NY City Wholesale Electricity Prices May Rise 89% Due to Market Design and Higher Natural Gas Prices

In a May 15 2008 Summer Market and Reliability Assessment report by FERC staff, FERC Commissioners were advised (slide 6) that this summer wholesale market prices for electricity in New York City may exceed last summer's prices by 89%. Driving this increase is the major increase in the price of natural gas (slides 7 - 8). The effect of the natural gas price increase is amplified by the design of NYISO wholesale electricity markets promoted by the New York Public Service Commission and FERC which pay all sellers the same price even if, as in the case of electricity produced from wind, water, uranium and coal, the cost of production has not risen in tandem with natural gas prices.

At a May 21 webcast meeting of the New York Public Service Commission, New York PSC staff indicated that, based on recent NYMEX data,

the electric market energy prices this summer could be 55 to 66 percent higher compared to last summer's actual electric market energy prices. Therefore, the trend is for higher electric market energy prices for the 2008 summer period compared to last summer.

See webcast minute 54 - 58, transcript p. 40. The lower New York PSC estimate may reflect different data sources used by FERC, an averaging of expected New York City price increases with upstate New York, or other factors.

The effect on retail rates will depend on a number of factors, including the utility, features of its retail rate plan, and its energy purchasing and hedging practices which are considered trade secrets. In addition, the impact may depend on the customer's rate classification (e.g., industrial, commercial, residential) and whether the customer has fixed or variable rates.

In general, to effectuate its 1996 "vision" of a deregulated power generation sector, the PSC promoted the eventual flow through of functionally deregulated NYISO prices to all customers, starting with larger industrial and commercial customers first, and with a more gradual introduction of such pricing to small commercial and residential customers. See Disconnected Policymakers. [Other states that restructured are encouraging utilities to retain or build power plants under state cost of service regulation [to avoid purchases from sellers with market-based rates allowed by FERC], and to make necessary purchases using a diverse portfolio of energy supply sources, with a mixture of long term contracts, that relies as little as possible on the volatile spot market prices].

The effect on retail residential rates of these large wholesale spot market price increases will depend on several factors. Some utilities like Con Edison and Orange & Rockland have been allowed by the PSC to buy much of their power at NYISO spot market prices, perhaps 40%. Also, some of their long term contracts may be indexed to NYISO spot market prices or fuel price indexes. As a result, prices of some of their off-spot market purchases may also increase significantly. These utilities most closely implemented the PSC and Enron-promoted restructuring model, and soon after the advent of the NYISO spot markets were allowed by the PSC to change their rates every month to pass through the effects of their recent wholesale energy purchases. This shifted market risk in the flawed electricity markets to consumers. See Consumers in Peril, Why RTO-Run Electricity Markets Fail to Produce Just and Reasonable Electric Rates, APPA, 2008.

Con Edison has indicated that this summer its residential customers may see increases of "only" 13%. Summer Juice Bill to Give Jolt. Con Edison residential rates spiked significantly in July 2007, so the large expected price increase for the summer of 2008 might be on top of a prior record spike. See Excelsior! Con Edison Residential Rates Spike (Again), PULP Network, September 6, 2007.

Upstate residential utility customers will not face the increases likely to affect customers of Con Edison and Orange & Rockland. RG&E maintained the benefit of low cost power generation by not selling some its power plants, and offers a fixed price so customers who chose that rate option will see no increase this summer. NYSEG residential customers who chose a fixed rate plan will see no increase. National Grid is in a long term rate plan that stabilized rates for residential customers.

Large customers, however, are likely to see increases that will reflect more directly any increases in NYISO spot market prices.

Why do electricity prices go up so much when natural gas-fired generation accounts for only about a quarter of the electricity used in the state? According to a NYSERDA report, there is a diverse mix of fuels for the state's electricity sector:

By fuel type:
Nuclear . . . . . . . . . . . . (26%)
Natural Gas . . . . . . . . . . (25%)
Hydro . . . . . . . . . . . . . . . (18%)
Coal . . . . . . . . . . . . . . . . (13%)
Net Imported Electricity (12%)
Petroleum . . . . . . . . . . . . (4%)
Biofuels . . . . . . . . . . . . . (2%)
Wind. . . . . . . . . . . . . . . . (0.3%)

NYSERDA, Patterns and Trends 1992 - 2006, Jan. 2008. Recently, there has been an increase in the amount of wind generation. In the NYISO markets, all sellers -- even those with much lower cost electricity -- are paid the same price paid to the seller whose output clears the market, which in the New York City market is almost always a natural gas peaking unit during periods of heavy usage.

Natural gas prices have soared since this system was adopted, and recent trends indicate the possibility of sustained higher prices. See Global Demand Squeezing Natural Gas Supply, NY Times, 5/29/09. The value to consumers of a fleet of power plants with diverse fuels was lost when, with encouragement by the PSC, New York's utilities sold their power plants to new owners. Now electricity for customers must be bought at market rates based on the price demanded for the most expensive output at any time. The value of lower cost generation is now reaped by the wholesale market sellers.

In other states, where utilities still hold power plants under full state regulation, their price increases have been less than New York's, which are now second only to Connecticut (another "restructured" state) in the continental states. See Total Average Delivered Retail Electricity Price, New York vs. Regulated States, 1991 - 2007 (PPI) showing that the electricity price gap between New York and other states has increased since the advent of "restructuring" and greater reliance on deregulated wholesale market prices. See also, Decade of Deregulation Felt in Climbing Bills, describing the Maryland experience. No state has adopted a regime similar to New York's since the demise of Enron in 2001. Some, like New Mexico and Virginia, changed their direction and retained ownership of power plants by state regulated utilities, thus avoiding purchases affected by the high federal market prices. Other states, like Connecticut, have reauthorized their utilities to build new power plants that would be under state cost of service regulation.