UNDER DISCUSSION

  • Does Deregulation Work?

Competitive Energy Markets Work for New York

In a response to an assemblyman's call for stricter regulation of the electricity marketplace, an industry official says deregulation is not to blame for high prices.

Despite wrongheaded claims by Assemblyman James Brennan ("Failed Deregulation: NYers Pay Too Much for Power," Dec. 6, 2013), competitive electricity markets still are the best option for New York.

The outstanding performance of the competitive wholesale electricity markets, in terms of both reliability and cost to ratepayers, reaffirms the state’s decision to move electricity away from an under-performing vertical monopoly utility structure into one driven by private competition. The success of the competitive markets was no more evident than this past summer, when facing a new record for peak demand during the July heat wave, the New York Independent System Operator (NYISO) credited the fact that every available generator was running as a major reason the system was capable of handling the high load.

Competition has pushed the market to record-low wholesale energy prices, electric generator availability and efficiency at its highest levels, and reduced environmental emissions from generation. Perhaps most importantly, this success was achieved with the private sector bearing all the risk, unlike the previous regulated utility model that put investment and operational risk on captive ratepayers.

Under the regulated paradigm to which Assemblyman Brennan would return, utility-owned generation places the risk of investment totally on consumers. Under competitive wholesale electricity markets, independent power producers assume all of the risk for loss in the market because the generating companies are not ensured a return with consumers covering the costs.

The importance of this shift in risk cannot be overstated. Cost overruns from traditional utility projects are not unusual, and consumers have footed the bill.

Contrary to Assemblyman Brennan’s statements, wholesale electricity markets were never “deregulated.” These markets arose from a restructuring of the electricity industry and are subject to oversight by the NYISO and, ultimately, the Federal Energy Regulatory Commission (FERC). The current market design includes a significant number of carefully structured monitoring and mitigation rules.

While Assemblyman Brennan cites that the retail price of electricity in New York State is the second-highest in the nation, it is not due to the cost of the electricity itself. The competitive wholesale market-clearing price mechanism is central to the operation of New York’s wholesale electricity markets, and it is universally accepted in the United States as the economically efficient design for competitive wholesale power markets. The main drivers of high electric bills are the components of the bills not subject to competitive forces – delivery charges, taxes and fees – factors over which Assemblyman Brennan and the Legislature do have control.

Notably, in 2012, New York ratepayers experienced record low wholesale electricity prices, and 2013 is trending at prices lower than were experienced ten years ago. Despite the reduction of wholesale prices, electric bills remain high. Up to 70 percent of a typical residential bill is composed of delivery costs, taxes and public policy fees. The actual commodity cost – the electricity used – is only 30 percent of the bill.

We have yet to see Assemblyman Brennan’s proposed bill to re-regulate the price of electricity, but we have serious doubts about its feasibility. Such a huge undertaking cannot be done solely on the State level and would require approval from FERC. The Federal Power Act makes it clear that FERC is the exclusive jurisdictional agency for regulating wholesale electricity markets and transactions that the NYISO administers including cross-border trades subject to FERC’s jurisdiction. In contrast, the state’s Public Service Commission is charged with addressing retail rate issues within New York. The NYISO market is a wholesale - not retail - market. Any attempt by the State of New York to regulate the rates for wholesale electricity sales would be unconstitutional.

The competitive wholesale electricity markets were restructured less than 15 years ago and have proven beneficial. Competition has reduced wholesale electricity prices. If the Legislature wants to reduce electric rates further, it has the authority – and the responsibility – to look at the other 70 percent of the electric bill.




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