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AUGUST 1998

How deregulation of power utilities will affect New York State businesses

By Kevin Lanahan

The ongoing restructuring of New York's electric utility industry is affecting the state's entire business community in many ways. Businesses of all sizes and kinds will see many changes in how they buy and pay for power.

High energy costs: New York's electricity costs have exceeded the national average, and business has clamored for relief for more than a decade. Extremely high taxes, misguided legislative mandates, and overreaching regulations of the past are the main reasons for New York's high electric costs.

Deregulation: In 1996, partly because of these concerns, New York's Public Service Commission (PSC) and major utilities agreed to a sweeping deregulation of the power utility industry. The goal is to bring the benefits of competition to the market.

It was determined that true competition could be achieved if New York's investor-owned utilities first separated generation, transmission and distribution functions. So the PSC directed utilities to sell all power generation facilities.

The first sale of a utility's generation assets happened in August. A Virginia-based company bought six coal-fired plants from New York State Electric & Gas (NYSEG) for $950 million. NYSEG also sold its 50 percent share in the coal-fired Homer City Electric Generating Station for $1.8 billion to Edison Mission Energy, an international firm.

Other such auctions are expected to follow. New York utilities can themselves form holding companies and subsidiaries that may also be permitted to buy generation facilities.

In a deregulated market, utilities will still oversee transmission and distribution of power within existing service territories, with the PSC continuing to regulate these activities to ensure safety and reliability.

Generating companies will sell power to "energy service companies" that will, in turn, retail it to residential and business consumers. The New York State Power Pool, a cooperative of the seven utilities that oversees transmission throughout the state, will be replaced by an independent system operator (ISO).

The ISO will be run by industry experts with experience in power generation, distribution and marketing, economics, consumer protection and environmental advocacy. The ISO will work with the New York State Reliability Council to implement reliability standards and rules for the transmission system while monitoring compliance.

Market pricing: In the regulated market, utilities were sole providers of generation, transmission and marketing in their service territories. Prices were regulated and approved by the PSC.

Ideally in the new market, both wholesale prices (what generators charge marketers) and retail prices (what marketers charge consumers) will be set by market forces. However, the PSC consciously decided to introduce competition gradually with a deregulation plan that minimizes confusion and lets utility consumers make informed choices about their energy suppliers.

The PSC has also given utilities the opportunity to recover their "stranded costs"-past investments by utilities, often on orders from lawmakers. The PSC recognized that many of these mandated investments of the past could not be recouped if the introduction of competition were immediate and total.

So the restructuring plan obliges new generation companies that wish to acquire generation facilities and compete in New York to add "competitive transition charges" to their bills, with revenues going to existing New York utilities to offset stranded costs.

According to the settlement agreements with the PSC, these competitive transition charges will sunset at varying times, depending on the utility.

Impact on ratepayers: How deregulation will affect ratepayers depends on the utility and the type of ratepayer.

In general, large manufacturers will enjoy the biggest rate cuts, some as much as 25 percent below current rates. (Existing discounts through economic development incentive programs will be folded into these savings, not added to them.) Small and medium-sized businesses and residential customers will see more marginal savings.

Next steps for The Business Council: The Council strongly supports competition in all markets and supported the deregulation plan. But The Council will continue to urge lawmakers to address a key remaining cause of New York's higher energy costs: high energy taxes.

The Council is urging lawmakers to reduce the state's gross receipts tax on utilities and other taxes on transfers of assets between holding companies. These taxes limit the ability of utility holding companies, and others in the new power market, to make prudent capital investments and further reduce the cost of electricity in New York State.

Kevin Lanahan is The Council's legislative analyst specializing in energy and telecommunications. For information on the new competitive power market, call 1-888-ASK-PSC1.

August 6, 1998

How deregulation affects New York utilities