Giving power to the people
The deregulation of New York state's electricity market was supposed to create competition and drive down the price of electricity.
That was the theory, anyway.
In practice, many customers have seen their bills skyrocket this summer. Customers of Orange and Rockland Utilities saw their July bills jump 20 percent from last year for the same amount of juice.
The one saving grace: This summer hasn't been very hot. A scorcher could have been fatal.
Deregulation backers say the state's free market isn't yet mature, and that the kinks will eventually get worked out.
For now, customers can fume and politicians can pound their lecterns. But no one seems sure of how to fix what's ailing New York's power market.
"We're committed to an open market, but there's definitely a concern because it's an untried market, it's in the early stages, and it's under some growing stress," said Ken Klapp, spokesman for the New York Independent System Operator (NYISO), which runs the show.
How it was supposed to work
Back in the days of the utility monopolies, your electric company did just about everything: pProducing power at its own plants, transporting it on its own lines and dropping it into each home or business.
The only thing utilities didn't do was set prices. The state Public Service Commission set rates based on each company's cost of doing business, with some profit tacked on. It wasn't glamorous, but business was steady, as were supplies.
A couple of years ago, that scenario began to change. Utilities were ordered to sell their power plants and focus on delivery, which would still be regulated. Other companies would buy the plants and sell power competitively through a wholesale state market run by the NYISO.
According to the plan, the promise of free-market profits would attract investment in new power plants to support the state's growing power needs. Increased competition would lower prices for consumers.
More power plants are indeed on the way. The PSC has received 10 applications, with several more in progress.
"If you had a sufficient number of plants up and running, that would drive down the wholesale price," said John Flumerfelt, a spokesman for Calpine Corp., which plans to build a 540-megawatt plant in the Town of Wawayanda. "In a big, growing state like New York, you should be building a power plant every year."
But it's been years since New York christened a new power plant. And it will likely be a couple more before any of the pending proposals yield power.
Free market or freedom from it?
Thanks to the thin margin between burgeoning demand and stagnant supply, the plants already running can demand hefty prices for power.
That's why customers of O&R and parent company Consolidated Edison have seen their bills jump. The utilities are heavily dependent on the market, where customers are exposed to fluctuations in price.
Customers of New York State Electric & Gas, on the other hand, have been insulated from price increases. NYSEG operates under a rate agreement with the PSC that guarantees fixed and declining customer rates through 2003. The company also has long-term contracts with energy suppliers.
"We knew the amount we had to pay for each unit of electricity" in order to satisfy the rate agreement and still make a profit, explained NYSEG spokesman Frank Scollan.
NYSEG bet it could get a better deal by staying out of the market. So far, that bet has paid off for NYSEG customers. Of course, if all the utilities followed NYSEG's lead, the market wouldn't mean much.
"If you tie up the market by getting contracts, you stifle the market," said O&R spokesman Michael Donovan.
Central Hudson Gas & Electric still produces its own power, so its customers have also been insulated from the market.
Price spikes and shortages
For consumers who buy their power on the market, the early days of the NYISO have been a disaster.
Rising prices for oil and natural gas the fuels many generators burn to create electricity have boosted the price of electricity this summer. So has increasing demand. But to understand why prices have risen so rapidly, you have to look at how the NYISO sets prices.
Electricity is traded on two markets, the "day-ahead" market and the "real-time" or spot market.
In the "day-ahead" auction, utilities across the state tell the NYISO how much power they expect to use the following day.
Energy suppliers then offer to sell a certain amount of power on the market at a certain price per megawatt-hour.
The NYISO accepts the lowest bid first, then the next-lowest and so on, until statewide demand is met. Plants whose bids aren't accepted don't get to sell any power on the day-ahead market. But all the winning bidders get the price set by the highest bid accepted.
If a company offers to supply 100 MWH of power at $40 each, and the highest bid accepted is $150, the company will get $150.
"If you price too high you won't get dispatched, but you still want to price high enough to make a profit," said NYISO spokesman Klapp. But because New York's supply is so tight, suppliers can be fairly certain of their bids being accepted often.
In fact, many suppliers bid the bulk of their power at no charge (some even offer to pay for the privilege of providing power) to ensure that they'll sell it, while betting that the final price will be set by a higher bid.
About half of New York's power is sold through long-term contracts. Another 45 percent moves on the day-ahead market. That leaves a relatively small amount for the highly volatile and lucrative spot market.
In the spot market, suppliers and utilities bid on power to be delivered just a few minutes ahead. On a hot day when air conditioners are churning and supplies are tight, prices soar. In July, the spot market produced prices in the $1,000 to $1,300 per MWH range, compared with typical prices of $20 to $60 per MWH. From hour to hour and day to day, it's hard to say where prices will end up.
"During peak periods, the supply is more limited. Under the normal laws of supply and demand, the prices are going to be higher," Klapp said. "We're hoping that the pricing will send signals... for generators to build in New York, and that would create more supply."
The waiting game
The flurry of plant proposals indicates that signal has been sent. But until those plants come online, there is little relief in sight. Last month, the Federal Energy Regulatory Commission imposed a bid cap of $1,000 per MWH on New York's market.
In California, where the energy crisis makes New York's troubles seem minute, the state ISO recently lowered its bid cap to $250. Now there's growing concern that producers might be scared off.
It's a dilemma New York faces as well: Do nothing and customers pay the price now; or take action to reduce prices now and risk scaring away producers who could provide relief later.
The lack of easy answers hasn't stopped politicians from laying blame at the feet of the utilities and the PSC. Everyone from Sen. Charles Schumer to Senate hopeful Hillary Clinton to Orange County legislator Jeffrey Berkman has weighed in.
Schumer called for a complete overhaul of New York's "half a loaf" effort. Clinton joined a growing list of Con Ed bashers. And Berkman, in a resolution presented Friday to the county Legislature, asked that the PSC investigate alleged predatory pricing by O&R.
Berkman's resolution was tabled, but his comments summed up a complaint subjects of the NYISO experiment have voiced all summer long: "It is outrageous that the people and businesses of Orange County must endure such burdensome increases, while areas serviced by O&R in Pennsylvania and New Jersey do not."
content © 2000-2002 Jeffrey Berkman
(except where indicated)
Orange County Legislature
PO Box 787
Middletown, New York 10940
fax: (845) 343-9158
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