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By DAVID ROBINSON
News Business Reporter
1/18/01
Niagara Mohawk wants to charge its customers less to deliver electricity to their homes or businesses, but rising power costs are likely to leave those consumers still paying higher monthly bills.
The Syracuse-based energy services company on Wednesday proposed cutting its electricity delivery charges by $132 million this September, followed by a 10-year rate freeze.
But Niagara Mohawk also warned that its lower delivery rates, which would fall by 7.8 percent for residential customers and 13.4 percent for the biggest industrial firms, wouldn't be enough to offset a projected surge in electricity prices.
Those power costs are expected to rise between 8 percent and 12 percent beginning in September, when some of Niagara Mohawk's long-term supply contracts begin to expire and more of its electricity costs are based on market prices, which have soared, said William Edwards, the company's senior vice president and chief financial officer.
As a result, Niagara Mohawk expects the typical customer's bill to rise by about 4 percent beginning this fall.
Niagara Mohawk proposed the rate reduction at the same time it asked the state Public Service Commission for the go-ahead to complete its proposed $3 billion merger with British power company National Grid Group Plc.
Edwards said the savings that are expected to result from the proposed merger will "go a long way" toward offsetting the pain from higher electricity prices.
But Paul Tonko, D-Amsterdam, the chairman of the Assembly's energy committee, said the company's proposal was a warning that bills are going up. "They are reducing one part of the bill. Unfortunately, consumers pay the total bill," he said.
Gerald A. Norlander, the executive director of the Public Utility Law Project in Albany, said he wouldn't be surprised if the increase in electricity costs was even greater than Niagara Mohawk officials now are forecasting.
"Those may be very benign assumptions, and the actual increases may be much larger," he said.
A customer's monthly electric bill under the state's deregulated market is based on two components: The actual cost of the electricity, which is determined on the nation's power markets, and the rates set by regulators to get the power to the consumer's home or business.
Because of the merger, Niagara Mohawk and National Grid said they expect to cut their costs by about $90 million over the first four years, allowing them to lower their delivery service rates.
But the actual price of the electricity used by NiMo customers is expected to rise sharply as the company's long-term supply contracts expire and more of the company's power is purchased on the open market.
That transition, which is part of the state's plan to encourage other suppliers to sell electricity to residents and businesses, will be a gradual one for residential customers, who will be offered a "levelized" rate through 2004, with an adjustment charge that would raise or lower that rate in tandem with electricity commodity prices.
"Customers aren't just going cold turkey to a spot market," which tends to have the most volatile price swings, Edwards said. "It is a transition we've tried to build in a thoughtful way that eases the move into the marketplace."
As the 10-year plan moves forward, less and less of Niagara Mohawk's power supply will be protected against big price swings by the company's hedging programs, Edwards said.
As Niagara Mohawk's supply of hedged electricity shrinks, the company plans to switch its bigger customers, who are more likely to have other options for buying electricity, to market rate plans, leaving more of its hedged power available for the smallest customers that are less attractive to energy marketers.
"They're not planning to get new long-term supply contracts," Norlander said. "They're planning to volatilize their supply portfolio."
Under the Niagara Mohawk proposal, delivery charges for small commercial customers will fall by 3.8 percent, while rates for medium-sized commercial and small industrial customers will decline by 6.4 percent.
Even with a 10-year freeze, the delivery charges could be adjusted to reflect changes in taxes, accounting rules, an inflation rate that exceeds 4 percent, and other "extraordinary events."
Niagara Mohawk also agreed to not seek the 1 percent annual increase in transmission and delivery charges that it was permitted this year and in 2002 under its current rate plan.
The plan, which Niagara Mohawk said it hopes to have the merger and the rate proposal approved by June 1, also would establish a service quality program that could impose penalties or rewards of up to $22 million a year, based on performance-related goals approved by the PSC.
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