What's New

Zack Hutchins
Director of Communications

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:

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.