New York State
Transitional
Energy Plan

A Comprehensive Plan to Solve
New York’s Energy Price Crisis

Table of Contents

Governor Pataki's Electric Deregulation Strategy Has Hurt Residential And Business Consumers

New Yorkers Need Relief From High Energy Costs And Protection From Unfair Market Practices

• Rate Relief
• Ratepayer Protections

New Yorkers Deserve An Energy Plan That Creates Jobs And Protects The Environment

• Job Growth
• Reducing Emissions to Safeguard Health and Safety

New York State Transitional Energy Plan

1. Consumer Rate Relief
   1. Universal Service Rate
   2. Elimination of the Gross Receipts Tax
   3. Energy Consumer Protection Act
   4. Energy Assistance Programs
   5. $1.5 Billion In Funding for Efficiency, Conservation, and Alternative Enery Sources

2. Ratepayer Protection
   1. Transition Period to Protect Consumers from Energy Price Increases
   2. Limitation on Automatic Energy Cost Pass-through to Consumers
   3. Energy Supply Reliability

3. Job Growth
   1. Expansion of Power for Jobs
   2. NYS Energy Research Institute

4. Environmental Protections
   1. Clean Energy Generation Incentive
   2. High Efficiency Vehicle Incentives

5. State Agency Reforms
   1. Power Authority of the State of New York (PASNY) Reform
   2. PSC Reform
   3. Agency Energy Conservation Action Plan

New York's Surging Electricity Costs

FAQs

Failed deregulation. In 1997, Governor Pataki directed the Public Service Commission (PSC) to initiate the deregulation of the State's electric power industry. The goal was to bring competition and lower prices to New York's electricity markets. Instead, as deregulation progressed, New Yorkers' electricity prices increased and grew faster than prices in the rest of the country.

Higher, out-of-control prices. The most recent statistics published by the Energy Information Administration, estimate that the New York average electric cost per kilowatt-hour (kwh) in December 2000 was 11.3 cents, 70 percent higher than the national average.

Residential customers are particularly burdened as they pay, on average 14.2 cents per kwh, a whopping 82 percent higher than the national average. Although increased fuel costs are partly responsible for raising electric rates, New York's costs are rising faster than the rest of the country.

No consumer choice. Prices were intended to be controlled by rigorous retail competition, but the vast majority of New York energy consumers appear to feel they have no competitive choices. Based on the most recent statistics from the PSC, as of January 2001, 96.3 percent of customers have stayed with their original electric utility.

Lack of a competitive wholesale market. The State's electric utilities have almost finished the process of divesting themselves of their generating plants. They must purchase electricity to serve their customers either through contracts with suppliers or on a wholesale spot market. The prospects for a truly competitive wholesale market appear grim, at least for the next few years. In a recent Assembly hearing, the Chair of the PSC stated that "to have a wholesale market that is well disciplined in terms of price" an additional 10 to 25 percent of generating capacity above that needed to maintain the reliability of the electric system is required.

The need to add this generating capacity before truly competitive markets materialize means that New Yorkers are several years away from being able to count on the market to lower prices. A report by an advisor to the New York Independent Systems Operator (NYISO), the entity that maintains electric markets in New York, forecasted that capacity shortages could lead to 45 percent price increases.

Governor Pataki's desperate measures. After price spikes occurred last summer, the Pataki Administration directed its public entity, the New York Power Authority, to spend nearly $500 million to build 400 megawatts of generating capacity in the New York City area. Many have argued that the Power Authority has skirted environmental regulations and ignored the concerns of local communities. The justification for this from the Administration has been that the Power Authority must get these plants operating virtually at any cost to "keep the lights on." There can be no clearer indicator of the failure of the PSC's deregulation scheme than having a public entity intervene in a private market. Unfortunately, ratepayers and the residents of the communities that play host to these plants are paying the price for this failure.

The Assembly Majority's Rate Relief Plan. Well-functioning competitive markets may hold the promise of eventually lowering electricity costs for New Yorkers. Unfortunately, not only are truly competitive markets years away, but the PSC's patchwork approach to deregulation has foreclosed a number of options that could have made the transition smoother and less risky for the consumer.

The Assembly Majority's New York State Transitional Energy Plan (NYSTEP) will mitigate impacts on ratepayers while at the same time will avoid creating barriers to new power plant construction. NYSTEP provides for immediate action to relieve burdens on consumers and protect them from wild price fluctuations and unfair selling practices. NYSTEP also promotes conservation, energy efficiency and alternative energy resources to lower energy costs and to spur job creation.

Because of the way deregulation has proceeded, the avenues available to reduce costs to consumers have become more limited. To provide some relief to consumers from the exorbitant cost of energy in New York, the plan elements include:

• The Universal Service Rate cuts the cost on the first 200 kwh per month used by a residential customer by 25 percent.
• The elimination of the gross receipts tax on electricity and natural gas.
• A State supplemental home energy assistance program to help low-income families and seniors pay for rising energy costs.

Almost all New Yorkers rely on their utility to purchase their electricity for them. Although the cost of delivering this electricity remains regulated, the wholesale market and electric power prices are deregulated. The PSC intends for consumers to pay these deregulated prices. Last summer, as the result of this policy, New York City had dramatic, unprecedented increases in electric bills as Con Edison passed the deregulated power costs through to its customers. As noted above, New York is well short of the generating capacity necessary for a fully competitive market so consumers require protection to avoid being victimized by market forces. NYSTEP would protect:

• Consumers, by limiting the automatic pass through of increased energy costs.
• Consumers, by ensuring that utilities act as "purchasing agents" for their retail customers thereby helping to protect them from price volatility and trying to obtain the "best deals" for them.
• Utilities, by providing for rapid review by the PSC of potentially excessive costs to determine whether a pass-through to consumers is justified or whether prices obtained by generators are unfair. The PSC would use its regulatory powers to encourage fair pricing practices.
• Reliability of the electric system, by ensuring adequate planning and monitoring of the system to ensure that necessary investments in transmission, distribution and generation are being made.
• Competitiveness of businesses, by helping them achieve gains in energy efficiency through conservation, adoption of new energy technologies and use of alternative energy resources.

A successful competitive energy market does not have to be accompanied by a decrease in the State's air quality or come at the expense of the health and safety of the State's residents. Nor will a competitive market help New York if it comes too late to save the businesses that employ thousands of workers. The Assembly plan provides $1.5 billion over five years for grants, loans, and incentives to reduce energy use and to provide cleaner power. It also helps to expedite efforts to repower the dirtiest generating facilities and to provide incentives for purchasing low-polluting vehicles. It will also provide low-cost power to the areas of the State that most desperately need it to stimulate their local economies.

Businesses, especially small and commercial firms, are heavily burdened by New York's high energy prices. New York's Niagara and St. Lawrence power projects produce some of the lowest cost electricity in the country.

According to the Power Authority, its current upgrade of these projects involves increasing the capacity of each of the generators it is replacing. The State must make the best use of any increase of low-cost hydropower. These upgrades open up the possibility of delivering low-cost power to areas that most need a boost to their economic activity.

By utilizing its excellent research institutions and capitalizing on its first-rate workforce, the State can turn adversity into an opportunity. The State must strategically encourage the growth of companies that develop, manufacture or sell products and services that involve conservation, energy management, renewables and new or alternative energy technologies. Specifically, NYSTEP would:

• Provide low-cost power to businesses in Empire Development Zones and communities in the North Country and Niagara areas through a new regionalized version of the successful Power for Jobs program.
• Create the New York State Institute for Energy to assist advanced energy technology companies to bring their technologies to market. The Institute would provide a double benefit by creating energy industry jobs while assisting other companies in adopting technologies and cutting their energy cost.
• Provide loans, loan guarantees, and grants from the New York Power Authority and the Long Island Power Authority to businesses to make investments that will make them more energy efficient and encourage them to adopt renewable and alternative fuel technologies.

While much of the emphasis of NYSTEP is on the cost and supply of energy, the plan contains significant measures to improve the environment to safeguard New Yorkers health and safety. NYSTEP would:

• Implement measures to protect the public's health and safety by providing incentives to reduce air pollution emissions.
• Provide funding through grants and loans for energy efficiency, conservation, and renewable and alternative energy sources to lower emissions and other environmental impacts through reduced use of fossil fuels.

The Emergency Ratepayer Protection Act includes a universal service rate, which provides a 25 percent per month rate cut for the first 200 kwh used by residential customers. Because 200 kwh represents the amount of energy needed to maintain the basic necessities of a small household, this Universal Service Rate will provide energy security and affordability to the customers who most need it, including seniors living on fixed incomes, while providing substantial rate relief to all residential customers.

The Gross Receipts Tax (GRT) on electricity and natural gas charged to utility companies is passed directly on to consumers. The State Fiscal Year (SFY) 2000-2001 Budget included a partial elimination of the GRT. The Assembly Majority Budget Resolution for SFY 2001-02 includes a phased reduction that completes the elimination of this tax. This action will save taxpayers over $350 million annually when fully implemented, and will help ease the energy cost burden on residential customers.

Under the PSC's deregulation scheme for the natural gas and electric industries, energy consumers who choose alternative suppliers, called Energy Service Companies (ESCOs), do not receive the same rights and legal protection as do people who stay with their incumbent utility. The Energy Consumer Protection Act would extend the legal protections incorporated within the Home Energy Fair Practices Act to all residential energy consumers and would guard against any unreasonable demands, conditions, and burdens placed on them by an ESCO.

This bill would also require ESCOs to post security with the PSC to protect consumers from bankruptcy, default or other failure. Furthermore, the bill would also prohibit "slamming", the unscrupulous practice of switching customers from one service provider to another.

Since the current Administration began its efforts to deregulate the energy industry, New York's residential electric energy prices have risen to 82 percent above the national average. Even with the recent rate increases in California, most New Yorkers still pay higher prices. NYSTEP includes two new programs to help residential customers pay their eye-popping energy bills.

The first component is a State program to supplement the Federal Home Energy Assistance Program (HEAP), which provides assistance to low-income residential customers during the winter season. However, the new State emergency supplemental HEAP program goes further than the federal program in that it also provides financial assistance for the summer cooling months.

The second component, the Emergency Energy Assistance to Seniors Program extends benefits to seniors who do not qualify for HEAP but meet the eligibility guidelines for the Elderly Pharmaceutical Insurance Coverage (EPIC) Program. This benefit would be the same as that under the State emergency supplemental HEAP program. This program will help these individuals and families pay their skyrocketing energy bills.

The Energy Conservation and Investment Act will provide $300 million annually for five years in excess funds from the Power Authority of the State of New York (PASNY) and the Long Island Power Authority (LIPA) to provide grants, low-income income loans, and loan guarantees to energy consumers for energy conservation and efficiency projects. These projects include furnace and boiler replacement, insulation, appliance purchase rebates, and other weatherization and load management improvements, which will result in greater energy efficiency and lower energy bills. These funds will also be available for alternative energy source development and installation, including solar, wind, and fuel cell equipment.

The Emergency Ratepayer Protection Act places in law a three-year transition period for energy deregulation. The Pataki Administration's deregulation plan has not resulted in competition in the electric industry at the wholesale or the retail level, and the Administration has done nothing to protect customers from dramatic price increases that result from this failed deregulation.

The bill directs the PSC to require electric and gas utilities to take every step necessary to avoid price increases, including long-term purchase agreements, hedging, and voluntary load reduction. In effect, the utility must act as a purchasing agent for its customers to obtain the best deal for them. The PSC will oversee this process by reviewing each utility's plan.

The sudden price increases experienced last year in New York City led many to question the operation of the State's electricity markets and whether price gouging had occurred. The price spikes also demonstrated the need for consumers to have protection from markets where energy prices often were not known until weeks later when bills were received.

NYSTEP eliminates automatic price pass-throughs to consumers by requiring a review by the Public Service Commission to ensure that any costs beyond those that are already established in the rates would be passed along only if they are proven by the utility companies to be absolutely necessary, just, and reasonable.

Utilities would be protected by the requirement that there be a rapid review by the PSC of potentially excessive costs to determine whether a pass-through is justified as well as a review as to whether prices obtained by generators are unfair. The PSC would use its regulatory powers to encourage fair pricing practices by generators.

Last fall, after sudden price spikes during a relatively cool summer, the PSC suddenly declared an emergency situation in New York City proclaiming that, without immediate new capacity being brought on-line, blackouts were likely for the summer of 2001. It is important for the State to avoid future "surprises" of this sort that appear to create a choice between blackouts and the health and vitality of local neighborhoods.

NYSTEP addresses the reliability of the electric energy system by ensuring adequate monitoring of the system and by implementing a planning strategy to insure that the necessary investments in transmission, distribution, and generation are being made. It also includes requirements for the creation of energy solutions, including necessary upgrades, to address New York City and Long Island load pockets, and requires planning to maximize renewable technologies and other resources in New York.

Projections indicate that scheduled upgrades at the Niagara and St. Lawrence hydro projects operated by the Power Authority result in 400 MW of additional generating capacity. Rather than allow them to feed this capacity into the wholesale energy market to reap windfall revenues, the Assembly plan directs these 400 MW to benefit the State's businesses that create and retain jobs. This new power would be available for a new regionalized version of the Assembly's successful Power for Jobs program, directed toward Empire Zones, and areas around the Niagara and St. Lawrence hydroelectric projects.

In the four years since this Assembly initiative was enacted, the Power for Jobs Program has created or secured over 300,000 jobs across the State. This additional allocation will provide more economic stimulus to those areas of the State with the greatest need.

The Assembly Majority Budget Resolution for SFY 2001-02 creates the New York State Energy Research Institute to assist advanced energy technology companies to bring their technologies to the market. This Institute will provide numerous benefits. By spurring the development of new energy technology companies and assisting them in bringing their products and services to market, it will create new energy industry jobs. In turn, the products and services of these companies will assist other businesses in cutting their energy costs and staying competitive.

In some areas with tight electricity supplies and poor air quality, both can be improved through repowering existing generating facilities. NYSTEP creates an incentive to bring these plants on-line by accelerating the siting process under Article X of the Public Service Law.. Specifically, the Siting Board approval time for the repowering of an existing facility, or the phase out of an old facility for a new, cleaner one is cut in half, from one year to six months. The legislation requires that the repowering must result in a reduction of at least 75 percent in the rate of emissions for three key pollutants - nitrogen oxide, sulfur oxide, and particulate matter. This action will encourage and facilitate the replacement of old, dirty, inefficient plants with modern, cleaner, high efficiency plants. Repowering or replacing older plants has been proven to increase generating capacity by up to 90 percent and to result in decreased rate of emissions.

To encourage New Yorkers to purchase vehicles that will help save on fuel costs and protect the environment, NYSTEP includes the elimination of the state share of the sales tax on highly fuel efficient vehicles and extremely low emitting vehicles. These vehicles include those meeting super-ultra-low (SULEV) standards and are 50 percent more fuel-efficient than average cars in the same class.

The Power Authority generates about 25 percent of the electricity used in New York State at ten generating facilities and operates 1,400 circuit-miles of transmission lines statewide. Under NYSTEP, a commission is created to develop a plan to refocus PASNY to better serve the residents of New York State. The commission is charged with making recommendations on the future role, structure, and governance of PASNY. As an immediate control measure, PASNY would be made accountable by being made subject to the review of the Public Authorities Control Board.

The PSC, in conjunction with the current Administration, has taken numerous actions in the name of competition that has treated consumers unfairly, and have required consumers to bear a disproportionate share of the burden of the Administration's deregulation failures. The Administration and the PSC have attempted to implement competition behind closed doors, shutting out customers.

To ensure greater responsiveness to consumer needs, the Assembly Majority's NYSTEP requires that the PSC Commissioners be elected, and terminates the current practice by which the Governor continues to appoint its Commissioners without any public accountability or input.

NYSTEP includes legislation that requires the Office of General Services (OGS), in coordination with the Energy Research and Development Authority (NYSERDA) and the PSC, to prepare an integrated State agency energy conservation action plan specifying measures to be taken by all State departments and agencies; the Executive, Legislature, and Judiciary. This will result in the elimination of any wasteful, inefficient, or non-essential use of energy or energy resources. Conservation goals include a target of 10 percent savings by 2003 and 25 percent by 2010.

NYSTEP also includes a component to foster and facilitate the use of a Statewide Coordinated Carpooling Plan at all agencies and requires the State fleet to achieve a savings goal of 25 percent by the use of high mileage or alternative fuel vehicles. PASNY would be required to provide technical and other assistance to State agencies in order to reduce their energy consumption and waste, and maximize efficiencies.

The graph below depicts the percentage that average New York electricity costs have exceeded the national average since 1995. The drop between 1997 and 1999 reflects a number of factors, including tax cuts and reductions in the regulated portions of the utility business. The increase between 1999 and 2000 coincides with the initial operation of the fully deregulated wholesale market and substantial "progress" by the PSC in deregulating the generating plants by having the utilities divest themselves of those plants.

NY Electric Price "Premium" Over US Average

The second graph compares average New York and U.S. electricity costs for the residential, commercial and industrial sectors, and on an overall basis. Electricity prices for large industrial customers in New York are only slightly above the national average. Prices in New York's residential and commercial sectors are both well above U.S. residential and commercial rates. On an overall basis, New York electric prices are nearly 70 percent above average national electric prices.

Electric Price Comparisons For 2000

Q:   Is this the same plan the Assembly put forward before?

A.   No. The Assembly proposals have continued to evolve based on changing circumstances. The plan represents a complete re-working of the legislation presented last year. However, our principles have remain unchanged:

• Protect Consumers
• Lower Rates
• Stimulate Job Growth

Q:   Earlier, plans included double-digit rate reductions; this doesn't, what happened?

A.   Two things happened; the PSC proceeded with its severely flawed deregulation scheme and foreclosed options that would have been beneficial to ratepayers; and fuel prices increased. As a result, we focus on keeping consumers from further harm and providing some modest relief through a number of mechanisms including the Universal Service Rate, a supplemental Home Energy Assistance Program, and resources to support conservation.

Q:   Does the Assembly still support competition?

A.   We support competitive markets, which we believe, can lower energy costs. What we do not support is deregulation without competition which is what the PSC has brought about. Until truly competitive markets exist, consumers require some level of protection so that they do not bear all the risks of the transition to competition.

The original Assembly Competition Plus plan phased in competition by calling for the PSC to exercise judgment in a step by step process that started with demonstration projects and required a wholesale market to be functioning before instituting retail competition. Other safeguards included only going forward with the divestiture of a generating plant by a utility when divestiture was in the public interest and to provide regulatory protections to consumers in load pockets until a competitive market developed.

Q:   Aren't you afraid of a California-like situation developing in New York?

A.   Actually, last summer, the PSC created "San Diego on the Hudson" in New York City. The first signs of problems in California occurred in San Diego. San Diego Gas and Electric was able to lift its rate freeze and pass all the energy costs it incurred buying all its energy in the spot market on to its customers. Customers saw substantial increases in their bills. This was the same scenario that played out in the Con Edison territory last summer as customers saw bills increase by 40 percent at one point. It is interesting to note that most other customers in New York State benefited by having their rates frozen and, because of a number of circumstances, did not suffer blackouts or bankruptcy by their local utility.

New York and California differ in a number of key ways that have kept New York from suffering the more dire electricity-related problems of that state although New Yorkers do pay more for electricity and have not benefited from the strong economic growth that helped cause California's shortages.

Q:   Does New York need more generating capacity?

A.   Yes. Both the New York City area and Long Island may face shortages of power in the near future. Statewide, more capacity is necessary to make electric power markets truly competitive. Conservation, energy efficiency and a number of new energy technologies can help reduce the need for more capacity which is why the Assembly proposal would triple the state spending in these areas through new and enhanced programs at the Power Authority of the State of New York, the Long Island Power Authority and NYSERDA. We would also impose an aggressive conservation campaign for state workplaces to save energy. Finally, to help meet the need for new capacity, we include a proposal that accelerates the time frame under the State siting law in cases where an older plant is being "repowered" with a significant cut in pollution emissions.