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June 15, 2001
Paul De Cotis
New York State Energy Planning Board
C/o New York State Energy Research and Development Authority
Corporate Plaza West
286 Washington Ave. Extension
Albany, New York 12203-6399
Dear Mr. De Cotis,
The Consumer Policy Institute of Consumers Union* is pleased to submit the following comments on the Scope for the 2002 State Energy Plan and Environmental Impact Statement.
The State Energy Plan and EIS should include a thorough examination of restructuring of the Electric Industry and Deregulation.
This plan must have a much more detailed and careful analysis than that done for the 1998 plan. Experience with the real world of electric industry restructuring is challenging many of the assumptions operative in 1998. In contrast to enormous expected benefits, none are apparent in 2001. Even worse the economic viability of the state is being severely threatened. New York's crisis is second only to that in California. We urge the state of New York and all elected officials to grapple effectively with this enormous problem today, and not put such action off until our crisis worsens. The State Energy Planning Process provides the perfect opportunity to analyze the issues and establish a corrective course. We urge the state to evaluate the means : to require just and reasonable pricing in the state, to evaluate restructuring and assess the need for re-regulation, to comprehensively plan for new and modified generation plants with the public, to counter the economic development and job losses resulting from high prices with job creating investments in energy efficiency and conservation investments, to protect consumers from market abuses, to provide extra protection for low income consumers and small businesses, to evaluate a role for public power, to protect the environment, to conduct a more comprehensive environmental review in 2002, and to prepare a NYC-specific energy plan.
It is inappropriate to spend time trying to assign blame for the current dilemma New York State is facing. Only careful analysis and early corrections can prevent a disaster in New York, like that California is experiencing. The state has the resources to conduct this kind of careful analysis. The State Energy Plan is the perfect place for this work to be done, but there must be the will to do it.
The first step toward serious analysis is to reexamine each of the 1998 assumptions about the market and competition and what it would do for consumers, businesses and economic development within the state. Many of the assumptions in the 1998 plan have turned out to be naïve in the extreme today, in 2001. Naivete in energy deregulation has been a national problem. However, many still pronounce these assumptions as truths and claim we just have not deregulated enough, or have not allowed the market to work enough. With a recession facing the country, New York is even more vulnerable to the impacts of an energy crisis on the economy, because of historical and recent prices and our move toward restructuring.
Using the same outline as found in the 1998 State Energy Plan (SEP), we will identify Sections where we have recommendations for more detailed analysis.
Section 2.3 Effects of Competition on New York
This new Energy Plan must deal with
the facts, not the naive assumptions prevalent in the 90s. Answers to the following
questions would move the state from idealistic assumptions to more measurable
goals.
It is time to specifically define in detail what the state means by competition.
What is it? What structures do we put in place to insure that it can thrive?
How do we know when we have it? What measures can we use to assess how well
competition is functioning? What measures do we have to monitor anti-competitive
practices? Are they adequate? How are mergers and acquisitions in the industry
consistent with more competition? What are the physical constraints to competition,
such as the existing transmission constraints? Is the state's idea of competition
consistent with what was envisioned by Congress in the Energy Policy Act of
1992?
What is a functioning market for electricity, according to the state and how
do we get one? All markets are not the same. One extreme example of a market
is the "company store," operative in the past in coal mining towns.
Exorbitant rates were charged for necessary commodities. How many losers are
acceptable in this functioning market? All markets have losers. (The entire
movement for consumer protection is based on this well-known problem.) How greedy
can the winners be? How much wealth will the losers have to transfer in New
York to the winners? What will the state do to prevent the fleecing of consumers?
What does deregulation mean in New York? Does it mean we move from a highly regulated industry to one in which there are no controls on predatory practices? Does it mean the state will entertain no regulations to control the exercise of market power?
What does consumer protection mean in New York? The 1998 plan stressed the importance of protecting consumers. Unfortunately there were no concrete recommendations to establish a structure for consumer protection. Instead, it was assumed that the market would deliver enormous consumer benefits. Now that the invisible hand of the marketplace has consumers by the throat, the state must adopt a structure and specific measures to protect consumers
Section 2.1 Factors that affect Energy Prices
The State Energy Plan should explore fully the concept of "just and reasonable prices" under the Federal Power Act and the relationship to the cost of producing electricity.
Under New York's Public Service Law § 65(l) companies have a statutory duty to see that the lights go on when the switch is turned and that all charges for this are just and reasonable.
The following should also be studied:
Consolidation in the Electric Industry
Withholding of electricity, exercise of market power to run spot market prices up
Various oversight and enforcement mechanisms the state can use
The ISO bidding system and whether it contributes to higher prices
Multi-year decline in investment in energy efficiency and conservation measures (since 1992)
Impact of transmission system constraints on competition
Decline in investment in transmission system and impact on reliability
Purchased Power
According to the 1998 SEP, New York
has greater influence than most states on electricity prices as most is produced
in-state and delivered through in-state distribution system.(p. 2-3). Is New
York's influence on electricity prices still true today? If so, what will New
York do about the current high prices?
According to the 1998 SEP, New York prices for residential electricity were
68% higher than the national average as of 1996 and the increase over the previous
6 years was 24% compared to a national increase of 8% (p. 2-3--2-4). As a result
of historical and recent price trends, New Yorkers have the highest electric
rates in the nation.
According to the 1998 SEP, a component of the high costs in New York relates to the large capital costs of nuclear power plant construction ( p. 2-7). This fact should be used in any evaluation of least cost energy resources for the future.
In 1998, the SEP noted that purchased power contributed approximately 30% of the difference in average electric revenues compared to the US (p. 2-10). Almost as a warning of things to come the SEP stated, "Use of purchased power can cause average utility electricity prices to increase…" (p. 2-8). The state created a system where purchased power is a given for all electric energy. Given the above, it does seem naive that the state expected prices to be lower. What remedies are now available to correct the problem?
Section 2.2 Energy and Economic Development
The assumption of reduced electric energy prices led to the conclusion that economic development would be stimulated with more consumer spending, more businesses retained or locating in the state and more jobs.
According to the 1998 SEP, electricity prices were frozen or reduced under the agreements with NY utilities (p. 2-20). Instead, Electricity prices have risen dramatically.
The economic analysis done in 1998 predicted that $100 million in rate reductions would stimulate the development of approximately 1100 to 1600 jobs, while increasing the gross output of goods and services by $155-230 million.
Employment Impacts should be analyzed in the new SEP.
Using the same economic model in 2001, the state should estimate the number of job losses and decline in output of goods and services that have resulted from the increased electric rates. This analysis should be done by region of the state so that a more accurate picture can be obtained. The NY Metro area experienced a 40% increase in electric rates for example.
In 1998, the SEP estimated that a $1 million investment in energy efficiency would result in 58 job years.
For the proposed plan the SEP should estimate the necessary investment in energy efficiency to counteract the impacts of job loss from rising electricity prices under the previous model.
Recessionary Impacts of High Electric Prices on the State Economy should be studied.
The proposed SEP should also examine the recessionary impacts on the New York State economy of current energy prices. While Federal Reserve Chairman Alan Greenspan has talked about energy prices contributing to a national recession, New York state's situation is considerably exacerbated by historic and recent energy prices in the state. The SEP should be carefully studying the potential for these impacts and remedies.
Section 2.4 Energy and the Environment
Clearly energy production and use has significant impacts on the environment. Avoiding or minimizing those impacts has largely been a government function with a push from the public. Protecting the environment has not been a function of the market.
Government can provide the regulatory structure and incentives that ensures that environmental considerations are part of the market structure for energy.
Efficiency and Conservation Measures should receive top priority in protecting the environment.
The way we get more energy work for
the same amount of pollution is by improving theefficiency of the entire system.
Since New York State is out of compliance with health-based air quality standards
and will likely be in non-compliance for many years to come it is imperative
that efficiency in the energy sector be given top priority. We note that the
1998 plan expressed efficiency and conservation goals. However, like the goals
for consumer protection the goals were not matched by an adequate framework
and implementation plan as well as adequate funding. If we are to protect the
environment there are only two choices-establish various requirements for energy
efficiency and conservation or create the right incentives for energy service
companies and transmission and distribution companies to actively promote these
programs. The plan should evaluate both of these options for all types of energy
efficiency and conservation measures. All market barriers must be identified
and eliminated under an incentive based option. It should be noted that nuclear
power, although creating less air pollution than fossil fuel power plants has
other serious environmental and safety problems.
A comprehensive analysis should be completed of the entire system of electric
energy production, transmission, distribution and use in the state. Improvements
along the whole production, transmission, distribution and use corridor should
be evaluated. How efficient are each of the plants in operation? What is the
state of the transmission and distribution system? What are the energy losses
there? Could more be done to prevent transmission losses? Should the state consider
establishing requirements for the transmission system upgrades as well as for
maintenance and repair? Should super-conductors be used in critical transmission
links where there are load pockets?
The Plan should evaluate ways to decouple sales in kWh from profits. Consumers should be purchasing energy services. Until this occurs and there is a requirement or the proper incentives for efficiency and conservation are in place, none of the System Benefit Charge (SBC) funding should be allocated for utility based programs. NYSERDA's most recent SBC evaluation report shows that Investor owned utilities have received 25% of SBC funding.
All ESCOs could be required to have
a substantial demand reduction component in their portfolio for all customer
classes, that includes information about efficiency and conservation measures,
energy audits, and technical assistance for equipment installations.
SBC Funding must be significantly increased to $1 billion annually and appropriately
allocated until market mechanisms are established or regulations are in place
requiring demand reduction efforts. At this time it is apparent that residential
and low income programs have received insufficient allocations. Given the large
residential sector in this state and the severe impacts of prices on the low
income sector we cannot continue to target large industrial and commercial classes
almost exclusively for these programs. Small businesses in low-income and economic
development zones need to be particularly targeted for efficiency and conservation
measures.
For the industrial and commercial sectors, sector specific field studies need to be conducted to understand market penetration of efficiency and conservation information and implementation of the programs. According to NYSERDA, these Technical Potential Studies were last done in 1992. Fact sheets targeted to specific business sectors could stimulate greater interest in these programs.
Improvements in state construction
standards and the impact on energy savings should be quantified. Some timeline
and action plan should be provided for the adoption of new standards. In the
interim the plan should evaluate mechanisms to reach new construction projects
with information about the benefits and costs of energy saving modifications.
This is particularly important in load constrained areas like NYC.
A 20% Renewable Portfolio standard should also be required of Energy Service
Companies to be reached in 10 years. The standards should include photovoltaics,
wind and fuel cells.
The state needs to carefully evaluate the environmental impacts of increased use of distributed generation that does not incorporate the most stringent environmental standards. Given the current electric rates, many businesses and residences may be driven to purchase their own generators. The state must evaluate the worst case environmental impacts of this.
Section 2.6 Role of Government
Planning is a critically important role for Government. Analysis and evaluation must result in a concrete implementation plan.
The 1998 Plan contained a number of important goals and objectives, which unfortunately lacked a concrete implementation plan. Consumer protection is one goal that has suffered from this deficiency. Planning for needed generation capacity and appropriate siting and public participation were compromised. This became critically apparent in NYC this year, but this issue will be exacerbated in future years unless government fulfills its appropriate planning role. Nuclear power, with its high capital costs, radioactive waste problems and environmental and health risks should be eliminated as an option for new generation. Careful consideration should be given to the phase-out of existing plants as they approach their expected lifetime.
NYC needs its own Energy Plan.
The 1998 Plan acknowledged that load pockets would be particularly vulnerable to the exercise of market power in the electric restructuring. They identified transmission constrained areas- Long Island and New York City- as of concern because the exercise of market power could not be countered by purchases from outside the load area. Mitigation measures were presented in the 1998 plan including requiring divestiture of ownership of plants where ownership concentration exists, improvements to transmission lines, facilitating the entry of new generators into the local market, targeted demand reduction programs and distributed generation (p.3-10-3-11). Unfortunately this analysis was not matched by appropriate action in New York City. Con Ed plants were sold to only three companies. In addition it is apparent that New York City has not received an equitable distribution of very limited SBC funds for demand reduction measures. Only 27% have been used in Con Ed territory despite serving over 40% of the residential population of the state and a very large percentage of the workday population of the state. It is estimated that there are 12 million people in NYC during the 5-day work week. If sufficient demand reduction efforts had been made from 1998 on, it would not have been necessary to rush the building of NYPA generators for this summer. Building more power plants is not the only solution and it is particularly inappropriate to use them to attempt to address price manipulation.
Despite awareness of the critical areas of the state for the exercise of market power, insufficient measures were taken to prevent extraordinary price increases in New York City. We believe that within the context of the 2002 State Energy Plan there is a need to disaggregate and study the particular problems in New York City and the measures needed to prevent the exercise of market power. New York City also presents unique environmental problems that pose challenges related to energy -dense urban population (a large percentage being low-income), poor air quality, limited available sites for power plant construction and inadequate rail lines for freight transport, resulting in almost complete reliance on diesel trucks for freight movement. Given these existing problems an Energy Plan is essential to appropriately plan for repowering activities and new generation. The market will not automatically consider NYC's unique problems.
Recently proposals for internet servers threaten to place a huge additional electric demand of 500 MW in NYC. Until the many unique problems of NYC are adequately addressed, any proposals which create large electricity demand in NYC should be carefully evaluated. A requirement for full environmental impact statements and comprehensive review should be implemented for all proposals involving large energy users.
Government must act to prevent and discipline abusive and predatory practices of businesses and to protect consumers.
The appropriate role for government requires understanding that the principle objective of any business or corporation is to maximize profits. In deregulating electricity, the government is choosing to create a freer environment for maximizing profits. If companies did not believe these profits were likely and the investment community did not agree, companies would not be able to borrow money to accomplish the acquisitions that have been occurring in the electric industry. The bottom line for the consumer is profits have to come from somewhere. In the case of health insurance, some profits have come from the denial of access to care. In the case of electric energy, some profits have come from exorbitant electric rates. Responsible government effectively grapples with this issue of profit maximization by acting to prevent and discipline abusive and predatory practices, whether by the distribution of unsafe products or price gouging. Responsible government understands that businesses will not discipline themselves when profits are to be made and shareholders will demand an accounting. Responsible government knows it must regulate and discipline all undesirable practices.
According to the 1998 SEP, "government is fostering competition by changing laws and streamlining regulations so they are fairer, across-the-board to market participants…" p. 2-91.
We believe that too often government serves those market participants with the most market power. We urge the new SEP to include consumers, residential and low-income, small businesses (even all businesses) outside of the energy sector as market participants that deserve serious consideration.
"Regulation will continue to be used as an instrument of public policy to address issues of public concern…" (p. 2-91 1998 SEP). In the proposed SEP it would be useful to describe current regulations in the state and how they can be used to address market power and protect consumers. New regulations that are needed should also be discussed. At the same time the relationship between FERC, the ISO, and state agencies in regulating the electric industry should be discussed and any problems with state authority clearly presented and thoroughly analyzed. The NY Times, May 12th described the Governor as powerless to implement penalties for price gouging. It stated that even if the ISO agrees to the Governor's proposal, the FERC would still have to give its approval. According to the NY Times, June 1st, Con Ed, Mayor Giuliani, and even the PSC are calling for increased government control. The SEP should address these concerns.
The California situation is instructive of the potential crisis New York could face. Deliberate withholding of as much as 11,000 MW has kept California in a continuous power shortage even in periods of low demand. The unresponseness of the FERC to California's crisis should indicate to New York, that giving up state authority to the ISO and the FERC is potentially disastrous.
The 2002 SEP should explore all options for re-regulation of the electric industry and of keeping more state control of this industry.
The 1998 Plan stated that "government's role is to protect consumers from fraudulent and abusive business practices…." and to "make certain consumers have access to accurate information regarding energy products and services…" Stated goals and visions for consumer protection in the 2002 SEP must be matched by a framework for ensuring implementation.
The 2002 SEP must address the ISO's current refusal to disclose basic data about its operations. The ISO's stance is that information related to possible abuse of market power is confidential business information. The ISO has refused to make information available to elected officials interested in pursuing an investigation of the exercise of market power. We believe Consumers have a fundamental Right to Know about such matters and inadequate attention to consumer interests in the current structure are preventing access to basic and essential consumer information.
Government must ensure Consumer Protection with special attention to low income consumers.
The SEP should fully discuss a state framework for consumer protection and all regulations and market incentives that will be used. Special classes of consumers that need additional protection should be discussed-low income and small businesses.
The SEP should explore whether in Con Ed territory residential rates should be managed by directing lowest cost energy to this class of consumers. Not only have spot markets had a severe effect on residential rates, but the large discrepancy between industrial and residential rates (22% points) is not cost-justified. Low income consumers put the least demand pressure on Con Edison since they use about 40% less electricity than those with higher incomes. Further low income consumers pay the most per kwh, since the average price increases for lower usage levels. These low income users should be receiving a bonus or credit for their lower usage instead of suffering from a pricing mechanism that further disadvantages them. The state should evaluate setting a price for a basic consumption level of kwh. Such pricing for an initial block of consumption could reward low income consumers for their lower usage by giving them industrial rates per kwh. This could also encourage conservation, by rewarding those who stay within that basic consumption block. Given the extraordinary price increases which are already impacting low income consumers, additional efforts must be considered to lessen these burdens. Suspension of late charges, moratorium on service shut-offs and budget assistance must be considered in the SEP for the low income sector. The Public Utility Law Project has estimated that over 1 million low and fixed income people may be at serious risk from higher prices this summer in NYC and that Con Ed has sufficient contracts for supply below current wholesale prices to provide a basic allocation of 300 kwh to every residential customer. ( March 13, 2001 filing with PSC, Case 96-E-0897, Price Mitigation Collaborative) A set price for a basic consumption level of energy should be evaluated for all residential consumers.
Small businesses are feeling the pricing pressure too, according to the Times Herald Record, June 3, 2001. In Port Jervis, NY, an economically depressed town, small businesses received a 50% increase in their electric bills recently. Two have decided to move in together to reduce costs, thus shutting one more storefront down where there are many vacancies already. Another retailer is thinking it may be forced out of business.
The SEP should evaluate requiring generators to meet their public service obligations under the State Public Service Law to provide electricity at just and reasonable prices.
Government must ensure Environmental Quality through regulations and appropriate incentives.
Market-based approaches for environmental quality were advanced in the last plan. Such approaches should rest on the principle that a perfect market should include all relevant costs and not allow the shifting of environmental and health costs onto the public sector. Market-based approaches, that facilitate private sector shifting of these costs onto the state, burden taxpayers rather than ratepayers. Such approaches also hinder cost analyses that reflect true costs. As a result, real least cost energy options are disadvantaged.
The fact that the state must find a way to continue to support energy efficiency and conservation makes clear that the market structure is not designed to adequately support the retailing of a full range of energy services, which includes energy conservation. Government needs to make sure that incentive programs are aligned with desirable public goals and needs that may be unserved by the magic of the marketplace.
Global warming is not currently addressed by market mechanisms in the state. Building more generation plants to control prices and not requiring the appropriate incentives for efficiency and conservation means greenhouse gases will not be capped.
The need for and role of Public Power should be fully evaluated in the 2002 SEP.
Publicly owned power plants have
kept power costs lower in many California jurisdictions served by them. The
State Energy Plan should include an evaluation of the use of public power to
stabilize the market, to provide lower cost energy to sectors disadvantaged
in the marketplace and to more aggressively promote energy efficiency and conservation.
The role of the NY Power Authority under electric restructuring is not clear
to anyone. Given the changing environment as well as the current price crisis,
this public agency should redefine its mission with extensive public input.
The State Energy Plan should further the analysis of how best to utilize this
agency and its assets from the sale of power plants to advance the public interest.
Whether NYPA should continue to sell more plants should be the subject of careful
analysis in the State Energy Plan. Currently there appears to be no coherent
public policy operative here. While NYPA is selling its large generating plants,
it has purchased and is installing smaller generators in NYC.
Government can act as a major purchaser of energy services and thereby provide market incentives that reflect the goals of the state.
The Governor's recent Executive Order committing state agencies to a 20% renewable energy goal is an important example of government taking a leadership role. The SEP should address implementation plans for this important development.
State Environmental Quality Review was inadequate in the last State Energy Plan. A more comprehensive assessment is needed for the new Energy Plan and should include study of the economic and social impacts of rising prices under electric restructuring.
Chapter 4 of the 1998 SEP constitutes a completely inadequate environmental review. SEQRA is a substantive law which requires detailed analysis of the environmental impacts of state actions. Instead Chapter 4 contains a list of page numbers where information might be gleaned and presumably pasted together to constitute the appropriate environmental review. The whole purpose of environmental review is to require an agency or in this case multiple agencies to carefully evaluate the environmental and other impacts of an action or plan. Therefore it is not adequate to write a document and then say, "Here is where we think you can find the relevant information for our environmental review." This leaves the public guessing as to what the state's judgment about these matters is. The public needs to know the state's analysis and judgment when reading an environmental review. Therefore the state's environmental review should be a readable stand alone document that lays out what the state thinks and why, based on the analysis it did. Pricing for an essential commodity like electricity has enormous economic impacts: economic development, job loss, and personal financial impacts, and social impacts: health, limitations on individual and community choices and community disruption from business moves elsewhere. Economic and social impacts are meant to be included under State Environmental Quality Review.
The 2002 Energy Plan should identify the Benefits of Electric Restructuring in New York State and more fully discuss mitigation measures.
The 1998 Plan cited the PSC's 1996 Opinion ( No. 96-12)in the Competitive Opportunities Proceeding and acknowledged that there would be adverse environmental impacts. The state promised to monitor air quality changes with the state and federal government and proposed two specific mitigation measures - one, a systems benefit charge for efficiency and conservation, and two, close monitoring of competitive restructuring to "ensure that specific mitigation measures are implemented if needed." P. 3-14 Appendix. The Systems Benefit Charge remains inadequate at lower levels than it was in 1992 and it is insufficient for a state of this size. The 2002 Energy Plan should fully and clearly discuss the above mitigation measures the PSC and the state have in mind, particularly those related to the close monitoring of competitive restructuring, and what events would cause the mitigation measures to be used.
According to the PSC in the 1996 Opinion, restructuring will have unavoidable adverse air quality impacts, loss of demand reduction activities, loss of research and development in the environmental and renewables area, displacement of workers, and local economic loss where plants are closed. However, after weighing and balancing all of this against the perceived benefits of restructuring, the state came to the conclusion that the benefits outweighed the environmental and other adverse impacts. P. 3-15 SEP Apprendix.
Since the assumptions in the 1998 Plan were wrong concerning the benefits related to the effects of competition on prices, the 2002 Plan must take a new look and conduct a more comprehensive and careful review of the environmental, economic and social impacts under electric restructuring.
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Please note that I would be happy to provide clarifications or to answer any questions regarding these comments. I can be reached at 718-984-6446 or warrenba@email.msn.com I look forward to receiving a copy of the Draft State Energy Plan and to participate in upcoming hearings.
Thank you for your attention.
Sincerely,
Barbara Warren
Project Director
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