Utilities ponder next offensive in battle with independents

CNY Business Journal (1994-95), May 01, 1995 by Hadley, Mark

BINGHAMTON--New York State Electric & Gas (NYSEG), Niagara Mohawk Power Corp., and other utilities around the state recently lost a battle in their war with independent power producers, but the war is far from over.

The Federal Energy Regulatory Commission (FERC) ruled against NYSEG on April 12 in the utility's bid to void long-term contracts with Lockport Energy Associates, L.P., and with Saranac Power Partners, L.P. The commission also reaffirmed an earlier decision in a case involving Orange & Rockland Utilities Inc. and another utility addressing the same issue. Niagara Mohawk was a party to the Orange & Rockland case.

Undeterred NYSEG plans to file a petition for rehearing with FERC by May 12, according to spokesman Frank Scollan. Scollan reports that NYSEG does not expect a different outcome, even if FERC agrees to rehear the original petition. "But this is a step we have to take if we intend to pursue it further in the courts," he adds.

Neither NYSEG nor the other utilities involved in the ongoing battle with independent generators believes FERC gave serious consideration to the issues raised in the two cases addressed in the April ruling.

"The commission only looked at the issue that a contract was in place," Scollan alleges. It did not address the validity of the contracts or the fact that provisions in those contracts are in violation of the federal Public Utilities Reform Policies Act (PURPA), he contends.

Niagara Mohawk is no more pleased with FERC's action than is NYSEG, according to Kerry Burns, spokesperson. At issue in the Orange & Rockland case was the 1987 law requiring the state's utilities to buy power from the independent generators at six cents per kilowatt hour.

The utilities originally filed a petition with FERC in 1988 charging that, because the six-cent level was higher than the utilities' cost of generating that power--"avoided cost" in industry jargon--it was in violation of the PURPA. FERC agreed in 1988 but immediately stayed the ruling and took no action until January, when it dismissed the case, saying that because the state's "six-cent law" was repealed in 1992, the case was moot.

FERC's interpretation of the state's action in 1992 is wrong, Burns claims. The 1992 legislative action simply amended the original law to exclude future contracts from the six-cent requirement. Existing contracts were not affected and are going to have an impact for years to come, she explains.

"Many of the contracts were signed between 1988 and 1992. There was a real rush into New York state by developers to get these contracts right before the law was amended in 1992," Burns reports. "And what really hurts is that the contracts are in effect for 15 years after the plants begin generating power. Some of them haven't even been built yet."

While NYSEG is already pursuing its next step in its offensive against the independents, Niagara Mohawk is weighing its options. "We are still waiting to see the written decision," Burns says, "and then we will have to look at what alternatives we have in trying to address this issue."

Of course, the independents are ecstatic with FERC's ruling.

Carol Murphy, executive director of Independent Power Producers of New York State, labels the FERC's action a major victory for the independents and for utility rate payers. She also believes the decision represents a critical step in moving to open competition for the utility industry.

"Clearly, the FERC has demonstrated with its unanimous decision to uphold existing agreements that the road to true competition in the electric power industry will not be paved with broken contracts," says Murphy. "It is even better news for consumers who will continue to enjoy the benefits of future competition in the electric market."

And Steven Burton, IPPNY president and general counsel of Sithe Energies, stresses, "A ruling in favor of NYSEG's request would have created chaos in the energy and investment communities. We agree wholeheartedly with (FERC Chair) Betsy Moler's comment, when she said, 'To rule as NYSEG requested would be bankrupt as a matter of policy as well as a matter of law.'"

In explaining her commission's decision, Moler charged that independent producers are not to blame for the state's high utility costs, that the companies' own plants are the biggest factor in high rates.

Utility companies vehemently disagree. Burns estimates that Niagara Mohawk customers are paying more than $1 million a day in payments above the utility's actual avoided costs for power from the independent generators.

"Right now, our rate payers can figure that the overpayments to unregulated generators account for 13 to 14 percent of their utility bill. Add the impact of state and local taxes at 18 percent, and you can see where much of the problem with utility rate lies," Burns stresses.

IPNNY and the FERC apparently are skeptical of those cost estimates. Murphy alleges that the utilities' generating costs are well in excess of what they report in filings with the state Public Service Commission (PSC) and with the FERC. But NYSEG's Scollan stresses that the utilities have not fabricated those estimates.