Failed Deregulation: New Yorkers Pay Too Much for Power
by New York State Assemblyman James Brennan
(originally published in CityLimits.org, 12/6/2013)
A study completed by my office last year looked at the impact of “deregulation” in New York State and concluded that the policies instituted by New York State in the late-1990s have made prices higher, with massive profiteering by unregulated generators of electricity. – Assemblyman James Brennan
The retail price of electricity in New York State, at 19.57 cents a kilowatt-hour, is the second-highest price by state in the nation, after Hawaii, according to the United States Energy Information Administration. Con Edison, at nearly 26 cents per kilowatt-hour, is among the highest-priced electric utilities in the nation.
But our prices are higher than they have to be.
A study completed by my office last year looked at the impact of “deregulation” in New York State and concluded that the policies instituted by New York State in the late-1990s have made prices higher, with massive profiteering by unregulated generators of electricity.
In the 1990s, many states across the nation directed their utilities to sell off their power plants to other companies, creating “unregulated” generators of electricity who would compete with each other, bringing lower prices to consumers through the benefits of competition.
In New York, the administration of then Gov. George Pataki directed the state’s utilities to sell off their power plants. The governor did not seek approval by the New York State legislature. Traditional utilities, such as Con Edison, would continue to deliver electricity through their transmission and distribution systems, but companies such as Entergy, which bought the Indian Point nuclear plant from Con Edison, began selling much of the generated power through an electricity power exchange called the “Independent System Operator.”
Today about half the power in the state is purchased through the exchange, and the remainder is purchased through bilateral contracts between the generators and the utilities. The pricing structure is dominated by a bidding system called the “market clearing price,” in which the utilities bid each day for a supply of power to meet their needs, and must pay the price that is bid to meet their peak demand. All producers then receive the peak-market clearing price regardless of their actual costs.
To determine whether privately owned “deregulated” plants are over-charging, my office looked at the revenues received from 13 of the largest generators of electricity in the state, and compared the money they were receiving to their actual costsfor 2010. It is also possible to determine the price a traditional power plant would charge if still regulated, based on (1) the investment in the plants (which has been reported) and (2) a standard regulated profit for a company such as Con Edison, which the New York State Public Service Commission allows to earn 10 percent a year for its stockholders.
The study found that the 13 privately-owned, “deregulated” plants generating about 40 percent of the electricity in the State were charging prices at least $1.1 billion higher than if the companies owning the plants were still regulated. For instance, the Entergy Corporation, owner of the two Indian Point nuclear plants, received $1.2 billion in revenue for the 16.2 billion kilowatt-hours it sold, about 7.33 cents a kilowatt-hour.
If the plants were still regulated, it would be receiving 4.34 cents a kilowatt-hour, an overcharge of $500 million a year for consumers. Entergy was earning a return on equity of 51 percent after-tax on these two plants.
Other producers in 2010 in the downstate electricity market, such as U.S. Power and Transco, which owned power plants in Queens, were earning similar returns and obtaining hundreds of millions of dollars in overcharges.
Overall, the plants in the downstate electricity market serving New York City and Westchester County were overcharging consumers by about $820 million a year, earning anywhere from 40 percent to more than 70 percent return on equity. The overcharges account for at least 10 percent of the electric bill, but are likely to be higher since not every plant producing electricity was analyzed.
Even if prices were reduced by this amount, these facilities would still be earning healthy profits and paying handsome salaries to executives and other standard corporate perks.
The clear answer to this high-priced problem is to re-regulate the price of electricity, and my office will be introducing legislation soon to accomplish this purpose. The New York State Public Service Commission would be directed by a new law to re-regulate the power companies “deregulated” by their previous actions, setting rates according to traditional methods, meaning taking the company’s actual costs and then permitting them a fair return on investment appropriate to the risk involved.
Pushing an unregulated company’s 50-75 percent after-tax profit on their investments back to what the regulated companies make, i.e., about 10 percent, would cut rates substantially.