New York Restructuring: It Was About Price

New Yorkers Pay More for Electricity
Today, New York electric consumers pay more than those in states that continued conventional state utility regulation. More troubling, the gap between New York and the states that did not drink the restructuring Kool-Aid is widening, making New York less competitive in the national economy.

This is illustrated in an October 1, 2007 report by Marilyn Showalter, for Power in the Public Interest. See Electricity Price Trends in New York Compared to Trends in Price-regulated States, based on EIA data through June 2007.

Marilyn Showalter is a former Chair of the Washington State Utilities and Transportation Commission (WUTC) and former President of NARUC, the national association of state utility regulators. She also served as chief clerk of the Washington State House of Representatives and as legal counsel to the governor of Washington. She is a graduate of Harvard College and Harvard Law School. Her report shows how New York customers are paying far more for electricity than customers in states that did not try to deregulate. In the traditionally regulated states, utilities did not sell their power plants and thus they are less dependent on buying energy in essentially deregulated federal wholesale markets.

A New York Times article, A New Push to Regulate Power Costs, also summarized the national trend: electricity prices in states that adhered to the deregulation model, like New York, are not only higher than they were before the experiment began, but also higher in relation to the majority of states that did not follow their example.

The First Goal of New York's Restructuring was Lower Retail Prices
Confronted with this reality - prices did not go down with deregulation, and the price gap between New York and other states is widening - a former New York PSC Chairman was recently quoted as saying lower prices are not the only goal of deregulation. See Push on for Energy Policy: 3 Former Heads of PSC Tell Independent Power Producers a State Plan Is Needed.

It is true that other goals were stated when the PSC adopted its "vision" of "unbundling" and deregulating wholesale and retail generation service in 1996, (see below), but the number one goal was to reduce New York electricity prices that were high in relation to other states

Market forces overall are expected to produce, over time, rates that will be lower than they would be under a regulated environment. As we move toward competition, our expectation is that rates overall will be reduced.

Opinion 96-12 at p. 26. It was this "vision order" that paved the way for the New York PSC and utilities to implement restructuring by requiring the utilities to file plans to conform with the "vision." PULP's opposition to divestiture and deregulation of new providers was not heeded. Subsequently, the legislature undid the PSC effort to deregulate new retail gas and electric companies.

After most of the utilities agreed to restructure, and as ownership of their power plants was being shifted to new wholesale utilities who would sell at market rates allowed by FERC, the 1998 State Energy Plan also stated an expectation that the rate differential between New York and other states would narrow:

Future electric generation prices should move closer to the national average since over time competition will likely eliminate most market distortions, leaving only regional anomalies for state-to-state price differences. Thus, changes in generation prices should have no more impact on New York's competitive position than comparable changes in other states.

Now, however the situation is worse. The gap between New York electricity prices and those of other conventionally regulated states is widening.

No state deregulated electricity like New York did since the demise of Enron in 2001 drew attention to the flawed scheme of deregulated federal wholesale markets. Since then, a number of states halted their plans to deregulate. Other states that had enacted laws requiring divestiture of power plants, like Connecticut, have recently passed new laws to authorize utilities to build or acquire power plants as a way to bring more of the generation costs of electric service back under state regulation. This reduces the need to buy electricity at wholesale market prices inflated by design and gaming.

Rate Differences Within New York: Customers of a Vertically Integrated Utility Did Best
Within New York state, customers of the utilities that most enthusiastically implemented the PSC vision saw their bills rise and become unpredictable. In contrast, residential customers of RG&E, a utility that kept most of its power plants, and thus remains the most traditionally regulated, enjoy the lowest bills. See Excelsior! Con Edison Residential Rates Spike (Again).

There is no legal barrier that prevents a utility from building a power plant, as Con Edison did with its East River steam/electric "repowering" project several years ago. RG&E has announced plans to retire an old coal plant and build a new 330 MW plant, and to improve several of its old hydro plants, raising their output by 9 MW. Deregulation proponents are now asking the PSC to require divestiture or prevent RG&E from repowering old power plants, so customers of that utility too would have to buy electricity at inflated prices established in the deregulated federal markets.

The New York PSC adopted a policy to flow NYISO spot market rates through to all customers, eventually, starting first with the largest customers. The results for industrial customers in the PPI Report show how this has caused their rates to soar as the policy was implemented. Again, this is due to faulty design and possible gaming of the spot markets, in which sellers with energy that costs less to produce can always get paid the top dollar demanded, which may be for the most costly, least efficient plant.

It's Market Design, Not Gas Prices
In response to Marilyn Showalter's study, deregulation proponents - mainly the deregulated wholesale utilities and traders - claim New York's rising electricity prices are simply tracking previously unanticipated increases in prices for natural gas and oil. See Energy Deregulation Too Costly, Study Shows New Yorkers Pay More for Electricity Now than under Regulated System, Says Advocacy Group Director.

Those fuels, however, only account for about 34% of New York's electricity production. According to NYSERDA data, the majority of New York's electricity supply is from sources that produce electricity at costs far lower than natural gas or oil fired power plants. This includes

• 25% from nuclear,
• 14% from hydro,12% from coal,
• 13% imported (much of which is Canadian hydro or produced from coal in other states)

Yet, New York prices are paralleling increases in natural gas prices is due to defective NYISO spot markets, where a 20% "tail" of natural gas in many hours wags the entire "dog" of prices for all generators, including those less costly to operate.

Sellers of lower cost energy receive the maximum clearing prices set in the NYISO markets for much more expensive power plants. As a result, with deregulation, the benefit of low cost electricity shifted from New York's consumers to producers and traders.

Industrial customers, once the major "consumer" supporter of deregulation, are defecting as the prices they pay in the deregulated states go up. See Industrial and Residential Customers Agree: Proposed FERC Rules for Electricity Market Rates are Flawed. It is now mainly the producers and traders who continue to bombard the public and press with spurious claims of that deregulation is succeeding. It is, for them.

Other Goals
As mentioned above, lower price was the first goal of deregulation, and there were other objectives. New York has not done so well on the other restructuring goals, either. The other goals articulated by the New York PSC when it adopted the "vision" promoted by Enron were

• Increasing Customer Choice (See Think Twice Before Switching Utilities)
• Continuing Reliability of Service (See Power Outage Mystery, Queens Power Outage Update)
• Continuing Programs That are in the Public Interest
• Allaying Concerns About Market Power (See Did Electricity Market Manipulation Cost New York Consumers $157 Million in the Summer of 2006? and NYISO Scarcity Pricing Events)
• Continuing Customer Protections and the Obligation to Serve (See the effort of new utilities to circumvent HEFPA)
  

Background: The "Vision" of Electricity Deregulation
In 1996 the New York Public Service Commission (PSC) adopted policies favoring electricity price deregulation. The major trade off for utilities was that in exchange for selling their power plants to new owners, as desired by the PSC, the utilities were allowed to form holding companies and to have long term "performance" rate plans. Rates would be set at a "macro" level rather than based on detailed scrutiny of costs, and the companies could retain savings achieved by cost cutting in operations. The PSC approved "rate/restructuring" agreements for each utility. In November 1999, the New York ISO (NYISO) was formed to create a FERC-approved "organized" market for spot market sales and purchases. Now the majority of wholesale energy in the state is sold or influenced by prices in that essentially deregulated market. See NYISO Costs Skyrocket, Benefits Questioned.

In 2004, the PSC still believed in a transition to a situation where eventually all customers would face spot market pricing:

Based on the current state of the competitiveness of the electric market, it is our view that, for the largest commercial and industrial customers, their commodity rates should reflect spot markets and existing hedges should be allowed to expire without being renewed. We will continue to monitor the state of the market for other customer classes and as the markets continue to mature, we expect that the hedges providing price volatility protection for these customers will be allowed to expire as well.

Statement of Policy on Further Steps Toward Competition in Retail Energy Markets, Aug. 25, 2004.

Utility consumer advocates generally oppose reliance on spot market pricing:

The Default Service Provider shall not simply pass through wholesale spot market rates for the energy or gas commodity portion of Default Service, and shall be required to take prudent measures to provide least cost service and assure long term rate stability, through various means including but not limited to competitive bid, bilateral contract, or provider-owned generation or supplies

NASUCA Resolution on Competitive Provision of Electricity and Natural Gas, 2001.

In 2006 the New York PSC commenced a new case to consider how retail utilities should acquire electricity and natural gas for their customers. That case is underway. Meanwhile, some New York utilities are continuing to implement plans adopted years ago to increase their reliance on short term spot markets to purchase energy for their retail customers in the coming years.

Time for a New Plan
Other states that restructured are considering major changes after the failed experiment with deregulation. See PSC Study: Michigan's Electric Utilities Should Return To Regulated Market Structure. The three former New York PSC commissioners mentioned in the article above were right to call for a new energy planning initiative for New York State. The last state energy plan issued in 2002 relied heavily on a deregulatory approach. See Disconnected Policymakers.

Energy Plan "Updates" to the 2002 plan have been issued by NYSERDA based on information voluntarily provided by industry sources. In its 2006 "update" report, NYSERDA stated

Although Article 6 expired on January 1, 2003, NYSERDA, acting on behalf of the former Energy Planning Board, requested this information on a voluntary basis in an attempt to maintain an accurate and complete record of information and data in anticipation of the future re-authorization of the planning process. As compliance of major energy suppliers with this voluntary request has waned considerably, NYSERDA will cease to request voluntary compliance.

It appears from the statement above that without new statutory authority, NYSERDA may lack the scope of information and tools needed even to assess the situation accurately. There has been no legislative reauthorization of a comprehensive energy planning process for the state.