Market Restructuring of Electricity Delivery
by Gavin Donohue, President and CEO, Independent Power Producers of New York, Inc.

It would be interesting to know how many residents of New York State are aware of the fact that nearly none of the electricity delivered to them is actually generated by their utility. That is a distinction New Yorkers should be aware of because, over the past ten years, a tremendous transformation has taken place regarding the generation of power in New York State – independent power producers are now competing against one another to provide power to New Yorkers. The results from this market restructuring have been phenomenal, leading to real, tangible benefits for ratepayers in our state.

Over ten years ago, New York State shifted its energy policy away from the traditional vertically controlled monopolies to a system in which private generators compete to supply and numerous companies vie to sell electricity to New Yorkers. The idea behind the move was that consumers would be better served if utilities no longer controlled every aspect of the electric system. Instead, private entities would dedicate investor money – not ratepayer money like under the traditional system – to fund investments in power plants to make them more efficient, more reliable, and to ultimately lower the cost of their power to make them more competitive in the market. And it worked; study after study has shown that all of these benefits have occurred here in New York under competitive markets – important findings for individuals living and operating businesses in this state.

However, there has been some criticism lobbed at New York’s energy policy, pointing to the fact that New York’s electricity prices are higher than those in many other areas of the country. It is incorrect, however, to attribute a rise in energy prices with the transition to competitive markets. A more accurate assessment would recognize that fuel costs are the biggest driver of price fluctuations, and fuel costs have risen over 150% since 1999. It would be wrong to think this would not still be the case under the traditional regulatory structure prior to the advent of competitive markets.

New York’s generation portfolio relies heavily on natural gas, which has experienced an escalation in fuel costs, especially for parts of the country near the end of the pipelines, like New York. It is unfair to compare New York’s energy costs to many other states that are fortunate enough to have ready access to more cheap hydropower (Idaho generates two-thirds of its power from hydro compared to New York’s roughly 20 percent) or utilize much more inexpensive coal than New York’s 16% (West Virginia gets nearly 90% of its power from coal). New York also has higher taxes, higher labor costs, very strict environmental regulations, and a bevy of other factors that drive up the cost of doing business and that are unique to this state.

What is fair to compare is how power plants are performing since the market restructured. Since 1999, approximately $6 billion in private investments have been made in our state’s power plants, resulting in New York now having an improved system that is more efficient, more reliable, and saves consumers money. That’s right, even though energy costs as a whole have risen since restructuring began, studies indicate that when you account for the increase in fuel costs, overall energy costs have actually decreased. According to the New York State Department of Public Service, the total real cost of electricity for the typical residential customer in New York dropped by almost 16% between 1996 and 2004. In a study conducted by the Analysis Group, system improvements stemming from restructured markets resulted in between $100-$200 million in annual savings for New York consumers.

Furthermore, even with an ever-increasing demand for power by ratepayers in this state, New York’s generators have improved their availability during the summer months to over 90% versus 86.5% prior to energy industry restructuring when utilities were the owners and operators. Generators are even producing 11% more output from plants previously owned by utilities. The reason, according to the Analysis Group report, is that “the new owners are just better than the previous ones.”

The clear price signals and non-discriminatory rules of New York’s electricity markets also are helping lead the way in developing alternative ways of meeting the state’s electricity needs. For example, the entry of renewable generation is spurred by those rules. There are 350 megawatts (MW) of wind-powered resources in commercial operation with proposals for another 50 projects totaling over 6,000 MW, equivalent in size to about eight large power plants. In addition, the New York market has over 1,800 MW of demand response resources available. These resources empower consumers to have some control over their energy bills, help keep the lights on during contingencies, reduce environmental impacts, and decrease the need to construct additional power plants.

New York’s energy markets aren’t perfect, but they are held up nationally as an example of how well competition can work. And clearly it is working. For New York to see more positive results, even more competition is needed energy markets, which will provide additional highly efficient generation, improved system reliability, and energy efficiency to empower all New Yorkers with the tools they need to control usage and reduce costs.

Gavin Donohue

President and CEO

Independent Power Producers of New York, Inc.