March 21, 2001
Panel: New York needs more energy, not legislative reregulation
What New York's energy market needs most is more power plants and a faster process for siting them, a panel of top economists, utility executives, and industry and labor leaders concluded in a panel discussion today.
During the discussion, a consensus also emerged about what New York's energy markets need least: new legislative intrusion into energy markets to legislate prices, redo deregulation, or re-regulate energy.
The main issues in the two-hour discussion were laid out in an opening speech by Alfred E. Kahn, former chairman of the New York State Public Service Commission (PSC) and an internationally recognized expert in deregulation. Now a professor emeritus at Cornell University, Kahn oversaw the successful deregulation of the U.S. airline industry as chairman of the Civil Aeronautics Board in the 1970s. He is the author of several books, including The Economics of Regulation, which is considered an authoritative work on deregulation.
The "clearest lesson from California" is the "overwhelming" need to expand supply in the short run, Kahn said.
The recent history of energy deregulation: Deregulation in New York and elsewhere was preceded by, and the stage for it was set by, "a series of enormous errors," Kahn said. Regulators overestimated how much demand would grow and approved a lot of new generating capacity that, for the time, proved to be excessive. These regulators also encouraged the building of large plants when the technology was moving toward smaller facilities, and they failed to foresee the "collapse" of fossil-fuel prices in the 1980s.
The result during the 1990s was wholesale electricity at 7 to 9 cents per kilowatt-hour, while electricity generated from new natural-gas plants was around 2 cents, Kahn said.
A key goal of deregulation should be moving away from a "cost-plus" system in which customers bear the risk of errors in forecasting demand and supply made by utilities, energy companies, and energy markets.
The generation, transmission, and distribution of energy remain interdependent because electricity cannot stored physically and is needed and used almost immediately after it is produced, Kahn noted. As a result, there remains some need for vertical integration among these parts of the energy system, he said. Before deregulation, the entire industry was vertically integrated, he noted.
How prices that reflect actual costs promote conservation: Kahn, with strong agreement from several panelists, said consumers will be convinced to reduce demand only with real-time pricing that confronts consumers immediately with the true costs of their energy use. Among the "catastrophic" decisions in California, the "most obvious" was to freeze retail prices while allowing wholesale prices to respond to the marketplace, Kahn said.
Kahn said California also erred in forbidding utilities from entering into long-term contracts for power. If companies are not going to be fully vertically integrated, he said, they must be allowed to hedge their risks with long-term contracts. Not allowing such contracts was another of California's major mistakes.
This, he said, is an example of "the very high marginal propensity of regulators to micro-meddle."
The merits of administrative restructuring: Another key lesson New York should take from California's experience is the superiority of administrative over statutory restructuring, Kahn said.
"The legislative process is the worst possible process for adaptability, for the discovery and remedy of errors" in regulating the industry, he said.
Participants in the discussion that following Kahn's remarks made a range of points, including:
- New York's energy policies should reflect a commitment to "fuel diversity," said William Allyn, chairman and CEO of Welch Allyn Ventures and chairman of The Business Council. Panelists noted that making all new energy plants natural gas-fueled plants will put a strain on natural gas supplies throughout the northeastern United States, and will also strain the natural gas transmission infrastructure within New York. Other technologies, including clean-coal technology, must be considered.
- New York also needs to address concerns about energy transmission, both of natural gas and of electricity, especially electricity generated in the western part of the state and slated for delivery downstate.
- A report released last week on New York's energy needs by the New York State Independent System Operator (ISO) outlines a good target for New York's need for new energy: the addition of 8600 megawatts in new power by 2005. Carol Murphy of the ISO, citing the ISO study, noted that demand in New York rose 2,700 megawatts from 1995 to 2000, but capacity increased only 1,060 megawatts during that period.
- A key obstacle to addressing energy needs generally and increasing capacity in particular, is generating the political will to make it happen. A broad range of economists and leaders of industry, utilities, and labor will need to collaborate to create that will, said Denis Hughes, president of the New York State AFL-CIO.
Besides Kahn, Allyn, Murphy, and Hughes, participants in the discussion included: Eugene McGrath, chairman, president, and CEO of Consolidated Edison, Inc., and a member of The Business Council's board of directors; Steven M. Fetter, managing director of the Global Power Group within Fitch, an international rating agency; Richard Anderson, president of the New York Building Congress; and William T. Orr, senior vice president of Mirant Americas, a global energy company. The discussion was moderated by Ed Dague, managing editor and anchor of WNYT-TV in Albany. The panel discussion was sponsored by the Energy Association of New York State.