Power Outrage

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Power problems have become as much a part of New York summers as rides on the Cyclone and odors that defy description. As temperatures reach sweltering peaks, lights, fans and air conditioners go on the blink, and New Yorkers are left to steam in the dark. Last year brought blackouts to Washington Heights. For a couple of years in a row before that, vast tracts of Queens were dark for hours on end.

But this summer, the first after the deregulation of New York’s power industry, may be remembered as the worst yet. Already saddled with the second-highest electric rates in the country, city residents and businesses stand a very good chance of being socked not just with more power outages than ever, but with bills that could be up to 30 percent higher than before.

It wasn’t supposed to turn out this way. Following a national trend that has made power a competitive business in 26 states, New York transformed its power industry from a set of local monopolies into a market-based free-for-all in November 1999. Utility companies sold off their power generating plants to independent companies, and literally became power brokers instead, buying electricity from the plants and reselling it to customers.

Deregulation was supposed to encourage competition through price wars, generate a robust market and, in the end, save consumers money. The government would keep its hands off, except to ensure that the air conditioners were working at all times.

But the months following deregulation have shown that consumers can expect anything but substantial savings. Power companies now have no limits, except market forces, on what they can charge. And because New York has fewer companies supplying power than it needs, there’s not enough competition to make sure prices stay low when demand is highest.

On an off-peak day in February, for instance, the price of electricity went from an average of $30 per megawatt to an unheard of $6,000 per megawatt because of an unexpected shortfall in supply. Industry experts say this is not an aberration. During a short but intense heat wave in early May, prices hit the $4,000-per-megawatt mark.

These spikes have not yet translated into higher bills, because they were temporary–a day long at most. But experts say that is likely to change this summer.

When Con Edison was the only power company in New York City, it was able to call in favors from out-of-town power plants when city dwellers demanded more power than Con Ed’s own generators could supply. Borrowing electricity that way was as ordinary a transaction as getting sugar from a neighbor; it was understood that Con Ed was good for its word.

But now that power is a market-based industry, every megawatt has its price–and when the biggest electricity market in the country is crying out for more juice, prices can go as high as the power-generating companies are willing to charge. Under huge political pressure to avoid another fiasco like Washington Heights, Con Ed–which still sells electricity to almost all of New York City–won’t be in a position to refuse offers from companies selling extra power, no matter how outrageous the price.

“If you are the only supplier in the area you can charge what you want,” says Ashok Gupta, senior energy economist of the Natural Resources Defense Council. “The sky’s the limit.”

According to industry analysts, mismanagement by the state Independent System Operator (ISO), the agency that is supposed to keep prices stable, has made cheaper suppliers unwilling to do business in New York. The ISO, an independent body appointed by the state Public Service Commission (PSC), has no authority to limit prices; its job is to create a stable wholesale market in which power can be bought and sold. On that front, say critics, it is failing miserably.

The PSC and the power-generating companies say the projected high costs are just teething pains, normal to a new and growing economy. Their theory runs something like this: High prices can only encourage the birth of more power-generating companies seeking to find ways to sell electricity more cheaply. In the end, as more companies enter the power-generating market, prices will drop and even out.

But critics contend mismanagement at the ISO has kept new companies out of play. “The advent of competition has not been handled to protect reliability and customers from volatile prices,” says Gerald Nordlander, executive director of the Public Utility Law Project, a statewide consumer advocacy group. The biggest losers are New York’s poor. “For people with a fixed low income, this could mean the difference between having bread on the table or not,” Nordlander says.

The reason deregulation appears to be leading to higher, not lower, electric prices is simple: so far, there is no competitive market. In fact, during peak periods power generation in New York City now falls mostly on one company: Keyspan Energy, formerly known as Brooklyn Union Gas. On a hot day it can charge what it wants for electricity, and sweaty New Yorkers will have little choice but to fork it over.

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Before deregulation, life was predictable. Utility companies made the electricity, and then they sold it. The PSC, appointed by the governor, regulated prices. Electricity bills were “cost-related,” meaning that the PSC made sure Con Edison and other power companies charged rates proportional to what it had cost the utility to pipe the juice into your apartment.

Deregulating the power industry first became technologically possible in the 1970s, when improvements in transmission lines allowed states to import electricity from generators hundreds of miles away. In theory, at least, what had been local monopolies could now be broken up.

The PSC looked into deregulation in 1993 and began pursuing it in earnest in 1996. This, says Gupta, was a period of acute uncertainty for New York’s utilities–and one that set the stage for the current crisis.

While Albany was debating the industry’s future, New York’s utilities put their plans to build new power plants on hold. At the same time, utility companies like Con Ed, which with incentives from the state had once invested up to $100 million a year in energy efficiency programs, cut funding down to less than $30 million. “They slashed these energy efficiency programs because of their fear of the future,” Gupta says. “We did away with these programs but did not build any new plants.”

But while New York’s capacity to generate electricity stayed frozen, its will to consume did not. Over the past five years or so, demand in the city has gone up by about 2 percent a year. That set New York City up for the current crunch, in which a few powerful suppliers can control the market. But it’s not entirely the suppliers’ fault, say power companies and industry analysts: The ISO is botching the job.

In April, the New York State Electric and Gas Corporation, which sells electricity to upstate customers, filed a complaint with the Federal Energy Regulatory Commission, asking the agency to step in to curb the state’s skyrocketing energy prices. In its complaint, NYSEG laid much of the blame on the Independent System Operator. “The ISO implemented the most ambitious restructuring proposal [for the electric industry] in this country’s history,” says Stuart Caplan, the attorney who filed the complaint. “But it is experiencing transitional problems.”

The ISO is responsible for predicting prices. Its forecasts are supposed to keep prices stable, by allowing transmitting companies like NYSEG and Con Ed to decide how much power they will buy, and how much they are willing to pay for it, before they pass it on to customers. But according to Caplan and independent industry analysts, the software the ISO uses to do the job is badly designed, incapable of predicting either demand or prices. The result, they say: mayhem. Unable to plan ahead, transmitters find themselves short of electricity when they need it most. They are then at the mercy of the power generators–and price gouging.

The software problems aren’t just a short-term inconvenience for utility companies. New York State does not produce enough electricity for its consumers. But according to Caplan and others familiar with the electricity business, the ISO has failed to import enough electricity from other sources, particularly Pennsylvania, New Jersey and Maryland. The major reason, they say, is that out-of-state power generating companies don’t want to get involved.

While these companies can make a lot of money in New York, they can also get burned. Using its software’s predictions, the ISO sets what it calls “day ahead” prices. If a transmitting company is looking for some power, and a generator is willing to sell it for that day’s predicted price, the generator can promise ahead of time to deliver electricity, locking in that rate even if the price later falls. These transactions work speculatively, much like in a commodities market.

For the power-generating company, this presents a dangerous gamble. Once it agrees to sell a certain volume of power at a certain price, it must deliver when the time comes. Should a generator fail–not an uncommon event–the company still must fulfill the obligation. If the price of power has gone up in the meantime, the company must pay the difference. When prices fluctuate a hundredfold in a single day, that’s no small liability. A company that runs into problems could find itself obligated to pay for hundreds of millions of dollars in power that started out worth only in the tens of thousands.

Out-of-state generators have made it clear that they plan to stay away until they think they can do business safely. In a letter to the ISO, Pennsylvania’s PJM Utilities complained that the agency routinely changes its electricity orders at the last moment–sometimes 10 minutes before the power is supposed to go online.

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In other states, legislatures passed laws to protect consumers. But in New York, Pataki’s PSC broke up the power industry on its own.

The PSC’s decision to deregulate the electric industry without legislative approval has caused the agency “to box itself in,” says Nordlander. The law books say that the agency is still supposed to regulate electric rates. But since the PSC has voluntarily abdicated that power, no agency now has the authority to keep prices under control. “We’ve not done the kind of things that would make electric bills go down in New York,” says Assemblymember Paul Tonko, an early opponent of Pataki’s decision to allow the PSC to call the shots on deregulation.

Industry watchers say consumers can expect electricity prices to climb higher before stabilizing. “We are going to face this problem for the next four or five years,” says Gupta. He estimates a new power plant will have to be built approximately every five years to keep up with demand. But such plans are already meeting resistance in Greenpoint, Astoria and other neighborhoods, and they are unlikely to become welcome anytime soon.

Gupta believes that the one blessing of deregulation, New York-style, is that consumers may finally feel pressure to conserve. “These price signals are needed to send people the message,” says Gupta. “It just might serve to dampen demand for electricity, and serve to lower prices.”