New York Deregulation model
In New York competition was introduced as a result of an administrative process. There were competitive opportunity proceedings to seek ways the industry could be restructured. A collaborative process was established to allow parties to present their positions and develop a framework for movement toward a competitive marketplace. The Administrative Law Judge3 and Deputy Director4 issued a recommended decision that set forth a proposed model for restructuring the electric industry in New York. The Public Service Commission (PSC) issued its opinion and order5 regarding competitive opportunities for electric service that restructured New York's electric power industry. As part of this order electric utilities were required to submit restructuring plans by October 1996. Individual utility proceedings and settlement agreements with different terms and conditions for different utilities helped develop these restructuring plans. The Public Service Commission (PSC) approved restructuring plans for six utilities in the State from 1997 to 1998. The PSC approved Consolidated Edison’s (Con Edison), Orange and Rockland’s (O&R) and Rochester Gas and Electric (RGE) proposals for restructuring in 1997. The Commission approved restructuring plans for New York State Electric & Gas (NYSEG), Central Hudson Gas & Electric (CHG&E) and Niagara Mohawk (NIMO) in 19986. As part of these plans, most utilities agreed to divest their fossil-fueled assets.
Settlement agreement effect on utility pricing
The settlement agreements led to utility commodity prices being linked to market prices. For example, Con Edison’s generation charge floated with the market price and was blended with other parts of Con Ed’s generation portfolio. Con Ed bought power at market prices and also obtained power through long term contracts with nuclear sources, independent power producers, etc. The utility’s delivery charge had a fixed transmission and distribution (T&D) component and an adjustment that moved inversely with the market to mitigate market volatility7. NYSEG offered its customers choice between a bundled rate option (BRO) and a variable rate option (VRO). The BRO was a bundled rate for generation and delivery, regulated8 by the Commission under the old model. The VRO was similar in design to Con Ed’s rate. The commodity portion was based on market prices and a charge in the delivery portion moved inversely with market prices to mitigate market volatility. O&R’s generation charge was based on market prices, the T&D component was fixed and there was no adjustment in the delivery portion to mitigate market volatility. For the first three years of its restructuring plan, NIMO charged its residential and small commercial and industrial (C&I) customers a generation charge based on the market price of electricity. NIMO’s delivery charge floated inversely with the market price of generation. The total price charged to the customer was frozen. However, after the first few years most New York utility rates included a commodity portion based on marginal cost and variable with market prices or contract prices. Delivery charges included an adjustment or hedge that mitigated market volatility. For example, NIMO rates were comprised of a generation or commodity charge based on the NYISO9 market price and a delivery charge with a transmission and distribution component, a stranded cost10 recovery component, a system benefit charge11 and a delivery charge adjustment (DCA). The DCA reconciled the forecast market price with the actual market price and the forecast contract price with the actual contract price. This ensured that customers paid the amount incurred by the company to obtain electric supply for them and provided partial protection against fluctuations in the market price of electricity. Settlement agreement effect on ESCO12 pricing
The settlement agreements led to utilities offering their customers a credit for switching to an ESCO. This credit was offered because the utility avoided certain costs when the customer switched to an ESCO. For example, if a NIMO customer migrated to an ESCO, the ESCO charged for generation and the utility charged for delivery. The utility offered customers a retail access credit of 2 or 4 mills per kWh for buying power from the ESCO. The credit was 4 mills for residential and small commercial and industrial (C&I) customers and 2 mills for all other customers. The credit was provided to the migrating customer because the utility avoided costs such as commodity procurement costs and uncollectibles. For the generation component, the ESCO could charge the NYISO market price or a contract price from another generator or a price it paid for out-of-state power. If the ESCO charged the market price, it could charge the customer upto the retail access credit as an adder. If the ESCO went over the market price it could charge less than the credit as an adder. The ESCO competed well against utilities and enjoyed high success rates provided it charged up to the retail access credit. This was because customers benefited if the difference between the credit they received and the adder they paid to the ESCO was positive. For large industrial customers buying millions of electric kWh, the ESCO received a large amount of money through the adder. This helped ESCOs remain profitable and encouraged them to enter the New York market. Findings: number of ESCOs, migration to ESCOs, electricity rates, customer savings and choices
Number of ESCOs
As of March 2004, there were approximately 50 energy service companies13 that met PSC requirements to provide service in New York. There were 33 companies actively serving customers, while remaining companies planned to serve customers in the future. For example, there were 2214 ESCOs in O&R service territory that met PSC requirements to provide service. Eleven of these companies were actively providing service to customers. All 11 provided service to non-residential customers, but only 6 offered service to residential customers. As shown in Table 1, all utility markets were actively served by at least one ESCO.
As shown in Table 2, by December 2003 approximately 23.7% of large time of use (LG TOU) non-residential customers in New York migrated to alternative suppliers, which represents 45.1% of LG TOU load. Eight percent of other non-residential customers migrated to alternative suppliers, which represents 26.0% of their total load. Four percent of New York state residential customers migrated to alternative suppliers which represents 5.9% of total residential load. O&R, the utility with the highest migration rates saw 28.8% of customer accounts migrating to alternative suppliers, which represents 39.5% of O&R’s total load. 19.0% of O&R’s non-residential LG TOU customers migrated to alternative suppliers which represents 50.3% of O&R’s LG TOU load. RG&E, the utility with the second highest migration saw 13.1% of customers migrating to alternative suppliers, which represents 21.8% of RGE’s total load. Forty-five percent of RGE’s LG TOU customers migrated to alternative suppliers which represents 35.3% of RG&E’s LG TOU load. The migration rates for LG TOU customer accounts were high for Con Ed, NIMO and NYSEG as well. The rates were 66.4% for Con Ed, 46.6% for NIMO and 37.7% for NYSEG. These represent 79.4%, 35.8% and 65.5% of their LG TOU load respectively. Residential customer migration was significant for O&R and RG&E. Approximately, 29% of O&R’s residential accounts migrated to ESCOs which represents 32.9% of O&R’s residential load and 11.7% of RGE residential customers migrated to alternative providers which represents 6.8 % of RGE’s residential load.
Reasons for migration of large business customers to ESCOs
High percentages of large non-residential customer accounts in New York State have switched to ESCOs. First, large customers receive lower prices from alternate providers. ESCOs are able to offer lower prices to large customers because of the lower costs of acquiring and maintaining large customer accounts. This is similar to a car dealership that is able to sell one thousand cars to a car rental company at a lower price than one thousand cars to individual customers. The costs of acquiring and maintaining one large customer are smaller than the costs for one thousand customers. ESCOs in New York are offering very attractive pricing options to their industrial customers. For example, Energetix18, an ESCO active in RGE’s service territory, offers a variable market-based price to its business customers using less than 25,000 kWh per month, but it offers custom pricing options to customers using more than 25,000 kWh per month. The company’s energy consultants work with the large customer to determine usage and business priorities. Then the ESCO creates a pricing plan that fits the current and future needs of the business. Second, larger customers tend to be more knowledgeable and more aware of alternative suppliers. Their larger usage or kWh consumption gives them more leverage with the ESCOs putting them in a better position to negotiate with the company. Finally, ESCOs target large customers because they are able to sell them more services like energy management services, operations and maintenance services. They prefer to sell a package of services rather than just kwhs to their customers. ESCOs in New York are offering appealing services to their large business customers. For example, Keyspan Energy Services, an ESCO in Con Ed’s service territory, provides integrated engineering, mechanical contracting, and facility operations and maintenance services for large scale clients19.
Reasons of migration from certain utilities to ESCOs
Large percentages of customers have switched from certain utilities to ESCOs. This migration to alternative providers occurred for the following reasons. First, because ESCO rates were less volatile than utility rates (most ESCOs were buying from the market on a month-to-month basis). For example, large percentages of O&R customers migrated to alternative suppliers because O&R’s prices were highly volatile. Customers switched because it was painful to stay with the utility and ESCOs provided stable prices. Second, migration from certain utilities to alternate providers occurred because these providers tailored advertising to fulfill individual customer needs. For example, large percentage of RGE customer accounts migrated to ESCOs. RGE’s prices were fixed20 and customers did not migrate to alternate providers because of price volatility. They migrated because the retail access credit for all customers (residential, commercial and industrial) was 4 mills per kWh. The higher retail access credit made it profitable for ESCOs to enter the market. Since ESCOs were making profits, they spent money to attract customers on an individual basis. Hence, the high migration from certain utilities to alternative suppliers occurred either because ESCOs provided more stable prices, or because ESCOs were making profits and were able to spend money to attract customers. Electricity rates and savings
Electricity rates have declined and customers have saved money as a result of the settlement agreements and restructuring plans approved at the start of deregulation. Con Edison’s settlement agreement led to customers paying $1.6 billion21 less over the course of the agreement, from January 1998 to March 2002. These savings were calculated by projecting what rates would have been over that time period without the agreement versus what the utility would collect as a result of the agreement. Rate changes prior to October 2000 were to bundled rates (delivery and commodity). The vast majority of those rate changes can be attributed to the delivery portion of the bill. Rate changes after that were entirely due to delivery price reductions.
NYSEG’s rate and restructuring plan provided for overall customer savings of $749 million22 from March 1998 to March 2003. NYSEG’s savings were calculated in the same fashion as Con Ed savings. NIMO’s PowerChoice Rate and Restructuring Plan saved customers over $657 million23 from September 1998 through August 2003. All of this decrease was related to delivery costs. RG&E’s rate reduction and restructuring plan provided cumulative rate savings to customers of $113.9 million24 between November 1997 and June 2002. These changes were to bundled rates and were based on expected changes to delivery and commodity costs. O&R’s four-year rate and restructuring plan led to $40.5 million25 in savings for customers from November 1997 to November 2001. All of this decrease was related to delivery costs. CHG&E’s plan provided customers with $20.3 million26 in benefits over three and a half years, from February 1998 through June 2001. These benefits can be attributed to decrease in delivery rates. Hence the collaborative agreements led to a decline in rates especially delivery rates and increased savings for New York customers.
Increased choices for customers
Deregulation in New York has led to greater choices for customers in the form of innovative pricing mechanisms and offers of green power. The innovative pricing mechanisms include real time pricing plans, fixed versus variable pricing and discounted delivery pricing. NIMO offers its customers real time pricing where customers receive hourly energy price information based on actual market conditions. This helps customers manage their energy use efficiently. NYSEG offers its customers choice between a fixed rate option and a variable rate option. The fixed rate is a regulated rate and does not change for two years. The variable rate option is a competitive rate. It includes a commodity portion linked to market prices and an adjustment in the delivery portion that mitigates market volatility. NIMO provides discounted delivery pricing to its business customers. The utility provides discounts to attract, revitalize and relocate business in its service territory. NIMO also offers its customers an option to buy green power27 at a premium. This option gives customers the choice of environment friendly supply sources. New York customers are also enjoying a variety of products and services offered by energy service companies. ESCOs are offering green power, energy efficiency services repair, maintenance and other services to customers. For example, Econnergy28 provides energy-related products and other services to customers in O&R’s service territory. The company provides customers the choice of green power and also offers its customers national and international long distance service at attractive rates. First Rochdale cooperative, an ESCO active in Con Ed’s service territory, provides energy management solutions to its business customers. The company helps businesses integrate clean technologies like solar power, micro turbines and fuel cells, efficient heating and lighting systems into their facility to lower energy costs29. Con Ed Solutions, another ESCO active in New York State, offers energy efficiency, maintenance and energy information services to business customers30. It helps business customers generate cost savings through energy management solutions, provides preventative maintenance for equipment, and informs customers about high spot market electricity prices so they can use energy efficiently. The company offers home security systems, energy saving products, home maintenance, repair services and back up power technology to its residential customers31. Conclusion
This study demonstrates that New York has been successful in creating an environment for alternate providers to flourish and for customers to choose alternative energy suppliers in the state. The state has also been successful in lowering rates and providing customers with savings as a result of its deregulation model. Customers have increased choices in the form of innovative pricing mechanisms, environmentally clean power and other products and services offered by energy service companies. The administrative proceedings at the start of deregulation have been helpful in ushering in competition. The state has shielded its customers from price volatility, even though it did not use standard offers to facilitate deregulation of the electric industry.
There are approximately 33 ESCOs active in the state. The large number of active ESCOs implies that it is profitable for alternate providers to enter the electricity market. The state has managed to lure these providers because ESCO rates were designed to include an adder that resulted in a large amount of money for the ESCOs. This made it attractive for them to enter the market and spend money to attract customers. Customers have migrated to alternate suppliers because the Commission encouraged utilities to divest generation as part of the restructuring plans and utility rates were linked to market prices. Customers like the stable prices offered by some ESCOs. In addition, customers receive a credit for switching to alternate suppliers. ESCOs through the adder have the money to tailor advertising to meet individual customer needs. ESCOs are making profits and are able to spend money to attract customers on an individual basis. High percentages of large business customers have switched to alternate providers because ESCOs offer lower prices and diverse services to attract these customers. New York has been successful in providing high savings and lower rates for its customers. The administrative process and follow-up individual utility settlement agreements allowed deals between the Commission and utilities that brought down rates, especially delivery rates and led to savings for customers. Individual agreements with utilities allowed a diverse group of parties to reach a consensus on ways to provide rate reductions for customers and led to significant savings. For example, the Competitive Opportunities and restructuring proceeding for Con Ed led to $1.6 billion in savings for its customers. The Commission has managed to protect customers from price volatility even though it did not use standard offers. Initially, utilities reduced rates as part of the price reduction and restructuring plans negotiated with the Commission. Second, most utility rates have an adjustment or hedge in the delivery portion to mitigate market volatility. Third, to the extent ESCOs are offering stable prices (most ESCOs buy from the market on a month-to-month basis), customers who have switched face less price volatility.
The New York Commission has done everything short of forcing customers to switch and short of providing standard offer prices to facilitate competition. The Commission encouraged utilities to divest generation and linked utility prices to the market. To the extent ESCOs offer fixed prices, customers who switch enjoy stable prices. The Commission has also made it attractive for ESCOs to enter the New York market, by designing ESCO rates to include the adder. Consumers are enjoying the benefits of competition in the form of greater choices in purchasing energy products and services from a large number of companies seeking to attract or retain customers. For example, customers can choose to buy power from environmentally clean sources. They can receive real time pricing information from their utility to manage power efficiently and can choose between different pricing options. Business customers have a choice of discounted delivery rates. Customers can also choose to buy other services from energy service companies, including engineering, mechanical and maintenance services for large business customers; home security, repair and power quality services for residential customers. To summarize, administrative proceedings in New York have paved the way for increased providers and choices for customers, especially large business customers. Customers have been protected from price volatility and have enjoyed the benefits of competition even though the state did not use legislative proceedings and did not introduce standard offers.
1 Retail competition – Retail customers can choose from a variety of energy suppliers.
2 Standard offer rates - Standard offer rates are guaranteed rates set by public utility commissions and offered by electric companies to their customers. These rates protect consumers from price volatility in a competitive marketplace until sufficient numbers of alternative providers enter the market and markets become truly competitive.
3 Judith A. Lee – Chief Administrative Law Judge, Office of Hearings and Alternative Dispute Resolution, Department of Public Service. The Department is the staff arm of the PSC.
4 Mr. Ronald Liberty – Deputy Director in the Department of Public Service’s Energy and Water Division, at that time.
5 CASES 94-E-0952 et al. - In the Matter of Competitive Opportunities Regarding Electric Service, opinion and order regarding competitive opportunities for Electric Service, issued and effective: May 20, 1996. http://www.eia.doe.gov/cneaf/electricity/chg_str/new_york.html
7 The retail price of electricity is equal to the price of generation services plus the price of delivery services. The price of generation services is dependent on the market price of electricity and contract prices. The price of delivery services equals the regulated price of transmission and distribution services and any other fees.
8 Regulated prices are equal to the average costs of producing and delivering the electricity to the customer, including a regulated return on investment in plant and equipment. There is no separate pricing of generation, transmission and distribution services.
9 NYISO-New York’s Independent System Operator. The NYISO oversees a wholesale market in which power is purchased and sold on the basis of competitive bidding.
10 Stranded costs – Costs of investments in expensive generating plans or fuel contracts or power contracts incurred under regulation that cannot be recovered through lower competitive prices. Utilities are permitted to recover these costs through the stranded cost recovery component.
11 Systems Benefit Charge – Charge that funds environmental programs and energy efficiency programs for low-income customers
12 ESCO – Energy Service Company, entities judged eligible by the Department of Public Service to provide electricity and associated customer service functions to end use customers in New York State. The following terms are interchangeable in this article - ESCOs, alternate suppliers, alternate providers.
16 Migration – customer switching from utility to alternative supplier
20 RGE has a bundled rate regulated by the Commission under the old model.
21 Consolidated Edison – Case 96-E-0897 – Adopted 9/12/97
Agreement in effect from 1/1/98 to 3/31/02
Con Edison was supposed to get an $87.1 million rate increase on 4/1/97 as part of Case 95-E-0182. This increase was forgone as part of Case 96-E-0897. The savings to ratepayers are part of the total cumulative impact of Case 96-E-0897.
$87.1 million * 5 years = $435.5 million
1/1/98: $27.7 million rate reduction * 4.25 years = $117.7 million
4/1/98: $101.7 million rate reduction * 4 years = $406.8 million
4/1/99: $79.9 million rate reduction * 3 years = $239.7 million
4/1/00: $102.8 million rate reduction * 2 years = $205.6 million
4/1/01: $208.7 million rate reduction * 1 year = $208.7 million
Total cumulative savings due to Case 96-E-0897 (including the forgone rate increase from 1997): $1,614,025,000
22 New York State Electric and Gas – Case 96-E-0891 – Adopted 3/5/98
Agreement in effect from 3/98 until 3/03.
NYSEG was supposed to get a $45.25 million rate increase in August 1996 and a $45.5 million increase in August 1997 as part of Case 94-M-0349. These increases were forgone as part of Case 96-E-0891. The savings to ratepayers are part of the total cumulative impact of Case 96-E-0891.
$45.25 million * 6.66 years = $301.4 million
$45.5 million * 5.66 years = $257.5 million
5/15/98: $7.3 million rate reduction * 4.88 years = $35.6 million
3/3/99: $8.7 million rate reduction * 4 years = $34.8 million
3/3/00: $16.0 million rate reduction * 3 years = $48.0 million
3/3/01: $6.0 million rate reduction * 2 years = $12.0 million
3/3/02: $60.0 million planned rate reduction * 1 year = $60.0 million
For the last year, the company entered into a new five year rate case, with a rate decrease of over $200 million. Since the original case called for a rate reduction of $60 million on 3/3/02, an argument can be made that $60 million of the $200 million was related to Case 96-E-0891.
Total cumulative savings due to Case 96-E-0891 (including the forgone rate increases from 1996 and 1997): $749,300,000
23 Niagara Mohawk – PowerChoice Agreement – Adopted 3/20/98
Agreement in effect for 5 years.
9/1/98: $49.6 million rate reduction * 5 years = $248.0 million
9/1/99: $31.9 million rate reduction * 4 years = $127.6 million
9/1/00: $19.9 million rate reduction * 3 years = $59.7 million
9/1/01: $111.0 million rate reduction * 2 years = $222 million.
The $111 million change on 9/1/01 is the delivery change and does not include the change in commodity price that took place at the same time. This is because rates were unbundled at this time. Rates were bundled until 9/1/01.
Total cumulative savings due to the PowerChoice Agreement over the full term of the agreement (9/98-8/03): $657,000,000.
24 Rochester Gas and Electric – Case 96-E-0898 – Adopted 11/25/97
In effect from November 1997 through June 2002.
11/26/97: $3.5 million rate reduction * 4.5833 years = $16.0 million
7/1/98: $5.9 million rate reduction * 4 years = $23.6 million
7/1/99: $9.8 million rate reduction * 3 years = $29.4 million
7/1/00: $9.9 million rate reduction * 2 years = $19.8 million
7/1/01: $25.1 million rate reduction * 1 year = $25.1 million
Total cumulative savings due to Case 96-E-0898: $113,900,000.
25 Orange & Rockland – Case 96-E-0900 – Adopted 11/25/97
4 year agreement, November 1997-November 2001.
11/26/97: $7.011 million rate reduction * 4 years = $28.0 million
11/26/98: $2.919 million rate reduction * 3 years = $8.8 million
A one-time pass-back of $3.75 million was instituted on 3/16/00 to refund customers the net proceeds of divesting generation plants. This is included in the total cumulative impact of Case 96-E-0900, since divestiture was a part of the case.
Total cumulative savings due to Case 96-E-0900: $40,551,000.
26 Central Hudson – Case 96-E-0909 – Adopted 2/19/98 Agreement in effect through 6/30/01
6/30/98: $3 million rate reduction * 3 years = $9 million
1999: No rate change
2000: No rate change
1/22/01: $27 million rate reduction * 0.417 = $11.3 million
Rates were reduced by approximately $27 million on 1/22/01 to reflect Central Hudson's auction of fossil generation and to provide unbundled rates and retail access to all customers. This was done as part of Case 96-E-0909.
The total cumulative savings due to Case 96-E-0909 were approximately $20.3 million. ($9 million + $11.3 million)
27 Green power is power generated from environmentally clean renewable resources like wind, solar, geothermal, hydro and biomass