Central Hudson’s market supply charge – the price it passes through to customers based on what it pays for electricity – is 7.3 cents per kilowatt-hour for July, said spokesman John Maserjian. Last July, with an assist from the Dynegy contract, the price was 5.4 cents per kwh.

Year-over-year, that’s an increase of about 35 percent.

Central Hudson’s residential rates, once lowest in the state, are now destabilized, and are higher than RG&E’s. See A Failed Experiment: Why Electricity Deregulation Did not Work and Could not Work.

In essence, what RG&E customers pay for energy is closer to what the power costs to produce locally at the utility’s power plants, and the cost of RG&E’s long term wholesale power contracts. As a result, the price of service from RG&E is less affected by NYISO spot market rates. The benefit of low cost power plants still flows to RG&E consumers, not to merchant power producers, because the energy can be acquired at cost, not at whatever price the market will bear in the seriously flawed wholesale markets. Those markets pay all producers the same price, regardless of their costs, at the price level demanded by the last seller needed to meet demand.

Con Edison Rates Eclipse LILCO/LIPA Rates
The chart also illustrates how Con Edison surpassed those of LILCO, which was bought by a publicly owned utility, the Long Island Power Authority (LIPA). LILCO once had the state’s highest rates, mainly due to the $7 billion cost of constructing an unused nuclear power plant. When LILCO was taken over by LIPA, the stranded cost of the abandoned nuclear facility could be financed with lower cost municipal bonds. Also, with no investors in the publicly owned utility, there was no longer a need to set rates at a level necessary to provide an ample after-tax return on their investments. LIPA rates dropped below Con Edison’s in 1999.

NYISO spot market prices are in many hours far higher for Long Island than for Con Edison’s area, but LIPA has managed to keep its rates lower than Con Edison’s. This appears to be due to LIPA’s proactive energy planning, long term contracting, construction of transmission lines to non-NYISO areas, all of which reduce dependence on NYISO spot market energy purchasing. Also, because LIPA still owns an 18% interest in the Nine Mile 2 nuclear plant in upstate Oswego, NY, low cost power from that facility may benefit LIPA ratepayers. LIPA refused to divest its interest when ownership of the plant shifted from Niagara Mohawk to Constellation. In contrast, Con Edison divested its nuclear facility at Indian Point to Entergy, and also sold most of its other power plants, including Ravenswood, which has capacity for about 25% of the New York City area market. As a result of divestiture, Con Edison today has little power available at the cost of production, requiring more purchases of power at market-based rates.

Other states that restructured and required their utilities to do what Con Edison has done voluntarily to comport with the 1996 PSC vision are now considering whether to allow power plants again to be built by retail utilities. Then, power can be produced and made available to consumers at state regulated cost based rates instead of buying it all at federal wholesale market rates, which are not meaningfully regulated by FERC. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed

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