Deregulators: Can Cuomo's Energy Overhaul Improve on Past Deregulation?

In April, Gov. Andrew Cuomo unveiled a groundbreaking proposal to transform New York’s electric utilities. The proposal, billed as the Reforming Energy Vision initiative, conceives of industrial customers, small businesses and residents producing more and more of their own energy—much of it through environmentally friendly sources like solar and wind—while shifting electricity generation away from the large power plants that have dominated the industry for generations. In time, New York would thus usher in a utopia of lower energy costs, greater resiliency and cleaner air. 

“What the governor is doing in New York State is to start writing the rules of the road, creating a market-based system so that our utilities will evolve to be that more decentralized power system,” Gil Quiniones, the president and CEO of the New York Power Authority, said during a recent City & State conference. “And that will spur innovation, and that will spur investment in the grid.” 

This effort isn’t the first time that the state has reenvisioned its energy system in an attempt to harness the power of the free market. And the last major overhaul earned mixed reviews. 

In the late 1990s, New York and a number of other states began moving toward “deregulated” power systems. The transition, following the opening up of other monopolized industries like telecommunications, was aimed at injecting private sector competition into the mix. Gov. George Pataki spearheaded the deregulation of New York’s wholesale electricity market, persuading utilities like Consolidated Edison to sell off their power plants to independent producers. 

It wasn’t long before that appoach came under sharp scrutiny, however. The most notorious case was in California, where Enron was accused of exploiting the state’s new market structure to restrict supply and rake in profits, and was widely blamed for a series of major blackouts in the early 2000s. In 2007 Marilyn Showalter, a former Washington State utility regulator, analyzed federal data and found that deregulated states experienced steeper rate increases—the opposite outcome of what was intended. Showalter’s figures demonstrated that New Yorkers would have saved $1.65 billion in 2007 if the state’s prices had risen at the same rate as states that were still regulated. 

“Consumer organizations and pro-regulation advocates have done studies that basically indicate that the prices that are charged are overcharges, that the prices are too high, and that they reflect the lack of competition in these markets and the ability of the producers to—in combination with the wholesale operations that they control—to charge way in excess of what a normal competitive price would be,” said Assemblyman James Brennan, whose office came to the same conclusion when it replicated Showalter’s study a few years ago. “Obviously, the industry has their own opinion.” 

Industry representatives counter that the market structure in place for more than a decade in New York has resulted in lower power plant emissions, has shifted the financial risk from customers to private investors and has improved reliability, especially during the hottest days of summer when the system is under the most stress. 

Some utility experts also note that the term deregulation itself is misleading, since the Federal Energy Regulatory Commission still regulates the wholesale market, and New York power producers are subject to oversight by the state’s Public Service Commission (PSC). A better description, they say, is that the market has been restructured or reregulated. 

Gavin Donohue, the president and CEO of Independent Power Producers of New York, Inc., a trade group, argued that Brennan’s analysis was fundamentally flawed, and that the real problem as to cost is a set of state taxes and fees built into energy bills. A proposal by the assemblyman to reregulate the market would be unworkable, Donohue said. 

“If you take it to where Brennan wants to go, and say, ‘Well, we should go back to the old system,’ the state of New York would be literally bankrupt, with what they would have to pay these folks to get those power plants back,” Donohue said. 

Where everyone agrees is that the REV initiative, currently under review at the PSC, will take years to plan for and to implement, and that many tough questions remain unanswered. To what degree can the energy grid rely on solar and wind, which are not always available? Will energy storage technology develop enough to be viable on a broad scale? Will alternatives like natural gas or diesel generation spread throughout cities and neighborhoods in an increasingly decentralized system pass muster with environmentalists? 

As for who will build out the upgraded system, and how everyone will get paid, that question—likely to be answered by state officials—serves as another reminder that the next step in deregulation will continue to leave plenty of regulation in place. 

“We’ve deregulated the wholesale market. Con Edison does not own power plants today to sell electricity to consumers,” said Quiniones, who suggested that utilities would take on the role of overseeing a restructured retail market. “So we kind of have started, the fact that they’re really just delivery utilities. They get paid for delivering the utility and, if we add the role of traffic cop, should be appropriately compensated by the various distributed resource providers that deliver electricity. We just need to set up the right compensation scheme so that utilities like Con Ed are properly compensated, [and] they are able to invest and maintain the reliability that we need here in New York City.” 

Compared with deregulation of the telecommunications industry, which has spurred a new era of technological innovation and competition, the restructuring of New York’s energy markets has been relatively limited so far, said Charles Zielinski, a Washington, D.C.-based energy lawyer and a former chair of the PSC. 

“The electric industry, historically, while it’s done a good job providing service—Con Edison has a terrific record, in terms of service reliability, bar none, when you look at it compared to other electric utilities—but the fact of the matter is, it’s not been very innovative in developing new technologies,” Zielinski said. “If you look at what we have today basically providing electric service, it’s the same technology we had 50, 60, 70 years ago. There’s been very little in the way of new development.” 

Cuomo’s Renewing Energy Vision could change all that, Zielinski asserted. 

“The newer technologies, the stuff that Mr. Quiniones was referring to, such as solar and wind, have also been around, but they haven’t been developed to the point they are being developed today so that the cost can be brought down by the utility industry or through private incentives that have been developed,” he said. “So to the extent that what Mr. Quiniones referred to—the governor’s initiative and what the Public Service Commission is doing—can bring more of that into the electric industry, if we see the telecom industry as being the model for that, I think that’s going to be helpful.”