Charging into change Times Union; Albany, N.Y.; Jul 9, 2000

Behold the two faces of electricity deregulation.

The first: Consumers had been promised that competition would bring lower rates. New York's high electricity prices remain high and will get higher still in some areas this summer. The free market is tied up in regulatory leftovers and long-term contracts that hamper competition. And power failures aren't just for gusty storms anymore; experts warn that too much demand this summer may bring the lights down.

Or look at it this way: Utilities are selling off their generation assets without legislative influence, unlike in many other states. A capital-investment market that had lain dormant for years suddenly is alive again, with 16 power plants in an official planning stage and dozens more at least a spark in a company's mind. Large factories have hacked as much as 25 percent off their bills. And one study considers New York second-best in the nation when it comes to promoting competition.

Two years after the state Public Service Commission unlocked the door for customers to shake free of their longtime utilities and shop for another electricity supplier, the results are resoundingly uncertain. Ask a buyer, seller or generator their thoughts on the process so far, and the answers will likely be different.

"There isn't a state right now that isn't struggling with this transition," said Maureen O. Helmer, chairman of the Public Service Commission. And in New York, she said, "I think that we've made a lot of progress."

Others agree: Progress, indeed. A ways to go, also.

"All in all, deregulation in New York has gone pretty well on the wholesale (power-generating) side," said Carol Murphy, executive director of Independent Power Producers of New York Inc., a trade group in Albany. For retailers -- the companies that billpayers might deal with -- true competition has yet to materialize. "It's hard for people to come in and make some profit. So I think the retail needs work. But the framework is there," she added.

The electric industry framework in New York, until lately, had been a lot easier to understand. It used to be that when a light switch went on, a power company made the electricity, delivered the electricity and sent a bill.

All that has changed. The trusty utility of yore is gearing down to do little more than send electrons through wires and service equipment. Other companies will generate the electricity. And those companies, in turn, sell electricity to energy service companies -- ESCOs -- that, in turn, sell it to customers.

If that sounds confusing, Gordon Boyd has made a business of it.

He's a partner in Salerni & Boyd Inc., a Saratoga Springs company that is working with six chambers of commerce across the state to secure good rates for members. So far, those members together are saving between $500,000 and $1 million a year. To some, that means individual savings between $10,000 and $20,000.

"It's bottom-line dollars, and to program managers that's a very exciting thing," Boyd said.

Kevin Murphy, executive director of NYAHSA Services Inc., is another client. When it comes to deregulation, he said, he's "mildly pleased -- but with great hopes of it becoming a lot better."

Murphy's group provides services to the New York Association of Homes and Services for the Aging, an Albany organization representing nonprofit nursing homes.

So far, his members have signed about 80 contracts to buy cheaper power. Savings vary, but the average bill is about 2 percent to 9 percent less.

He turned to Salerni & Boyd for help in understanding the deregulation morass. The idea those consultants advance is that buyers in groups can drive better deals than on their own. Even so, individuals expected to see cheaper power. Whether customers can work those deals themselves depends somewhat on where they physically are located.

Because New York is restructuring the electricity industry with no help from the state Legislature, each of the state's six utilities struck separate agreements with the Public Service Commission. Each settlement contains different dates for divesting generation assets and putting customers into the competitive market.

That is not making life easy for the companies that want to sell you electricity.

Consider Agway Energy Services Inc. of Syracuse, which has built a stable of 41,000 customers in the past three years. Half of those are in Niagara Mohawk Power Co.'s turf; the rest are spread out over seven other utility areas.

Doing business in eight utility systems, said Michael Meath, Agway's vice president of energy products, "is like running eight different companies."

In the service area of New York State Electric & Gas Corp., for example, customers who switch to another electricity provider are given a credit of 3.71 cents per kilowatt hour every month. This amount represents the portion of the NYSEG bill devoted to electricity alone -- a portion now being sold by another company.

In Niagara Mohawk's area, customers get $1 a month plus 7 cents a kilowatt hour to switch.

Niagara Mohawk's deal wasn't inducing many customers to jump ship, Meath said. So the utility tried a bigger carrot: It distributed a $3 million pot to the marketers to lure customers away themselves. Agway was handing out $50 a head, and guaranteeing customers the Niagara Mohawk electricity rate plus 3.5 cents a kilowatt hour.

"It was the most successful campaign we've done to date," Meath said.

Don't call him looking for it now: Niagara Mohawk's pot of cash dried up. So Agway finds itself in the unbusinesslike position of turning away customers.

"We suggest you just sit tight until the next program comes along," Meath said.

NYSEG's deal is causing some electric providers fits, too. One electricity retailer, Advantage Energy Inc. of Westfield, filed a motion with the Public Service Commission complaining that NYSEG's electricity rates are set so low there's no way it can match the price.

That 3.71-cent credit, dubbed a "back-out rate," doesn't come close to what Advantage and others say they can charge for electricity. In the summer, Advantage says it pays about 6.4 cents per kilowatt hour.

Few customers paying attention will pay Advantage 6.4 cents for electricity if they can get it from NYSEG for 3.71 cents.

So far, not many people are biting at the wonders of competition, as currently available.

About 2.8 percent of Niagara Mohawk's customer base has migrated, despite the fact that all of them have had the opportunity to move since 1999. Statewide, the migration rate of residences and businesses is about 2.6 percent.

What competition has been spurred has been subsidized by ratepayers, in many instances. Consider the Niagara Mohawk carrot: "They're not giving you a rebate," said Assemblyman Paul Tonko, D- Amsterdam, chairman of the Assembly Energy Committee. "You're giving you a rebate."

The Public Utility Law Project, a policy group based in Albany, doesn't cotton to that approach, either. "They could have reduced rates by giving that amount to everybody," said Gerald Norlander, the group's executive director.

Tonko long has called for more legislative influence in the deregulation process, calling the Public Service Commission's settlements with each utility "piecemeal" and "cobblestoned." The PSC's Helmer, though, said the agency's approach has allowed it to be more flexible, reacting to markets as the need arises. Advantage Energy's complaint, for example, is being taken up by the PSC now.

"States that did it through legislation are struggling just as much, if not more," she said.

While savings and choice are the ultimate promise of deregulation, market forces are not necessarily cooperating in the short term. At the bunkerlike headquarters of the New York Independent System Operator in Guilderland -- the organization that oversees the market feeding the state's power grid -- it's easy to see why.

The NYISO projected peak electricity usage this summer at 30,200 megawatts. The state's electricity generators are capable of making 36,336 megawatts -- only 700 megawatts above a reserve requirement of 35,636 megawatts.

And as deregulation promises cheaper rates, the old laws of supply and demand kick in: The cheaper it gets, the more people want it; the more people want it, the tighter supplies get.

"It shouldn't be a surprise to anybody that the cost of wholesale power is considerably higher than it was two years ago," said William J. Museler, president and chief executive officer of the NYISO.

Capacity woes should be alleviated as new power goes online, he said. And recent approval of a new power plant in Athens, Greene County, is a good signal for new demand.

Another good sign are the high prices being bid right now for electricity at peak demand times. "I think it's a very good market," said Frank Cassidy, president and chief operating officer of New Jersey-based PSEG Power LLC, which in the spring bought the Albany Steam Station from Niagara Mohawk, as that utility divests its generating assets.

The NYISO was created to help manage demand needs of the new, free- market system, which hasn't been without its problems, including software glitches and wild price swings.

Price relief is not quite at hand, either. High natural gas and oil prices are not doing much for electricity markets. And even though more than 60 power plants are currently in some stage of planning in New York -- some, like the 1,080-megawatt one in Greene County, are all but approved while others are in the imagination stage only -- the earliest any would power up is 2003.

Aging electricity infrastructure and sky-high demand may result in brownouts and blackouts in certain areas, especially in New York City and Long Island.

Recognizing that, a Washington, D.C.-based group called Lighten the Load is calling for some old-fashioned conservation measures and energy efficiency.

Requests to shut off electric equipment is not much of an option, said Ashok Gupta, a senior economist with the National Resources Defense Council speaking for the Washington, D.C.-based group. In fact, "we think it's hilarious," he said.

Sharp cuts in conservation programs required by the Public Service Commission haven't helped, he added.

Assemblyman Tonko maintains that more money needs to be put aside for new, more efficient energy sources.

"You really have a system that doesn't embrace demand-side management, that doesn't embrace alternative technologies," he said.

Tonko remains convinced the consumer is the loser. "I think the whole response from state governments has not been consumer-driven," he said. "There's just, I think, a very feeble attempt that has been made."

Tonko and others are championing clean-energy legislation that will force utilities to invest in green electricity.

Some surveys show that power users are willing to pay more for cleaner electricity -- indication, for some, that legislative meddling is not needed.

It's too early in the game for debate, say some, including Johnny Evers, a legislative analyst with The Business Council of New York State Inc., the Albany-based large-business lobby. He's simply happy to see steps toward deregulation: "It's only two years out. That's the key here. We don't want anybody to rush to judgment on the evolution."

But with big changes come big expectations.

"I think it's not working very well right now," said the Public Utility Law Project's Norlander of deregulation. "But if you're a true believer, more deregulation is the answer."