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Deregulation sends electric bills soaring and you're surprised?

By Philip Lentz

When the state decided to make the electric industry more competitive a few years ago, we were told that, like the deregulation of long-distance telephone bills, the result would be more consumer choice and lower prices.

So consumers are in for quite a shock this summer. Electric bills will actually be going up by anywhere from 20% to 40% - and that's if we have a normal summer, temperature wise. If we have another heat wave like last July -- phenomena said to be a one-in-20-years occurrence -- electric costs could shoot up even higher.

And the cause of this electric sticker shock? Why deregulation, of course.

Strange but true.

How could this happen? It's a sad tale of well-meaning actions, but unintended consequences.

The most immediate reason for higher rates is that this summer, for the first time ever, Consolidated Edison will be buying its electricity in a competitive wholesale market.

In the past, Con Ed produced its own power at its own generating plants and sold it to its own customers. But Gov. George Pataki and his Public Utilities Commission (PSC) wanted to break up the monopoly utilities to create more competition. So it ordered Con Ed to sell its power plants.

The concept behind this divestiture was sound - over the long term. As power generation becomes unregulated, the theory goes, there will be more incentive for power generating companies to build new plants, produce more power and compete to sell electricity on the open market.

But that's the long term. For the short term, we have problems.

While the city economy has been rapidly expanding -- nearly 400,000 new jobs in the last six years -- no new power plants have been built here for the last decade.

That means we are using more and more electricity -- every new job means another computer on another desk that needs electricity to run -- but not producing any more power for all those new computers.

A temporary solution would be to buy more electricity from outside the city and import it. The problem is that there are limits to how much electricity can be brought in over existing transmission lines running into the city.

That means most of the city's electric needs must come from plants already within the city limits. And those plants are now owned, not by a regulated utility like Con Ed, but by private generating companies free to sell their power on the open market.

So this summer's energy market will be a classic example of Economics 101: When demand grows faster than supply, prices go up.

But electric rates are still regulated by the state, aren't they? Well, not exactly. It seems that PSC, as part of its deregulation policies, agreed to allow Con Ed to pass its higher energy costs right to you, the consumer, through what is called a "market supply charge" that is added to the electric bill of every consumer Con Ed serves.

So far, there hasn't been much public debate over these changes because energy deregulation has occurred pretty much under the radar screen of public attention. But that calm may very well be shattered as temperatures -- and electric rates -- rise this summer.

Higher electric bills are sure to set off a firestorm of controversy and, this being an election year, politicians will undoubtedly jump in. In fact, we are likely to see a welter of finger pointing as consumers blame politicians, politicians blame Con Ed, Con Ed blames the state, Democrats blame the Pataki administration and Republicans blame the Democrats.

The irony, of course, is that Governor Pataki decided to deregulate the electric industry to lower bills, not raise them. When the Governor was first elected in 1994, high electric costs were a big political issue on Long Island and upstate (less so in New York City, where we're used to high prices). So he hit upon deregulation as a strategy to increase competition and drive prices down.

Trouble is, untangling the electric system has proven to be awfully complicated, and lower prices now seem to be pretty far down the political horizon.

In fact, there is a good chance that the political backlash from this summer's higher electric costs could result in some type of re-regulation of the electric industry.

As they say, no good deed goes unpunished.

Philip Lentz is a reporter for Crain's New York Business


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