Not Everyone Pleased with New York State Electric and Gas Rate-Freeze Plan
By Kenneth Aaron, Times Union, Albany, N.Y. -- April 23
New York State Electric and Gas customers must be pleased with their utility's solution to yawing electric prices: For the next seven years, the utility has proposed a rate freeze.
"I look at this plan as really unassailable," said Ralph Tedesco, NYSEG's president.
Yet it has assailants.
Those who would vie with NYSEG for electricity customers, along with some who are watching the energy deregulation frontier, charge the plan has drawbacks. In exchange for stability, NYSEG may be sacrificing the growth of competition -- and subjecting consumers to rates in the future higher than they would have been otherwise.
And while NYSEG says it has proposed the freeze to avoid Golden State volatility, some contend that the riskiness inherent in locking the price of anything for so long might end up sinking the Binghamton-based utility in a California-sized hole.
"To basically have a fixed price for seven years shuts down the market," said Usher Fogel, an Albany attorney representing a group of small power resellers. "There's no free lunches. The notion that you can have fixed prices for seven years just doesn't work."
Tedesco maintains that the plan takes care of those worries. Others are not so sure.
The program has clear appeal. Ask customers in New York City who rely on Con Edison, or ask customers in San Diego, and they'd probably be pretty happy to have locked in prices a year ago.
Gerald Norlander, executive director of the Public Utility Law Project, an Albany-based policy group, said that much of the plan looks good. "(A)ll the utilities have an obligation to provide energy at reasonable prices. And part of reasonable rates is stable rates."
The utility wants the state Public Service Commission to make up its mind quickly about the deal and approve it by June 27. The time is ripe, NYSEG officials say, to lock up contracts now as they expect them to cost more soon. The arrangement will affect about 45,000 customers in the Capital Region, including Saratoga, Rensselaer, Washington, Greene and Columbia counties.
Until 2008, NYSEG wants to give consumers a frozen electricity rate, although there is some room for adjustment.
If fuel prices soar, the residential rate stays at about 13 cents a kilowatt. If the ice caps melt and air conditioners kick in, the rate stays at about 13 cents a kilowatt.
Of course, if power prices tumble, rates stay at 13 cents a kilowatt. And that has caused some to squirm.
"There is something superficially appealing to the words `rate freeze,' " said Attorney General Eliot Spitzer about the NYSEG plan, on which he has yet to take an official stance. "The risk is that seven years is such a lengthy time horizon that we may be giving up something significant, because if our plans work over the next two, three years, then rates six, seven years out could be lower than they are today."
Executives at NYSEG and its parent, utility holding company Energy East Corp., maintain that if competitors can beat the price, customers are welcome to beat a path to their door.
But those competitors say NYSEG has put obstacles in their way.
When customers pack bags for other electricity providers, they still must pay NYSEG for some things, such as delivery of power.
But NYSEG still doesn't do everything for them. The competitors allege that NYSEG collects too much money from customers for things it no longer does -- and the competitors now must.
In a sense, those companies say customers pay twice for some functions. And they can't compete with a company to whom they'd only pay once.
A PSC proceeding to figure out just how much every part of a customer's bill costs -- it's called unbundling -- will start
Monday.
Some, including Attorney General Spitzer, said that it might be a good idea to wait until that work is done. NYSEG does not want to wait.
NYSEG officials consider all the talk of competition somewhat irrelevant, anyway. They say they pitched such a long rate freeze because they are supremely bearish on the development of a robust, competitive retail electric market anytime soon.
"I think this whole thing about deregulation and retail competition is going to take some time," said Wes von Schack, Energy East's chairman, president and chief executive, two months ago. "This is not something that gets done overnight and it's going to be a much longer transition than anybody expected."
Customers tell von Schack that stable prices are a high priority -- especially in upstate New York, where the economy seems to constantly teeter on peril.
Still, there is a balance that can be struck between stability and risk.
Niagara Mohawk Power Corp., the major power company in the Capital Region, has a proposal of its own. It would freeze its cost of delivering electricity for 10 years, as well as its cost of electricity for four years out.
But NiMo would also pass along cost increases to customers if the hike is due to higher fuel costs. NYSEG won't.
"The idea of sort of maintaining these fixed retail rates is sort of defeating the whole purpose of a market," said Timothy Mount, a professor of applied economics and management at Cornell University who studies electricity-market models and is an opponent of NYSEG's plan. "I personally think it's an outrageous proposal."
Part of Mount's objection comes from the rate the company is freezing. NYSEG's rates are already among the most expensive in the state; freezing them, he said, is not much of a favor.
But NYSEG does take a big risk in doing so. One Niagara Mohawk economist who was asked about the plan was fairly speechless when told that rising fuel costs do not trigger a rate increase. And as of now, NYSEG has locked up supplies only partway through 2003.
So customers who want the comfort of knowing their power prices will stay the same for a long time must expect to pay that premium.
"But a 50 percent markup is pretty incredible," Mount said.
To that end, Attorney General Spitzer wants to learn just how much risk NYSEG has swallowed, then find out whether the company can pass more savings to consumers.
Craig Goodman, president of the Washington, D.C.-based National Energy Marketers Association, suspects that NYSEG has bitten off more than it can chew.
"Generally, what happens in a price freeze, is a utility sets out a subsidized rate, below market rate, hides the losses that they are taking in order to prevent customers from leaving," he said. "When the losses become apparent, or too big, they go to the commission and ask the customers to pay the losses."
Part of NYSEG's rate plan involves setting aside money every year to pay for unexpected expenses. Tedesco said that the slush fund -- known as the Customer Protection Account -- is intended to handle unexpected costs that the state mandates, but might also be used to cover NYSEG in the event that things go awry.
And while the plan calls for some losses to be made up after the plan ends, Tedesco assured that any bad bets won't get passed along.
Not everybody was willing to trust him.
"Eventually, you're going to have to pay that bill," Goodman said.
Part of ensuring that NYSEG's plan doesn't cause such woe involves ensuring that more power plants are built, to help drive future power costs down. One study, released Wednesday by the New York Independent System Operator, indicated that power prices in New York may go up 46 percent over last summer.
To that end, Tedesco praised Gov. George Pataki for helping get temporary power plants built in New York City this summer -- but added that more needs to be done, lest power troubles there migrate upstate.
And if all that happens? "We think (the plan) will work extraordinarily well," he said.
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