Historically, New York Cheap Electricity rates have been regulated by the Public Service Commission (PSC). The rate structure is defined by the PSC, and includes pure generation costs and cross subsidies, as well as administrative costs and load factor costs. The regulated retail price also includes the cost of reliability and social/environmental programs. These programs must be implemented by electric utilities. The utility must also provide customers with the option to shop for their electricity. This retail competition is intended to lower the cost of electricity to consumers.
New York State has initiated a major restructuring of its electricity purchase. As of April 1998, the restructuring will be completed and consumers will have a choice of electric suppliers. This restructuring is part of a national trend that is intended to drive down electricity costs. The New York experience will provide lessons for utilities across the country and around the world.
The New York State public service commission has approved utility plans to allow customers to choose their electricity supplier. The first phase of the plan involves the transferring of transmission and distribution systems from Long Island Power Authority (LIPA) and Long Island Lighting Company (LILCO) to LIPA. The second phase involves the addition of 1,000 MW of generating capacity. The plan is expected to produce approximately $3.3 million in revenues each year. It will also provide a source of funding for necessary public policy programs.
The first phase of the plan will include a reduction of 25 percent of the electric rate for all large industrial customers. This rate reduction will continue for the next five years. The rate reductions will exclude forgone revenues, and will also include the effects of the 1997 tax reduction. The second phase of the plan will begin in December 1998. The second phase includes an expansion of in-city generating capacity by 50 percent. The remaining half of in-city generating capacity will be sold to third parties.
In-city generating capacity is limited by transmission constraints. Currently, most of the generating capacity for in-city customers is owned by Con Edison. However, Con Edison is required to sell 15 percent of its in-city generating capacity to other companies. The second phase of the plan will include the transfer of additional generating capacity to Con Edison. These additional generating capacities must be purchased at a cost of at least 70 percent of the peak load for in-city customers. The plan will also impose cost allocation rules and restrict “revolving door” transfers of employees and common officers.
The plan also requires Con Edison to operate at arm’s length from unregulated subsidiaries. The benefits of these subsidiaries include name recognition, good will and credit standing. In addition, the affiliates may not occupy the same building as the regulated utility. They will also be required to pay substantial compensation for transfers of employees.
The plan will also require Con Edison to maintain at least 50 percent of its in-city generating capacity. However, once Con Edison sells more than 50 percent of its in-city generating capacities, the earnings sharing provision will no longer apply.