Wednesday, June 02, 2010

Raiding Niagara

The New York Public Authorities Law Section 1005 generally requires, with some exceptions, that hydro power be used for the benefit of the state's "rural and domestic customers." This makes the power from the Niagara and St. Lawrence hydro plants available at the very low cost of production without any markup. Over the years, large business groups have sought to increase the portion of hydro benefits they receive by raiding the longstanding residential allocation, in the name of job creation. They are now asking for changes in the law to take all the residential allocation. This would allow the Power Authority (and the Governor, who must approve all hydro contracts) to "pick winners" in the competitive business world by giving selected companies very low cost public power. See, e.g., Higher electric bills for homes suggested as way to grow jobs, Journal News - 03-10-2007.

The drumbeat for taking power from residential customers increased at the legislature in recent years when businesses faced the economic downturn coupled with the cost of high and spiking electric prices. Since 1999, those prices have been increasingly influenced by deregulated and flawed wholesale electricity spot markets run by the NYISO. The latest hydropower raid seeks to go beyond other existing economic development programs for businesses. These include secret discount "negotiated" utility rates, which can be obtained through the PSC, even if the utility does not agree in "negotiations", as has occurred with large industrial customers like Nucor and Corning.

Ironically, New York big business groups once clamored for deregulation of wholesale electric prices to avoid retail prices set by state regulation. The power generation function of the investor owned utilities was transferred to merchant power companies who are under federal rate jurisdiction, and they are now de facto deregulated by FERC. Instead of fighting harder for reform of the wholesale electricity markets run by the NYISO, New York's large business users of electricity now seek to take cheap hydropower away from residential customers, thus diluting the high cost of electricity driven by the flawed NYISO markets.

According to the New York State Power Authority:
Power for Jobs has helped hundreds of companies make the transition to the newly deregulated electricity marketplace in New York State.
The "transition to the newly deregulated marketplace" mentioned above tacitly acknowledges that it is not working. (If the "transition" to deregulation had lowered electric rates, big business would not need state relief from the marketplace). Cheap hydropower is seen as a palliative for New York businesses who face some of the highest electricity costs in the nation, despite the relative abundance in New York State of low cost hydro and nuclear power. (New York state has the nation's third largest output of hydropower, and several large nuclear plants). Since the advent of wholesale electricity deregulation in 1999, programs for allocation of NYPA power to businesses have grown. See New York Power Authority Report to the Governor and Legislative Leaders on NYPA Power Programs for Economic Development, (prepared pursuant to Section 9 of Chapter 217 of the Laws of 2009), December, 2009.

The increased clamor to take cheap hydropower from residential customers appears to be in response to the deregulation experiment begun by the Pataki administration. New York's largest industrial and large business customers, already benefiting from Power Authority programs which offset and dilute some of the high and spiking deregulated market prices, are much quieter about the failure of New York's deregulation than their counterparts in the New England ISO and the PJM RTO regions. In contrast, business groups in those areas are more vigorous than New York's in urging FERC to reform deregulated wholesale electricity markets.

Brushed aside in the "Power for Jobs" sloganeering s a sure consequence of reallocating the residential hydro power: it will raise electric bills substantially for large numbers of residential consumers, making matters worse for them. As stated by a representative of NYSEG/RG&E to a legislative commission on hydropower appointed by Governor Pataki:
In addition, and just as important, a loss of this power to residential customers in the NYSEG and RG&E service areas would significantly increase rates, severely impacting customers at a time when the upstate economy continues to struggle. Absent the Niagara Project allocation, residential electricity rates would increase 7.2% to 8.7% for NYSEG customers and 10.8% to 14.2% for RG&E, depending on the type of service a customer has chosen. If St. Lawrence allocations, which are covered by the same contracts that cover the allocation of Niagara Project power, were also lost, the rate increase climbs to between 12% and 14.5% for NYSEG customers and 19.6% to 25.7% for RG&E customers. These dramatic increases at a time when the upstate economy continues to struggle would cause a true hardship for our customers.


Suggesting that these savings are meaningless to a residential customer and that the residential customer allocation would be better spent on economic development programs is irresponsible.
The commission should resist an arbitrary shifting of this allocation to programs that may not add significantly to the regional economy. It cannot be assumed that the transfer of low-cost power from residential customers to a business creates an automatic, substantial win for the economy.
Consumer spending may be the engine for renewed economic growth after a recession. Raising consumer utility bills, however, deflates the consumer economy. With high unemployment and even less money in consumers' pockets to spend in the regional economy, economic recovery may be slowed if hydro benefits are diverted away from residential customers.

filed a report several years ago with the state hydro commission appointed by then-Governor Pataki indicating that the putative benefit to the economy from using residential hydro for businesses in the name of creating jobs would be far outweighed by the damage to the region's economy by raising prices for massive numbers of residential customers and reducing their collective purchasing power. This report found that shifting $51.7 million of hydro benefits away from residential customers would actually have a serious and much greater negative economic impact that outweighs the putative benefits of shifting the cheap power to business customers. Because the money saved would not be spent -and respent- by residential customers in the local economy, there would be
  • a net reduction in Gross Regional Product of $97 million,
  • a wage loss of $40 million,
  • a loss of 1,186 jobs, and
  • a population loss of 2,326.
See EMCG Report on Selected Socioeconomic Impacts that Eliminating Power from the Niagara Power Project Would have on the Service Territories of New York State Electric and Gas Corp and Rochester Gas and Electric - 12-1-2005 - 5-18-2010.

Now, proponents of hydro power reallocation to business propose taking nearly all of the residential allocation, currently valued at $100 million or more. They dismiss the cost of the shift of this very broad based benefit to a select few businesses, and the dampening effect that adding a billion dollars to residential electric bills over a decade would likely have on consumer spending and the local economy.

Business proponents of the shift scoff at the relatively small monthly amounts their proposal would add to residential electric bills, (and they may be underestimating the bill impacts, contrary to NYSEG and RG&E's estimations). But whatever the amount, every dollar added to consumers' bills by diversion of hydro benefits to business customers cuts the amount of income households can spend in the local economy. Dollars saved by low cost residential hydro power help meet household needs. Many residential customers lack significant savings and are living today from check to check, often running out of money for food and other essentials in the days preceding their next paycheck, social security, or pension check, and living in hardship. Indeed, in 2009, the investor owned utilities interrupted service as a collection measure to more than 330,000 New York utility customers who could not afford to pay their bills. Adding to the energy burdens of residential customers would only make matters worse.

Justifications for changing the longstanding law mandating residential benefits are based on very speculative job creation claims. This, of course, requires government to pick the winners of low cost hydro subsidies - normally anathema to the ideas of "free market" business competition and "level playing fields" usually touted by the same business groups now clamoring for more low cost public hydro power. The business groups support new legislation to gradually convert the residential hydro benefit for upstate customers into a cash credit on the utility bill that would diminish over five years from $100 million to just $30 million.

The actual value of the cheap Niagara residential hydro power varies in relation to the cost of other power obtained in the marketplace from private suppliers. Governor Paterson estimated that it was worth $82 million in 2009. The utilities who receive the cheap power under contracts with the Power Authority and pass the benefit on to residential customers have said it is worth much more over time. The value is the difference between the cost of the hydro power - which is less than one cent per kilowatt hour - and what the utilities would have to pay to replace it with power bought in the wholesale electric market at market-based rates set at the NYISO by the most expensive producer whose bid is accepted. Over the past year, due to the recession and the drop in the price of natural gas, and mild weather, electricity market prices have come down somewhat, narrowing the spread between the cheap hydro and the market price of other power. Estimates based on this recent narrower spread may significantly understate the real long term wealth shift from residential to business customers that would be accomplished over time if the legislative proposals are approved.

Proponents of giving residential hydropower to selected companies argue that it will create new jobs. Such claims should be taken with a grain of salt, as the record of many publicly subsidized economic development programs is at best spotty. Even if some jobs are created with more power subsidies to certain businesses, the the total resource cost of creating those jobs must include the offsetting damage to the regional economy from raising monthly bills for large numbers of residential customers and decreasing their discretionary incomes. Rather than make the hard case to justify investment of general tax dollars to subsidize businesses to grow jobs and build the economy, New York's large businesses appear to be aiming at a "softer" target: reallocation of residential hydropower benefits.

There is a long history involving private acquisition and domination of the public water power assets in New York. In 1907 New York Governor Charles Evans Hughes (later Chief Justice of the United States) declared that water power in New York state "should be preserved and held for the benefit of the people and should not be surrendered to private interests."

In 1914, Theodore Roosevelt warned in his autobiography against water power barons seeking a monopoly on natural resources:
the work of the [Corporations] Bureau showed that ten great interests and their allies held nearly sixty per cent of the developed water power of the United States. Says [Corporations Bureau] Commissioner Smith: "Perhaps the most important thing in the whole work was its clear demonstration of the fact that the only effective place to control water power in the public interest is at the power sites; that as to powers now owned by the public it is absolutely essential that the public shall retain title....
In the 1920's Governor Alfred E. Smith called for hydropower development by a state authority. Smith expressed concern over privatization of hydropower:
During the presidential campaign of 1928, Al Smith insisted that private control of hydropower sites reduced public control of power rates, weakened regulatory authority over electric utilities, and exposed the public to unnamed future hazards. Given these dangers, he argued, there was "nothing socialistic or revolutionary" about regulating utilities or developing public power.
Canada took steps to undo privatization of its Niagara hydro power early in the last century. Karl Froschauer, Ontario's Niagara Falls, 1887-1929: Reversing the Privatization of Hydro, (2005).

In 1931, when Franklin D. Roosevelt was Governor, the state Legislature created the Power Authority of the State of New York (PASNY). A driving purpose of its creation was to develop the International Rapids section of the St. Lawrence near Massena, NY, in cooperation with Canada. The St. Lawrence FDR Project began in 1954, when PASNY was headed by Robert Moses, after a 1950 treaty with Canada and 1953 federal legislation authorized the project.

The 1950 treaty also cleared the way for redevelopment of the Niagara Falls hydro project. At that time, Niagara Mohawk Power Corporation owned the "Schoellkopf" station at Niagara, built in three segments between 1903 and 1924, which by 1950 was capable of producing only 360 MW of power. "The original redevelopment plans called for construction of a new power plant with more than 1300 MW of installed capacity." Alex Radin, Public Power, Private Life, p. 159 (APPA 2003). A struggle ensued over whether the new facility would be publicly or privately owned.

On June 7, 1956, in "the most spectacular accident in the history of electric service. . .[a] series of giant rockfalls sent two-thirds of Niagara Mohawk Power Corporation's large Schoellkopf hydroelectric plant crashing into the Niagara River Gorge a half mile below Niagara Falls."Radin, supra. At that point, it was determined that PASNY would redevelop the site at Lewiston, downstream from the ruined Schoellkopf site, and Niagara Mohawk would receive the "replacement power" output from the amount of water it had been using at the ruined plant, equal to 445 MW because the higher head of the new plant could make better use of the water than the Schoellkopf units had. Half of the output was reserved, by federal statute, as "preference" power for municipally owned utilities and rural electric cooperatives.

Even if New York state law were amended to shift residential hydro benefits to businesses, the federal Niagara Redevelopment Act seemingly requires at least half the output of the Niagara Redevelopment Project to be allocated to residential customers. FERC mentioned this requirement in its 2007 Order granting NYPA's application for relicensing of the Niagara Project:
Niagara Redevelopment Act section 836... authorizes and directs the Commission to issue a license to the Power Authority for the construction and operation of a project with the electric generation capacity to use all of the United States’ share of the Niagara River water available for power generation. It requires the Commission to include among the license conditions, in addition to those deemed necessary and required under the terms of the FPA, provisions to:
  • Assure that at least 50 percent of the project power is available primarily for the benefit of consumers, particularly domestic and rural consumers, and to make such power available at the lowest rates reasonably possible to encourage the widest possible use, and to give preference to public bodies and nonprofit cooperatives within economic transmission distance.
In a 1985 court decision, however, the mid-level Court of Appeals for the Second Circuit decided that the above language indicating that the majority of power should go to residential customers does not really mean what it appears to say. It relied on legislative history to conclude that the words of the statute that seemingly guarantee benefits to residential customers are empty: "The term "domestic and rural consumers" expresses a Congressional expectation, not a mandate, and the word "primarily" does not mean "exclusively". Residential customers were not represented in that litigation, and the case did not culminate in any definitive decision of the Supreme Court on the meaning of the statute.

In allowing flexible allocation of hydro benefits seemingly at odds with the plain language of the statue, the court decision at page 107 backstopped its decision by pointing out that in any event, as a "practical matter", very substantial hydro power benefits were then being received by residential customers:
Finally, we note that FERC's rejection of PASNY's "end-use" contention has not as a practical matter injured domestic and rural consumers. Although MEUA's members presently sell only 42% of their preference power allocation to such consumers, the 58% remaining being supplied to commercial and industrial users, the private utilities are bound by contract to resell 600 MW of their non-withdrawable power at retail at a fixed percentage above cost to domestic consumers.
Now, it is proposed to drastically reduce or nearly eliminate the residential benefit, by removing the residential ("domestic") allocation requirement from New York state law. This might not resolve the federal issue, i.e., the requirements of the Niagara Redevelopment Act.

New York's share of the water power of Niagara and the St. Lawrence is purposed under existing laws to provide direct benefits to residential consumers. It still belongs to the people of the state and could be viewed as part of the "commons" which should not be appropriated for the benefit of a few businesses:
They hang the man and flog the woman
That steals the goose from off the Common
But let the greater villain loose
That steals the Common from the goose

The law demands that we atone
When we take things we do not own
But leaves the lords and ladies fine
Who take things that are yours and mine
English Nursery Rhyme c. 1760.

"The New York Power Authority will conduct a public hearing this week in Syracuse to solicit opinions on continuing the sale of cheap state-owned hydropower for use by Upstate residential customers....Some economic development advocates say the electricity — valued at about $82 million below market in 2009 — could be better used to subsidize business growth. Paterson and Senate leaders this year backed a plan to use some of the power for economic development, but the plan was blocked in the Assembly. NYPA is proposing to extend its current contracts with the utilities through 2011, subject to revocation with 30 days notice." New York Power Authority holds hearing in Syracuse on sale of hydropower to utilities, Post Standard, Nov. 3, 2010.

NYPA Holding Hearings on Reduced Hydropower Allocation for Residential Customers, PULP Network, Sept 1, 2009.

David Robinson, Recharge New York is new take on power share, Buffalo News, Feb. 3, 2011. "

Brian Amaral, Cuomo pushes low-cost power bill, Watertown Daily Times, Feb. 3, 2011.

Brian Amaral, Low-cost power bill OK'd by Senate, Cuomo optimistic: Assembly less certain; farmers get boost, Watertown Daily Times, March 9, 2011. "The new program would be twice the size of its predecessor, at 910 megawatts. It does so by taking 455 megawatts that are used to reduce electricity bills for residential energy bills upstate.... The legislation would cushion the residential blow by providing a $100 million annual discount — the same figure as in 2010 — for residential patrons until 2014, when it would be cut to $70 million. In 2015, it would be cut to $50 million. By 2016, the figure would be cut to $30 million, where it would remain."

Jimmy Vielkind, Power Plan Revived in Budget, Times Union, March 30, 2011.
"Now called Recharge New York, the program will be administered by the New York Power Authority and will automatically renew benefits for more than 500 businesses and nonprofits -- including SCA Tissue, Finch Paper, Albany Molecular Research and the Albany Institute of History and Art -- that participated in the old Power for Jobs program.

That program expired in 2010. Then-Gov. David Paterson and members of the state Senate favored an expanded program, which would have made 910 megawatts of subsidized power available, up from 577 megawatts. (A megawatt is enough power to supply up to 1,000 homes.)

That larger amount would be directed entirely to businesses. Previously, residential customers of three upstate utilities -- NYSEG, National Grid and RG&E -- also benefited from an allotment of subsidized power.

Cuomo submitted a bill similar to Paterson's, which eliminated the residential benefit.

Cuomo's measure passed the Senate and will be included in budget legislation expected to pass this week.

The new program will continue the monthly rebate for these residential customers -- an average of $3.30 per month -- for three years, and then offer a $30 million subsidy.

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