How
New York can avoid
California's Energy Problems
Daniel
B. Walsh
President/CEO The Business Council of New York State
New York knows
that prosperity is powered by power. That's why New York's leaders have been
warily watching California's energy crisis. Already California may be losing
competitiveness. Even the perception that power will be too scarce or expensive
is already steering growth to other states.
Can it happen
here? It's unlikely but not impossible. New York must do more to secure a
stable energy future — and California's crisis is a stark reminder of
the urgency of wise action.
The good moves
New York has made
Give New York
credit for recognizing that energy costs here are a disadvantage.
Our average industrial
user costs for electricity are the nation's ninth-highest, 40.8 percent above
the average, according to of Just the Facts: 2001, an annual compendium of
data on New York's social and economic indicators by The Business Council's
research affiliate, The Public Policy Institute. For commercial users, these
costs are the nation's second highest, 54 percent above the national average.
These numbers
are discouraging, but New York has been addressing the issue. Albany has voted
to repeal the gross receipts tax (GRT) on energy for industrial users, a key
factor in our above-average costs. And in 1996, the state Public Service Commission
(PSC) began a carefully planned transition to competitive energy markets.
The goal of this
gradual deregulation was to avoid the shock an overnight change would give
markets, utilities, and consumers. The PSC carefully considered the unique
circumstances of each of New York's seven investor-owned utilities and the
regions they serve. Then it crafted a deregulation plan to address all parties'
needs.
The transition,
although gradual, is significant. Formerly, utilities produced electricity,
delivered it to homes and businesses, and provided all other key services.
Under deregulation, utilities for the most part are becoming "pipes and
wires" companies, focused primarily on transmitting energy. They move
power that is offered to consumers by a range of generating companies.
If competition
works effectively, it will affect energy markets as its does all markets:
Prices will go down. Service will improve. And competing companies will produce
unexpected innovations as they compete for business.
The bad moves
New York must avoid
But these benefits
will elude us if New York emulates California in its two worst mistakes: providing
too little power and trying to legislate price through stultifying re-regulation
schemes.
Siting more
plants: Healthy competition requires a supply of power ample enough to
create downward pressure on price. Newer, more efficient generating plants
will also create healthy competition with older plants that are less efficient
and therefore more costly.
Unfortunately,
New York has not been siting the power plants it needs to create the needed
capacity. Until last month, when the state announced approval of a new Oswego
County plant, there had not been a single power plant sited in New York since
1994.
But demand during
that period has been increasing — because our economy, happily, has also
been growing. Since 1998, New York's energy use has outpaced all projections.
Annual peak electricity usage grew from 27,206 megawatts in 1995 to 30,311
megawatts in 1999. That year, New York's actual load exceeded the highest
growth projections for 2002. And there's been still more growth since then.
The PSC says
New York should be able to meet electricity demand through 2002 — but
after that, the state will need new sources of power. And the PSC has been
adamant that conservation measures, although valuable, will by no means suffice.
Resisting
reregulation: California deregulated wholesale prices but capped the price
utilities could charge customers for energy. It also forbade long-term power
contracts for power, forcing utilities to buy all power on the "spot
market," where prices skyrocket when supplies are tight.
Sure enough,
supplies tightened, utilities could buy only costly spot-market power, and
retail caps prevented them from recovering their costs. Out-of-state generators
stopped selling power to California at all, worsening the crisis.
There are many
differences between New York and California, but California's core mistake
— trying to legislate prices — is one that New York can easily make,
and that some advocates are already recommending.
New York can
avoid California's woes by rejecting proposals for one-size-fits-all re-regulating
schemes that ignore critical differences between utilities and the regions
they serve. This meant catastrophe in California; New York's outcome would
be no different.
Remember the
"six-cents law," the Legislature's last foray into micromanaging
electricity markets? Passed in 1980, it required utilities to buy electricity
from independent power producers at six cents per kilowatt hour. This well-intentioned
but short-sighted attempt to legislate the price of power is a universally-acknowledged
failure. It drove up energy prices. It helped drive businesses and jobs out
of state by saddling utilities with commitments to buy power at a loss –
losses that inevitably were passed on to the public.
What New York
needs is enough power to let its free markets work. What it doesn't need is
ill-conceived dreams of legislating away laws of supply and demand.
