LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

January 2, 2000, Sunday, FINAL EDITION

SECTION: VIEWPOINTS, Pg. 1F

LENGTH: 1746 words

HEADLINE: ENERGY CRISIS;
NEW YORK'S SKY-HIGH ELECTRIC RATES HURT BOTH INDUSTRY, CONSUMERS

BYLINE: PAUL D. TONKO; Special to The News

BODY:

Our industrial economy runs on energy. Many of us can remember how the oil price hikes of the early seventies put our nation's economy in a tailspin. Today, New York State faces a similar and equally dangerous crisis -- high electricity prices.

New York's electric costs are 60 percent above the national average. This makes our state's economy hugely uncompetitive in attracting and retaining employers, particularly in manufacturing, which is very heavily dependent on electricity.

A case in point is Ford Motor Co.'s Woodlawn plant. Company representatives have told me this plant is the most productive stamping plant in the Ford system. Quality is superb, and the work force is outstanding. But the plant is not competitive for one basic reason -- high electric costs. This story can be repeated across New York. We are losing jobs due to our high electric bills.

How did we get into this mess? There are three basic reasons: poor management decisions by utilities, failed government policies and bad tax policy.

sh New York and nukes

New York utilities were once the pride of the nation. Huge increases in electricity demand during the middle of this century produced increased profits and stable prices. But things began to change in the sixties and seventies, when New York embraced nuclear power. Eight nuclear plants were built across the state, with the promise of energy "too cheap to meter."

Then came the Three Mile Island nuclear plant accident in 1979. New safety regulations made the cost of building, maintaining and operating these plants skyrocket. The Nine Mile Point II plant in Oswego, for example, cost 1,200 percent more than original cost estimates, and the Shoreham plant on Long Island experienced similar cost overruns. Today, every New York utility has these high costs embedded in its rates.

Today, utilities such as Niagara Mohawk and New York State Electric and Gas are in the process of voluntarily selling their nuclear assets to third parties. And what have they found out? The price of these plants is nowhere near the amount they have invested. In fact, current offers are less than 5 percent of their book value.

To insulate their shareholders from this loss, Niagara Mohawk is asking the state Public Service Commission for the right to recover losses from customers for the next 15 years, just as if it continued to own the plants.

So much for "too cheap to meter."

sh New York embraces co-generation

As a result of the oil embargo of the mid-seventies, the federal and state governments enacted laws that were designed to maximize the use of fossil fuels by encouraging co-generation, that is the dual use of energy for both electric generation and industrial purposes.

An example of this technology is the power plant located adjacent to the Outokumpu American Brass facility in Buffalo. This plant generates electricity and sells it into the state power grid (at a guaranteed price) and also uses waste heat to make steam, which it sells to American Brass, thereby greatly increasing the fuel efficiency of the gas the plant burns. Sounds great, doesn't it?

Well, maybe not. First, the prices guaranteed for the electricity were based on ever-increasing fossil fuel prices, with no provision for lowering prices if the cost of fossil fuel dropped. Second, state law guaranteed fixed prices for small plants of 80 megawatts or less with no approval process as to the need for the electricity produced by utilities.

In addition, the law allowing full review of plants larger than 80 megawatts sunset for a three-year period, meaning no tests were conducted anywhere in the state regarding the need for the electricity from these plants.

Consequently, co-generation plants exploded in size to as large as 1,000 megawatts. With this dramatic increase in generating capacity, combined with guaranteed prices based on estimates of ever-increasing fossil fuel prices, the market was flooded with huge amounts of overpriced and unneeded electricity. And since these costs were allowed to pass directly to consumers, retail electricity prices increased dramatically.

Despite the fact that the policy of promoting non-utility generation failed as a result of poor implementation, it did spawn a whole new industry. The independent power industry proved that highly efficient and clean power plants could be built by non-utilities and gave birth to the notion that electric generation need no longer be considered a "natural monopoly."

sh Selective discounting takes hold

While the policy of over building of generation was in place, utilities fully understood the impact of this rapid expansion. Managers acknowledged increased New York utility costs would lead to a reduction in electricity sales, because manufacturers would flee New York seeking lower power prices.

In reaction, utilities began selectively to discount prices to large customers that threatened to leave their systems. These discounts were financed primarily by shifting costs to other customers, further fueling the spiral of escalating prices. This move was approved by regulators anxious to stem the loss of industrial customers.

Over the years, utilities have become the hidden tax collector for New York's state and local governments. In fact today, taxes account for an average of 18 percent of customers' utility bills. While both the state and local governments tax utilities, local governments take the lion's share of the money, primarily through property and sales taxes.

Much has been written about the impact of the Gross Receipts Tax the state imposed on the price of electricity. While I agree that this onerous tax is a major problem, it is often used as an excuse for every aspect of New York's high energy prices.

In fact, the Legislature has cut this tax by more than one third, and beginning this year, it will account for only 2.5 percent of the retail price of electricity. Even if we eliminate this tax completely, and we should, New York's price gap with the rest of the country will still be more than 50 percent.

Real property taxes pose a far more difficult problem for New York State's utility customers. Electric utilities are typically the largest single taxpayers for most municipalities and school districts. If a large power plant is located in a community, this tax dependence can be far greater. This unique real property tax status of utilities, combined with the local sales tax burden they bear, makes the cost of running our counties, cities, schools, towns and villages over 10 percent of our electric bills.

What can be done?

The Assembly has long recognized the need for competitive energy prices to ensure job creation and a strong state economy. Consequently, it has passed a package of bills designed to reduce the gap between New York State's electricity costs and those of the rest of the nation, while providing fair competition and quality service. Highlights of this plan would:

Reduce electric rates for residential customers by 13-20 percent through a Universal Service Rate.

Expand the state Power for Jobs Program that targets low-cost power for preserving and creating jobs.

Allocate a new 150 megawatts of Power for Jobs, according to local and regional economic development plans and economic need.

Reduce the sales tax paid by businesses.

Create an "Electric Consumers' Bill of Rights."

Stimulate competition and lower prices by providing a "shopping credit" that would enable customers to save by choosing a supplier while allowing those suppliers to remain financially viable.

Maintain the electricity system through an expert work force.

Create the Energy 2000 Fund to develop new technologies and to foster energy efficiency.

Restructure the State Power Authority, including selling its non-hydro assets and putting these assets back on local tax rolls.

Provide accountability of industry regulators by requiring their election.

New York is not alone in its desire to reduce electricity prices. More than two dozen states are engaged in a process of lowering prices through deregulation and competition. However, the vast majority of states have taken a very different course from that pursued by New York.

First, they recognized the goal of lowering prices had to be approached in the broadest way possible, that all players -- utilities and utility workers, large and small customers, governors, state and local governments, and regulators -- had to be brought together to tackle this formidable task.

In almost every one of these states, the result has been broad and sweeping statutory change that in most cases includes double-digit rate reductions enacted in law -- and even bigger discounts for large manufacturers.

These states have given all customers big and small a much clearer and predictable energy future. While this process may not be perfect, I believe it is a whole lot better than what New York has done.

In New York, we have given (or abdicated) the entire deregulation exercise to the regulator, the PSC. This non-elected body has been hamstrung in its efforts because it lacks the statutory authority to force the dramatic changes we need.

While the Assembly has sought to address this enforcement issue and has vigorously pursued and passed serious reforms, we have been unable to secure Senate support for our legislative approach.

On the tax front, it is clear that New York needs a program not only of energy tax reduction, but of fundamental energy tax reform. As utility services are unbundled into their component parts of generation, transmission, billing and metering, changes in our current tax laws must be developed.

Great caution must be used when we make these changes. For example, if changes in real property tax assessment of power plants occurs, local governments may see tax shifts resulting in doubling or tripling of their tax rates on other types of property.

One thing is clear. Comprehensive deregulation of New York's electric industry is essential. Our failure to attain this goal will result in the steady decline of our economy, particularly in the manufacturing sector -- the traditional base of New York's economy.

Other states have shown us the right way; we must not let politics or the "blame game" stand in our way. Let's go back to work, and do it right this time. ASSEMBLYMAN PAUL D. TONKO, D-Amsterdam, is chairman of the Assembly Energy Committee.

LOAD-DATE: January 5, 2000