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N.Y. Isues Electric Restructuring Plan

Fortnightly Magazine - July 15 1996

The New York Public Service Commission (PSC) has issued a framework of goals and strategies for restructuring the electric industry in the state. The PSC directs all electric utilities in the state that have not yet initiated restructuring to file plans that will open the retail generation and energy-service markets to competition for all customer classes.

Market Structure (em PoolCo Model. The PSC adopted a "flexible retail PoolCo" model to ensure an orderly transition to retail competition. Restructuring begins with wholesale competition, including formation of a centrally dispatched, voluntary, spot-market power pool with an independent system operator (ISO) to ensure fairness in market transactions and guarantee system reliability. The pool will accommodate both "contracts for differences" and, eventually, individual retail "physical bilateral contracts."

Deregulation and Market Power. Once a competitive market is established, the PSC expects generation to be largely deregulated. Although it expects to limit market power by mandating utility divestiture of generating assets and energy service operations, the PSC has asked utilities to propose their own changes in corporate structure and to explain how market power will be alleviated. In addition, utilities must identify "load pockets" (em i.e., areas where transmission system limitations dictate the location of generation units to maintain reliable service. According to the PSC, the load pockets could create horizontal market-power concerns in an open market where competing generators set the price for energy production.

Public Policy Issues. The restructuring is motivated by PSC findings that a fully developed, competitive retail market should lower power bills for consumers by increasing incentives for cost control and opening the market to new and cheaper sources of electric power. Unacceptable shifting of costs to smaller users will be forestalled through a well-designed ISO market mechanism as well as "carefully designed revenue allocation and rate design of wires charges on the transmission and distribution system." The PSC also plans to use a "systems benefit charge" to fund conservation and research and development in environmental and renewable resource fields during the transition period. However, the PSC expects competition to promote market-based solutions to public policy issues and more aggressive marketing of energy-efficiency measures.

Stranded Costs. While finding itself not bound to compensate utilities for stranded costs, the PSC decided to consider recovery during individual rate cases. It noted, however, that any recovery mechanism for "utility strandable costs" might be assessed as a charge on the local distribution system, making the distribution charge from a customer's transmission and distribution company a reasonable place to access such costs. The PSC refused to adopt a generic method of stranded-cost recovery for above-market utility contracts with independent power producers, but warned that it would pursue polices to mitigate the impact of such contracts on rates if the parties prove unwilling to restructure contracts voluntarily. It also refused to modify existing flexible rate guidelines to accommodate a new nonbypassable stranded-cost charge, finding that such a move

might cause more customers to bypass the system.

Re Competitive Opportunities Regarding Electric Service, Cases 94-E-0952, et al., Opinion No. 96-12, May 20, 1996 (N.Y.P.S.C.).

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