DEREGULATION OF ELECTRICITY ISN'T WORKING OUT AS HOPED

Buffalo News; Buffalo, N.Y.; Sep 2, 2001; DAVID ROBINSON;

So this is what we get from deregulation: A rate increase that will push up  bills for most Niagara Mohawk residential customers by 8.2 percent.

Isn't the free market just grand?

It wasn't supposed to turn out this way.

The grand plan hatched by state regulators five years ago was supposed to  provide a cure for the sky-high electric rates that have sapped some of the life out of the Upstate economy and burdened its residents. Make the state's utilities sell off their power plants and create a wholesale market for electricity that would reward innovation and efficiency and push prices lower. Open up the utility's monopolistic control over its customer base so new  electricity suppliers can jump in with innovative offers that save consumers even more.

It was going to be great, but the plan hasn't panned out -- yet.

For starters, the push to deregulate has been hampered by some lousy timing, coming just as the price of the oil and natural gas used to generate much of the state's electricity has soared. Those higher costs are just now hitting home with the higher rates NiMo's customers started paying on Saturday.

To be sure, the higher oil and gas prices would have pushed up rates even  under the old regulated system. In fact, electricity prices are up everywhere, in states that deregulated and states that haven't.

But it's also apparent that deregulation isn't working out quite the way state regulators had hoped.

"The idea was that new competitors would come on the scene and be the  salvation," says Gerald A. Norlander, the executive director of the Public Utility Law Project, an Albany advocacy group for low income consumers. "That's  not happening."

In fact, the rate hike for all but a relative handful of NiMo's 1.4 million  residential customers will be 8.2 percent, not the 7.9 percent average increase  the state Public Service Commission announced Wednesday. The PSC came up with the lower figure by including about 1,800 NiMo residential customers who will see their delivery rates decline because they buy their electricity from NiMo or  another supplier at market prices, commission documents say.

Rates for small commercial customers will go up by an average of 6.8 percent.  NiMo's biggest industrial customers, whose delivery rates already have fallen 25 percent over the last three years, will get another 4.5 percent cut. But those firms already have been enduring increases in their overall power bills because  they've been buying their electricity on the more costly open market.

Either way, the bitter reality is that, three years after Niagara Mohawk and other New York utilities started down the path to competition, NiMo's  residential and small business customers are paying more for their electricity than ever before. The ballyhooed 3.25 percent rate cuts that saved NiMo's  residential customers a few bucks in deregulation's early days are gone, gobbled up and then some by the latest rate increase.

"Restructuring has harmed, not benefited, the small NiMo consumer," Norlander  says.

Not that the increase is really NiMo's fault. The deregulation plan forced the Syracuse-based company to sell most of its power plants and instead, purchase its electricity on the volatile open market. The new rate plan actually cuts Niagara Mohawk's charge  for delivering the electricity to homes and businesses by an average of 5.4 percent.

But overall bills are going up because Niagara Mohawk estimates that the price of the electricity itself will be about 40 percent higher than what consumers were paying under the rates that were set in 1998 under its Power  Choice plan.

"This is all the cost of the electricity itself, which we no longer make," says Stephen F. Brady, a Niagara Mohawk spokesman.

For the first time, the rate plan calls for

See Deregulation Page B8

Deregulation: Rates will adjust  monthly,

reflecting wholesale cost of electricity

Continued from Page B5

some of those open market power costs to be passed through to consumers, although initially, the impact on residential consumers will be limited because  the utility still will be hedging about 95 percent of its electricity for those  customers, the PSC says. The agreement also puts a $40 million annual cap on the  amount that customers can either save or pay extra because of fluctuations in  wholesale power prices.

"The majority of Niagara Mohawk's electricity supply still is hedged," Brady says. "But the cost of those hedges is going up."

Some critics, like Attorney General Eliot Spitzer and Paul Tonko, the  chairman of the Assembly energy committee, say exposing consumers to the volatility of the wholesale power markets is a dangerous thing for NiMo's  customers.

"I think the way they've done deregulation is miserably bad," says Tonko,  D-Amsterdam. "And now, by allowing market passthroughs, it's making it worse."

The PSC, however, says passing on the actual cost of electricity to  customers, which is standard practice with natural gas utilities, is essential  to avoid a California-type crisis. To have a free market that functions properly, consumers need to know how much their electricity really costs, whether that's through rates that are adjusted monthly, as with the NiMo plan,  or with rates that change daily or by the hour, as some big businesses now pay. That way, they can react by reducing their power consumption when prices are  high or shifting their electricity use to a time when demand -- and prices --  are lower.

Energy officials say those market signals helped reduce the need for power by  as much as 400 megawatts during the August heat wave and help avert blackouts at  a time when the demand for electricity was at a record high.

It's a sound concept. But the problem in New York is that the state has been pushing ahead with deregulation at  a time when power supplies are tight -- and getting tighter -- and the fledgling wholesale power markets are prone to big ups and downs.

For starters, the state's appetite for electricity grew much faster than regulators thought it would, thanks to the power- guzzling computer age. Instead  of the state having a surplus of power that would last until at least 2005, supplies are getting uncomfortably tight today, especially downstate, and power consumption is expected to keep growing by 1.2 percent to 1.4 percent a  year.

At the same time, private companies haven't built any new power plants yet,  even though the agency that manages the state's power grid says New York needs  to increase its generating capacity by about 25 percent over the next four years  to avoid electricity shortages and sharply higher prices.

While there are enough projects on the drawing board to nearly double the  state's supply of electricity, the state's process for siting and approving new  power generating facilities has moved slowly. Only two projects have made it through the state's three- year-old process for siting new power plants and it will be a couple more years before they come on line.

Ideally, the best time to deregulate is when there's an ample supply of  electricity, allowing the wholesale market to get its legs at a time when pricing pressures are muted.

But that's not the way it is today. Electricity supplies are tight, and that gives the handful of companies who bought the power plants sold by the state's utilities a lot of leverage in the wholesale power market.

"Electricity markets can only perform well if all generators are equal in  size and if total demand for electricity is significantly less than the amount that these generators can produce," says Mark N. Cooper, the research director for the Consumer Federation of America, in a new report that takes a dim view of  electricity deregulation efforts nationwide.

And like any other product, be it electricity or a red-hot toy at Christmas, prices go up when raw material costs rise and when demand outstrips supply.

That doesn't mean deregulation is the wrong way to go. But right now, we're all paying the price.