HAS DISAGREEMENT BETWEEN STATE HOUSE AND COMmission stalled electric industry restructuring efforts in New York?

Sheldon Silver, speaker of the New York State Assembly, insists the Legislature is busy working on comprehensive restructuring legislation for the state. He has expressed dismay at efforts of the New York Public Service Commission, which is restructuring the industry utility by utility.

Silver believes legislation offers the best chance to introduce competition quickly and efficiently, rather than through multiple, individual restructuring plans. Moreover, there appears to be general agreement in the state on the need for action regarding stranded costs, securitization and the state's gross receipts tax.

In February, at a meeting of financial analysts in New York City, Silver noted that the Association for the Advancement of Retired Persons had withdrawn from restructuring hearings because it had felt the PSC had left the public out of the process. He questioned whether the PSC had "forgotten" the people who pay the bills: "The problem in New York is that there is no one to talk to."

Speaking at the same meeting, then deputy PSC chairwoman Maureen Helmer had disagreed, defending the commission's piecemeal process, built around decisions in individual cases.

Last month, however, the outlook may have shifted, as the republican PSC chairman John O'Mara announced he would resign from the commission effective April 15. That move gave Gov. George Pataki the opportunity to name Helmer the new PSC chair, plus appoint a new commissioner to serve out the remainder of O'Mara's term, which expires on Jan. 31, 1999.

Battling Over Tactics

One problem New York must overcome to develop legislation, says Helmer, is the patchwork of energy "mistakes," across New York state, "Many of which have been caused by government."

This patchwork has led to rate disparities and other concerns. For example, the problems of Niagara Mohawk Power Corp. in dealing with independent power producers varied greatly from the task that faced Long Island Lighting Co. in unloading the Shoreham nuclear plant. The PSC did not require LILCO to file a restructuring plan. Instead, LILCO's electric customers should see savings through (1) the company's transfer of its Shoreham plant and transmission and distribution assets to Long Island Power Authority, and (2) LILCO's merger with Brooklyn Union Gas Co., which will send LILCO's remaining non-nuclear generating assets to KeySpan Energy Services Corp., the holding company for Brooklyn Union.

On April 22, the New York Public Authority Control Board authorized up to $5.23 billion in tax-exempt bonds for the takeover, after the LIPA board had OK'd an immediate 20 percent rate cut for former LILCO customers on April 9. Seth Hulkower, executive director of LIPA, who confirmed the PACB action, says the takeover should take place toward the end of May or early June.

In fact, the PSC approved the LILCO/Brooklyn merger effective April 14. The settlement promises savings of 3.21 percent for LILCO electric customers through credits for reductions in base rates. (Case 97-m-0567, Opinion No. 98-9, April 14, 1998.)

"The PSC cannot solve these situations by saying that all customers should have a rate cut of 'x' percent," Helmer said in February. "The same solution will not fit all customers."

Helmer quipped that Silver "apparently is hanging by a cliff and talking to God and not liking the answers." She explained the PSC was restructuring the electricity industry using a bottoms-up approach. "This process began in 1993 and is based on the recommendations of more than 90 diverse parties," she added.

Many of the larger New York utilities have cut their own deals with generators, which has slowed the pace of deregulation in that state, said Dan Scotto, senior managing director of Bear Stearns & Co. He predicted that New York would be more active during the next year.

Silver questioned whether the market that will emerge from the PSC's efforts truly will offer competition. He said New York utilities charged the highest electric rates in the nation. For example, he noted that in 1996 New Yorkers paid an average of 62 percent more than the national average for their electricity. The disparity continues to widen each year.

"You don't have to be a financial analyst to see that right now New York continues to go in the wrong direction," Silver said. "I think therefore it is fair to say that ongoing attempts to reduce rates and start competition are not working." He said PSC rate cuts for small businesses are "minuscule" and "nonexistent" for homeowners (em all at the benefit of large industrial customers.

Silver pointed to the takeover of the Long Island Lighting Co. by the state's Long Island Power Authority, and noted that the contract guaranteed rate cuts that were enabled due to the use of tax-exempt financing. He pointed out that the governor made sure in that deal that all customer classes, not just large industrial customers, would receive equal savings. In fact, that deal came closer to realization in March when the Internal Revenue Service issued a ruling allowing LIPA to move forward. LILCO will issue $7.3 billion in municipal bonds as approved by the IRS. The IRS further ruled that revenues produced by LIPA's utility business would not be subject to federal income taxes.

Helmer defended the PSC's efforts. She said the PSC decided to provide larger rate decreases to industrial customers under rate cap plans. This action was based on the belief that industrial customers needed a bigger boost given the state of the economy in New York. Generation of new industrial jobs has languished in the state due to high electricity rates. To retain an industrial clientele, the PSC realized it needed to provide faster rate relief.

Working Out the Details

The issues of securitization, stranded costs, and the state's gross receipts tax have generated a bit more cohesion between state house and commission.

Silver noted that in every state that has passed securitization legislation, it was either part of a general restructuring bill or passed after a comprehensive bill.

"Here in New York, the calls for securitization have deteriorated to desperate claims and that's all." He explained that some parties have claimed that securitization alone could reduce rates by 7 to 10 percent; utilities say it's more like 1 percent. He said Niagara Mohawk Power Co., for example, probably cannot restructure some of their long-term IPP contracts without securitization. But that prediction proved untrue.

Helmer agreed there exists a short-term role for the Legislature regarding securitization. Helmer and Silver both feel that citizens are very uncomfortable with the issue. First, the Legislature needs to rename the proposed legislation, removing the word "securitization" and perhaps calling it something like "ratepayer relief," Helmer said. Second, it needs to tell consumers what it means.

A securitization bill, according to Silver, must follow three basic principles. First, public backing of any credit enhancement mechanism, such as an irrevocable rate that underlies securitization must be linked to the amount of ratepayer savings. Refinancing used to raise the bottom line, buy back stock and make investments in other states or foreign countries is not the way to reduce electric costs in New York, he argued. Second, securitization can't be a new barrier to competition. Third, securitization cannot be a mechanism for locking in higher rates.

Silver opposes any open-ended term for securitization. Ultimately, Silver would look to the federal government to offer tax-exempt financing to help make the transition to a competitive market while dealing with stranded nuclear plants. Silver believes such financing should be available not only in New York but throughout the country.

Silver also noted that the Public Power Authority of New York was planning to refinance $1.6 billion of debt to become more competitive with private industry. He questioned whether public power should compete with private utilities. He explained that a proposal has been made to restructure the power authority and create loan guarantee bonds that would reduce the need for securitization. He pointed out that the power authority had been created for a limited purpose and now would be at a competitive advantage. He said the assets of the power authority should be used to foster competition.

The PSC has said all along that utilities would be allowed to recover prudent, verifiable and non-mitigable stranded costs. Helmer explained that the stranded cost settlements vary across the board reflecting each utility's unique situation. However, in highlighting concerns of the financial community over a PSC solution to stranded costs, Dan Scotto has noted that a "general/vague policy implies less than full recovery."

Scotto has also cautioned that nuclear power could prove the "trump card" in the move to competitive markets. "At this stage of the evolutionary process, it is still unclear whether decommissioning will be the responsibility of the wire companies," he said. He pointed out that PECO Energy and Westinghouse, in particular, are approaching a showdown on the issues.

In March, the PSC announced that it would open its own inquiry on the future of nuclear power in a deregulated electricity market. At that time it reviewed industry comments on a skeletal nine-page report issued by commission staff. That report (Nuclear Generation in a Competitive Market for Electricity) recommended a public auction of nuclear plants to private buyers, but that the obligation to collect, fund and pay nuclear plant decommissioning costs should remain with the entity that owns the regulated transmission and distribution network. If the auction wouldn't fly, the staff would fall back on an administrative solution whereby the PSC would hold all so-called "to-go" nuclear plant costs (an undefined term but equated by some to "running costs") to a market-determined generation price. (PSC Cases 94-e-9052, 98-e-0405, March 20, 1998.)

Further complicating the nuclear situation, the four entities in New York that operate nuclear power plants (New York Power Authority, Con Edison, NiMo and Rochester Gas & Electric) have formed NYNOC, the New York Nuclear Operating Company, a new company put together to operate and manage but not own the state's six nuclear plants.

(As recently as 1996, New York's six nuclear plants accounted for almost one-fourth of the state's electric generation, according to the PSC. Two plants, about 1,780 megawatts, are owned by NYPA. The remaining four, with a total capacity of about 3,210 MW, are owned by the investor-owned utilities.)

Other issues remain as well. Helmer, for one, has advocated legislative reform on the issue of gross-receipts taxes. As the law now stands, she believes that in-state generators will be disadvantaged to out-of-state ones: "We've already seen on the gas side that companies are locating out of state."

A Unique Case: Niagara Mohawk

The most recent and controversial decision at the PSC on electric restructuring: Niagara Mohawk Power Corp. The plan, approved by the PSC in outline form on Feb. 24, and spelled out in greater detail in a decision issued March 30 would restructure the company's expensive purchased power contracts with independent power producers and qualifying cogeneration facilities.

Speaking in February, William F. Edwards, senior vice president and CFO of Niagara Mohawk noted that NiMo had entered the 1990s among the lowest-cost providers in the state. But that situation eroded as payments to QFs escalated from $200 million a year in 1990 to nearly $1 billion a year in 1995. The crises led to the filing in 1995 of a PowerChoice proposal with PSC. The linchpin was a reduction in IPP contract payments. But discussions with IPPs failed to progress.

Late in 1996, the utility decided a different approach was needed. In July 1997, it signed its Master Restructuring Agreement with the IPPs. As approved by the PSC, the MRA will terminate, restate or amend some 29 purchased power contracts with 16 IPPs, in exchange for a payment of $3.6 billion in cash, 46 million shares of NiMo common stock (about 25 percent of common outstanding) and a portfolio of financial and physical delivery contracts. Initially, the MRA will reduce NiMo's purchases from the 16 IPPs by about 5,000 gigawatt-hours per year, making that electricity available for purchase in an open market. More than one-half the capacity under IPP contracts will terminate (em about 1,800 megawatts (em which Edwards predicted would become the merchant plants of the future. The restructuring should reduce the utility's energy payments by about $600 million a year over the next decade.

The PSC commented on the settlement's unusual nature: "[T]he MRA [should] result in new contracts with IPPs that will afford NiMo greater operating flexibility¼ Nor are we troubled by NiMo using a portion of its common stock to pay the IPPs¼ [they] cannot use their combined interests in the company to improperly influence its operations. Were they to attempt to do so, we would investigate."

Overall, Scotto of Bear Stearns expects deregulation in New York and nationally will positively affect bond and equity investors. He predicted many bond ratings would be upgraded, as new entities on the transmission and generation sides find new ways of addressing debt and creating cash flow, resulting in more consolidations and buyouts.

He boldly predicted that in five to 10 years, 120 investor-owned utility companies will fall to about 20.

Lori A. Burkhart is a contributing legal editor for

Public Utilities Fortnightly.

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