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Energy Committee Newsletter, January 12, 2001

Staff Contact: Ken Pokalsky

SENATE ENERGY TAX PACKAGE

Senate Majority Energy Tax Proposals

The Senate Majority announced energy tax changes January 9th as part of their energy cost reduction program. The changes proposed to energy tax law are:

In addition to the tax proposals set forth by the Senate Majority, there was a strong endorsement of the siting of new generating plants in New York State. Senator Bruno stated that with electricty demand increasing each year and New York not having built a power plant since 1994, we need to expedite the siting process and have new generation installed. This point was echoed by Senator Wright, Chair of the Senate Energy and Telecommunications Committee. In addition to their support for new power plants, the Senate Majority rejected the idea of new legislation to regulate New York's unfolding electricty market and emphasized its support for the Public Service Commission's role in administering the deregulation process. A key point stressed was the elimination of energy taxes as an immediate way to reduce rates not legislative intervention in deregulation.

CALIFORNIA ELECTRICITY PROBLEMS

Last month I briefed the committee on the problems going on in the California electricity market. As things continue to unfold this has become an important issue nationwide. The following summation may help the committee understand the situation better.

The State of California started deregulating its electricity market in 1994 in response to high electricity prices. The California Public Utilities Commission (PUC) issued a restructuring order in December 1995. The California Legislature adopted deregulation, in a modified version, in September 1996. It was signed into law in late1996. In January 1998 divestiture commenced and deregulation started. Consumers had their rates frozen while utilities began to purchase electricity on the day-ahead or spot markets.

Power plants were sold by utilities to independent companies. An independent system operator (ISO) was established to administer the transmission grid. The California Power Exchange was established to serve as a clearing house for electricity through which most power is sold in California.

The utilities in turn provide electricity to about 3/4 of California’s consumers. The ISO plays a significant role in administering the market by matching demand with electricity [purchased through the PX].

In California long term or bilateral contracts were not allowed. Without long term contracts or hedging, utilities are exposed to volatile markets and high costs on a daily basis. In early 2000 a megawatt-hour sold for an average of $30; in December 2000 it hit a high of $1,400; so far this year the average is $265.

Since consumer rates were frozen under deregulation and utilities were exposed to day ahead wholesale prices, the utilities developed huge deficits. Since rates have been frozen under deregulation until March 31, 2002, utilities have been forced to sell power to consumers for less than the purchase price. This has caused them to absorb anywhere from $8 to $11 billion in losses.

In addition to the cost utilities were exposed too, there are a number of factors driving the price of electricity including;

One key fact is noticeable in the crisis. The lack of new generation in the State of California. There have been no new plants built in the last 15 to 20 years and there are only 11 in the planning process. Six are being constructed now but they will not be up and running for at least two years.

At the same time it should be noted that California is experiencing a dramatic increase in demand (about 2% annually).

Some results to date:

California utilities are nearing bankruptcy.

The State, under Governor Davis, is considering a number of options including seizing the generators and undertaking a bond issuance to bail out the utility (electricity transmission) industry. The Governor has promised to emphasize energy efficiency measures and offer loans to encourage refurbishment of old generation and the development of new plants.

An immediate measure was an increase in rates by an average of 10% on consumer electricity bills. This was designed to help utilities with their sagging debt.

So far Governor Davis and Federal officials have met once to discuss possible remedies (January 10th). Additional meetings have been planned.

PUBLIC SERVICE COMMISSION

The Public Service Commission will meet in its Albany Offices on Wednesday, January 24, 2001 at 10AM. The Commission may act on the System Benefits Charge (SBC). The Business Council has objected to a number of provisions under this proposal. Our comments are available on our Energy page.

SPENCER ABRAHAM TO HEAD ENERGY DEPARTMENT

President-elect George Bush has nominated former Michigan Senator Spencer Abraham to head the U.S. Department of Energy. His nomination must be confirmed by the United States Senate.

Abraham’s appointment comes at a critical time with the electricity issues in California, a shortage of natural gas, and an increase crude oil prices. The Department of Energy, under his predecessor Secretary Richardson, had been active in ordering out-of-state generators to sell into the California electricity market to avoid blackouts.

FERC CHAIRMAN RESIGNS

The Chairman of the Federal Energy Regulatory Commission resigned effective January 18, 2001. Chairman James Hoecker, who has been a commissioner since 1993 and chair from 1997, has been a central figure in the deregulation of the electricity industry. His resignation leaves a second vacancy on the board. Members of the five member federal panel are appointed by the President.