To the Editor:
This winter, National Grid ratepayers were subjected to exorbitant electric bills, which have been attributed to the high cost of natural gas. Although some commentators have inquired as to why natural gas prices were so high, there is a more basic question: Why did New York State, and National Grid customers in particular, become so dependent on natural gas in the first place?
The answer to that question lies in the decision made by the Public Service Commission to deregulate or “restructure” the electric industry in the 1990s, a decision that resulted in significant financial windfalls for large industrial users; National Grid’s predecessor, Niagara Mohawk; and for power plant developers, but was a total disaster for the residential ratepayers of New York State.
When electric power was first developed, in the late 19th and early 20th centuries, it was not practicable to have competing electric companies because only one central station and only one set of wires was needed in a particular urban area.
Rather than establish municipally owned power systems, most states in the United States adopted a model of a “regulated utility” for electric power. Under this model, a monopoly would be granted to a private company, which would be guaranteed a profit.
The concept of a “regulated utility” was championed by Samuel Insull, who came to the United States in 1879 to work as Thomas Edison’s personal secretary and was instrumental in bringing General Electric to Schenectady. Insull left General Electric in 1892 to develop one of the first central electric stations in Chicago.
Although Insull advocated for government ownership of the electric industry in his native England, he worked with a variety of industrial interests to develop the concept of an electric monopoly, with rates to be set by government regulators, as an alternative to the “socialist” government ownership.
Electric power rates were designed to reimburse operating costs, and to provide a profit on capital investment. Therefore, electric utilities were encouraged to build capital-intensive power plants, rather than plants with low capital investment and relatively high operating costs.
Utilities, including Niagara Mohawk, primarily relied on large oil, coal, and later nuclear plants, which were expensive to construct, but, once constructed, generated large quantities of power at relatively low average cost.
In the early 1990s, largely as a result of the Federal Energy Regulatory Commission’s Order 888, electric transmission facilities were opened up to competition, which made it possible for electric users, especially large industrial users, to buy power from other generators besides their local electric utility. Many states, including New York, decided to “deregulate” or “restructure” their electric utilities, based upon a mystical belief that the market would solve all problems, and the cost of electricity would decrease.
In reality, the only electrical consumers to benefit were the large industrial users.
Under deregulation, Niagara Mohawk was required to divest itself of all of its power plants, including the large “base-load” plants that generated electric power cheaply, and purchase power on the open market, for resale to its remaining customers. Because of the particularly shameful way that the Public Service Commission chose to implement deregulation, Niagara Mohawk recovered the costs of its wasteful construction practices at the nuclear plant Nine Mile 2 and sold its generating power plants at highly discounted prices and stuck ratepayers with the costs through a “competitive transition charge.”
Advocates of unrestricted competition claimed that Niagara Mohawk would be able to purchase cheaper power because the owners of merchant power plants would compete against each other to sell power. However, the new owners of Niagara Mohawk’s large plants frequently chose to sell power directly to large industrial users, rather than sell to Niagara Mohawk for delivery to residential users.
More critically, no new large plants with low average costs for electricity have been built in New York in recent years.
Power producers chose to construct natural gas electrical generating plants — even though they generate higher cost power — because they come on line much more quickly than oil or coal or nuclear plants.
The price of electric power is determined in a complicated bidding system, by which generators offer to sell power, both on a long-term basis and for very short periods of time. The need for power, and therefore the price, is greatest during times of peak demand, typically periods of extreme cold or extreme heat.
More profit can be made by constructing plants that can sell power during peak events at a higher price, than can be made constructing the base-load plants that are actually needed.
Therefore, power producers have chosen to focus on building more natural gas plants, which, while providing a greater profit margin for the power producer, do not meet the needs of New York State residents.
Almost 20 years after the decision was made to deregulate the electric industry, National Grid customers are increasingly dependent upon high-cost natural gas plants, which can become even more high-cost when, as happened this winter, gas prices spike.
The only way of assuring reliable electric service for New York State residents at a reasonable price is to attempt to put the genie back in the bottle: to re-establish a regulated electric utility or, even better, have power delivered through a government-owned authority.
The crisis this winter should demonstrate what should have been obvious 15 years ago: The vagaries of the market cannot adequately handle the provision of a fundamental service such as electricity.
Peter Henner
New Scotland
Editor’s note: Peter Henner, who writes the Enterprise chess column, is a lawyer. In 1998, he represented several municipalities, including the cities of Oswego and Cohoes, in a legal challenge to the restructuring of Niagara Mohawk in 1998. In 2002 and 2003, he taught a graduate course in the Rensselaer Polytechnic Institute’s Environmental Management program on the restructuring of the electric industry.
This winter, National Grid ratepayers were subjected to exorbitant electric bills, which have been attributed to the high cost of natural gas. Although some commentators have inquired as to why natural gas prices were so high, there is a more basic question: Why did New York State, and National Grid customers in particular, become so dependent on natural gas in the first place?
The answer to that question lies in the decision made by the Public Service Commission to deregulate or “restructure” the electric industry in the 1990s, a decision that resulted in significant financial windfalls for large industrial users; National Grid’s predecessor, Niagara Mohawk; and for power plant developers, but was a total disaster for the residential ratepayers of New York State.
When electric power was first developed, in the late 19th and early 20th centuries, it was not practicable to have competing electric companies because only one central station and only one set of wires was needed in a particular urban area.
Rather than establish municipally owned power systems, most states in the United States adopted a model of a “regulated utility” for electric power. Under this model, a monopoly would be granted to a private company, which would be guaranteed a profit.
The concept of a “regulated utility” was championed by Samuel Insull, who came to the United States in 1879 to work as Thomas Edison’s personal secretary and was instrumental in bringing General Electric to Schenectady. Insull left General Electric in 1892 to develop one of the first central electric stations in Chicago.
Although Insull advocated for government ownership of the electric industry in his native England, he worked with a variety of industrial interests to develop the concept of an electric monopoly, with rates to be set by government regulators, as an alternative to the “socialist” government ownership.
Electric power rates were designed to reimburse operating costs, and to provide a profit on capital investment. Therefore, electric utilities were encouraged to build capital-intensive power plants, rather than plants with low capital investment and relatively high operating costs.
Utilities, including Niagara Mohawk, primarily relied on large oil, coal, and later nuclear plants, which were expensive to construct, but, once constructed, generated large quantities of power at relatively low average cost.
In the early 1990s, largely as a result of the Federal Energy Regulatory Commission’s Order 888, electric transmission facilities were opened up to competition, which made it possible for electric users, especially large industrial users, to buy power from other generators besides their local electric utility. Many states, including New York, decided to “deregulate” or “restructure” their electric utilities, based upon a mystical belief that the market would solve all problems, and the cost of electricity would decrease.
In reality, the only electrical consumers to benefit were the large industrial users.
Under deregulation, Niagara Mohawk was required to divest itself of all of its power plants, including the large “base-load” plants that generated electric power cheaply, and purchase power on the open market, for resale to its remaining customers. Because of the particularly shameful way that the Public Service Commission chose to implement deregulation, Niagara Mohawk recovered the costs of its wasteful construction practices at the nuclear plant Nine Mile 2 and sold its generating power plants at highly discounted prices and stuck ratepayers with the costs through a “competitive transition charge.”
Advocates of unrestricted competition claimed that Niagara Mohawk would be able to purchase cheaper power because the owners of merchant power plants would compete against each other to sell power. However, the new owners of Niagara Mohawk’s large plants frequently chose to sell power directly to large industrial users, rather than sell to Niagara Mohawk for delivery to residential users.
More critically, no new large plants with low average costs for electricity have been built in New York in recent years.
Power producers chose to construct natural gas electrical generating plants — even though they generate higher cost power — because they come on line much more quickly than oil or coal or nuclear plants.
The price of electric power is determined in a complicated bidding system, by which generators offer to sell power, both on a long-term basis and for very short periods of time. The need for power, and therefore the price, is greatest during times of peak demand, typically periods of extreme cold or extreme heat.
More profit can be made by constructing plants that can sell power during peak events at a higher price, than can be made constructing the base-load plants that are actually needed.
Therefore, power producers have chosen to focus on building more natural gas plants, which, while providing a greater profit margin for the power producer, do not meet the needs of New York State residents.
Almost 20 years after the decision was made to deregulate the electric industry, National Grid customers are increasingly dependent upon high-cost natural gas plants, which can become even more high-cost when, as happened this winter, gas prices spike.
The only way of assuring reliable electric service for New York State residents at a reasonable price is to attempt to put the genie back in the bottle: to re-establish a regulated electric utility or, even better, have power delivered through a government-owned authority.
The crisis this winter should demonstrate what should have been obvious 15 years ago: The vagaries of the market cannot adequately handle the provision of a fundamental service such as electricity.
Peter Henner
New Scotland
Editor’s note: Peter Henner, who writes the Enterprise chess column, is a lawyer. In 1998, he represented several municipalities, including the cities of Oswego and Cohoes, in a legal challenge to the restructuring of Niagara Mohawk in 1998. In 2002 and 2003, he taught a graduate course in the Rensselaer Polytechnic Institute’s Environmental Management program on the restructuring of the electric industry.
Post date:
April 23, 2014
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