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IssueAlert for  April 6, 2001

Future Looks Dark for New York Market; 
NYSEG Outlines Energy Policy

by Will McNamara 
Director, Electric Industry Analysis

[News item from Reuters] New York State Electric & Gas Corp. (NYSEG), one of 
New York's seven utilities, said the state will not have enough megawatts to 
support a truly competitive wholesale electric market until 2008. NYSEG, in a 
report issued late Wednesday, warned there are "serious problems with (New 
York's) generation supply and a lack of transmission and pipeline 
infrastructure." The report challenges a market appraisal by the New York 
Independent System Operator (NYISO), which has run the state's wholesale 
power market since 1999. The NYSEG report, titled ``New York State's Electric 
Energy Crisis and NYSEG's Comprehensive Solution,'' criticizes the NYISO for 
not giving power consumers "price certainty" in the transition from local 
monopolies to an open, competitive market. 

Analysis: New York can now officially be added to the list of troubled energy 
markets, as market projections and fundamental structural problems spell out 
an alarming prognosis for the state as it heads into the summer season. 
However, unlike California, which basically faces a power supply problem that 
can be improved over time, New York arguably suffers from a more severe and 
permanent set of conditions that cannot be easily resolved. Like its West 
Coast counterpart, New York also suffers from a supply / demand imbalance and 
local resistance that thwarts new generation development. However, even if or 
when power supply can be increased in New York, the core load center of New 
York City still suffers from inherent transmission deficiencies that continue 
to take their own toll on the stability of the market. 

Various stakeholders in the New York market have now begun to place blame on 
each other in advance of what could shape up to be a very problematic summer. 
As noted, in its new report, NYSEG, a subsidiary of Energy East (NYSE: EAS), 
is especially critical of NYISO, which it says has contributed to soaring 
wholesale prices in New York. NYSEG also blames NYISO for outlining 
unrealistic goals for new power supply, not providing accurate price signals 
to energy customers, and for not doing enough to solve immediate problems.  

Yet, beyond the finger pointing, some essential facts can be established, on 
which both NYSEG and the NYISO apparently agree. According to data included 
in the NYISO report, between 1995 and 2000, while statewide demand in New 
York rose by 2,700 MW, generating capacity under contract in the state 
increased only by 1,060 MW. New York has not brought a new plant online since 
1996, when a 200-MW plant opened in Brooklyn. It has been almost seven years 
since a 1,000 MW unit in Oswego, N.Y. marked the last plant to open upstate.  

In addition, New York suffers from severe transmission bottlenecks. Deficient 
transmission systems in central New York, around New York City and at the 
outlining borders to other states and Canada limit the amount of power than 
can be imported into the state. New York City is relatively isolated from the 
transmission grids that serve the rest of the state and must rely heavily on 
city-based power supply. New York City's load should reach 10,535 MW this 
summer alone, requiring 8,428 MW of in-city capacity, along with imports, to 
meet demand and provide a reserve margin. With a current capacity of 8,132 
MW, there is a potential 296 MW shortfall. These projections presume normal 
weather conditions. If New York experiences a warmer-than-normal summer, the 
outlook gets even worse.  

Further, according to a report from New York's State Attorney General, 
between 1988 and 1998 capital improvements to New York's transmission system 
dropped from $307.7 million per year to $90 million per year. At the present 
time, only one major addition to the transmission system in the state is 
scheduled. A proposed underwater line linking Long Island to Connecticut 
would provide Long Island with about 300 MW of additional power and increase 
its import capacity by about 4 percent. Unless this transmission expansion is 
expedited, it is not scheduled for operation until 2002.  

Consequently, given all of these factors, power supplies in New York most 
certainly will be strained this summer when warmer temperatures drive up the 
use of air conditioners, pushing demand to annual highs. While NYSEG and the 
NYISO may agree on the nature of New York's problems, a contentious debate 
has emerged with regard to finding a solution. In its own proposal, released 
in early March, the NYISO focused on building new generation, expediting 
siting processes, improving transmission lines, and conservation efforts. In 
one of its key proposals, the NYISO urged the creation of 8,600 MW of new 
electricity (roughly 30 percent of New York's peak demand) by 2005, with up 
to 5,000 MW of that generation being made available by the end of 2001.  

NYSEG immediately denounced the plan for "falling short in its assessment of 
the magnitude of the crisis" and issued its own proposals in its recent 
report. For instance, NYSEG officials said that NYISO had "grossly 
oversimplified the situation" and that, considering the tenuous state of 
power construction in New York, the objective of establishing 8,600 MW by 
2005 was "extremely unrealistic." In turn, NYSEG says that a robust wholesale 
electric market will not materialize in New York until 2008, assuming that 
measures to repair the problems in the state are taken immediately. In early 
March, NYSEG released the "NYSEGPlan," outlining six steps which it believes 
"contain the real solutions to ensure a successful transition" to a 
competitive market in New York. In summary, the NYSEGPlan includes: 

Streamlining the siting and approval process to build new generating plants. 
Adding to the state's transmission capacity.  
Adding to the state's natural-gas supply infrastructure.   
Creating a regional transmission organization to increase supply liquidity. 
Reinforcing the need for wise energy use by all consumers, by encouraging 
interruptible load where feasible, and building the technological 
infrastructure necessary for real-time pricing. 
Approving the NYSEG Price Protection Plan, in which electric rates would be 
frozen for seven years, by July 1, 2001. 

However, while NYSEG criticized NYISO for espousing unrealistic goals, the 
same obstacles inherent in New York's market might also thwart its own energy 
plan. For instance, topping the list of NYSEG's six steps is an emphasis on 
establishing new generation in New York through a streamlined siting and 
approval process. This may be easier said than done. As I mentioned in my 
3/22/01IssueAlert, the opposition to new power plants in New York equals the 
lobbying force that community groups in California wield. In that column, I 
discussed the fact that Sithe Energies has downscaled a proposed plant in 
Ramapo, N.Y. (from an 827-MW combined-cycle facility to a 510-MW peaking 
unit) due to opposition raised by local residents.  

In addition, just yesterday, a New York Supreme Court judged blocked efforts 
by the New York Power Authority (NYPA) to build two 44-MW gas-fired 
generators in the borough of Queens. The Supreme Court judge order NYPA to 
"cease all construction on the units" and ruled that the power authority 
violated state environmental-review laws to its efforts to rush the plant 
into service by June. In response, NYPA has said that the plants*along with 
nine others that it is hoping to build throughout New York City*are needed to 
prevent power outages this summer. NYPA continues to face fierce opposition 
from community groups (many of them launching lawsuits) who do not want the 
generation units in their neighborhoods.  

Consequently, the supply / demand imbalance in New York is a very serious 
matter, and one that residents in the state may not fully appreciate unless 
blackouts occur. Until the core problem of insufficient transmission lines 
surrounding New York State and New York City are solved, adding new power 
supply (assuming that generation development can move past community 
opposition) would not be enough to bring more balance to the market. In the 
interim, conservation efforts may truly be the only tool that New Yorkers can 
user to abate power outages this summer, but again the general public may not 
fully understand the need to reduce their power usage.  

New York basically has three options at this point to prepare for near-term 
problems. First, expedite the building of new generation sources (including 
distribution generation alternatives). This assumes that gas lines will be 
sufficient to import necessary fuel. Second, allow the economy of New York 
City to stagnate as a result of the supply / demand imbalance, which will 
drive residents out of the city and in turn reduce demand. And, third, focus 
on conservation efforts, which again may not work until residents are 
directly impacted by outages. The city may choose a combination of all three 
approaches or decide to focus on just one. However, to address the immediate 
concerns, it does not appear that New York has any options besides this 
three-tier approach. 

One point that bears mentioning is the similarity between California and New 
York regarding the position that both states took on divestiture. Although it 
is not completely accurate to say that either state officially mandated 
divestiture, utilities in both California and New York felt intense pressure 
to divest and submitted restructuring plans that included the sale of most of 
their power plants. NYSEG, the author of the new report on New York's power 
problems, is one utility that sold all of its generation assets and will 
remain only in the transmission business. This most likely creates a 
heightened sensitivity on NYSEG's part with regard to the power supply 
shortages presently facing New York. Again, we now have two states that 
represent the array of problems that can result when the vertical utility 
model becomes dismantled. Of course, it is not fair to say that divestiture 
is the sole source of the current problems in California and New York, but 
taking away a utility's ability to effectively control is own power supply 
costs certainly contributed to the vulnerability in both states.  

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com




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