DEREGULATION:

QUESTIONS & ANSWERS

 

What is electric deregulation?

 

            Electric deregulation is the removal of governmental regulations from the industry to allow energy prices to fluctuate with market conditions.  For deregulation purposes, the electric utility industry can be divided into three parts – generation, transmission, and distribution.

 

            Generation, or the manufacture of electricity, has been deregulated and is the only portion of the industry to be deregulated at this time.  Transmission, or the moving of electricity from where it is made to where it is distributed, has been re-regulated.  Distribution of electricity to the customer remains regulated (unchanged).

 

What is the state of deregulation in New York?

 

            In mid-November 1999, the New York State electric utility marketplace was deregulated.  Deregulation was supposed to bring lower costs to the electric utility industry and its customers.  For the majority of the customers located in New York, including Freeport Electric customers, so far we have experienced the opposite effect.  We have seen the cost of electric on the wholesale market increase steadily over the past 14 months.  Currently our energy costs are up 16.5% over 1999.   This is not unique to Freeport, but is being felt all over the state.  As a comparison, customers in New York City saw their costs go up as much as 50% this past summer.  Freeport is fortunate because it has its own generation.  Freeport runs its generation when market prices are higher than generation costs.  Using this approach, Freeport Electric saved its customers approximately $600,000 in the year 2000.

 

Who monitors energy prices in this new market?

 

            As a result of deregulation, a quasi-governmental agency was created for deregulation—the New York Independent System Operator (NYISO).  This organization is responsible for creating a free marketplace for electricity sales and an unbiased operating system for moving electricity from where it is made to where it is distributed.  These are two essential elements to prevent market participants from taking advantage of the marketplace.

 

We hear a lot of discussion about deregulation not working in California and other western states - why isn’t deregulation working?

 

Everyone believed that deregulating the electric industry would create a competitive marketplace and result in lower electric prices.  However, in order to have effective competition you need:

 

1.      Adequate product supply - (electrical generating units)

2.      A means to get the product to market - (transmission lines)

3.      A customer base. 

 

Unfortunately, the electric industry only has one of the three elements that make for effective competition.   In many parts of the country, including California and New York, there is not enough generation capacity to meet existing electrical demands.  In addition, in many parts of the country there are limited transmission lines to carry energy to other places.  This means that even when the energy is available it cannot be delivered to various parts of the country.  For example, there are only two transmission lines connecting Long Island to the rest of New York State.  These lines have a capacity of approximately 1200 megawatts.  Long Island had a 4800 megawatt peak load in 1999.  Due to limited transmission capacity, Long Island has to use generation located on Long Island. 

 

            Considering the generation and transmission problems in most parts of the country, it is apparent that deregulation will only result in increased prices for many years to come.

 

What effect has deregulation had on Freeport Electric customers?

 

            Deregulation of the electric utility industry and its reorganization has not progressed easily or inexpensively in New York, or any other state.  Fortunately, the Freeport Electric territory is somewhat insulated due to a long-term hydropower supply contract and local diesel generation.  The New York Independent System Operator, the essential, quasi-governmental agency, has added a level of cost and bureaucracy to the electric utility marketplace that did not exist before deregulation.  The NYISO’s year 2000 operating budget was $75.3 million and is projected to be $105.5 million in 2001.  Freeport Electric customers have been paying their share of these costs through the fuel cost adjustment portion of their bill since November 1999.  This, coupled with the higher cost of fuel, has caused the Freeport Electric customer’s average bill to increase by 16% over prior year's costs.

 

Has Freeport Electric raised its electric rates?

 

            No, Freeport Electric has NOT raised its rates.  Our last rate change occurred five years ago.

 

If my rate has not increased, then why is my electric bill increasing?

 

            The amount Freeport Electric is allowed to charge for your electricity is determined by a lengthy and complicated rate case that is presented to the New York State Department of Public Service (PSC) for approval.  The electric rate is comprised of the basic service charge, demand charge, energy charge, and the fuel cost adjustment charge.  At the time the rate case is filed, a base rate is set for the cost of electricity and the cost of moving the electricity from where it is made to where it is distributed.  When the PSC approves a rate, the basic service charge, demand charge, and the ENERGY CHARGE REMAIN CONSTANT UNTIL ANOTHER RATE IS APPLIED FOR.  The increase on your bill is a result of the fuel cost adjustment charge.  The fuel cost adjustment fluctuates monthly and is adjusted up or down based upon market costs the utility cannot control.

 

The fuel cost adjustment is a mechanism to account for the fluctuations in fuel cost and spent fuel disposal, fluctuations in power supply contracts, and fluctuations in the changes of the costs to move electricity from where it is produced to where it is distributed.  The fuel cost adjustment charge is an essential part of our rate case process.  If there were no mechanism for recovering these fluctuating, uncontrollable charges, Freeport Electric would be forced to file annual rate cases, dramatically increasing the cost of electricity to all customers as the cost of preparing and presenting a rate case is very expensive.

 

Over the last ten months, Freeport Electric customers have seen their costs rise by about 17%.  This rise has been due to an increase in the fuel cost adjustment portion of their bills.  The dramatic increase in the fuel cost adjustment charge is being caused by the following three events:

 

1.      Additional NYISO charges for operation of the ISO - described above.

2.      Freeport Electric experienced increased fuel costs due to the dramatic increase in oil prices.  The cost of diesel fuel is 36% higher than 1999.

3.      Due to the drought of the last few years, the Great Lakes water levels have diminished, causing reduced river flows and reduced hydropower from the Niagara Falls project.  Freeport Electric replaced the reduction of its low-cost hydropower allotment with market cost energy or Freeport Electric’s own diesel powered generation, depending on market prices.  Freeport Electric has also been advised to expect the decreased generation capacity to continue into next year.   Projections for 2001 range from a 6% to 25% reduction depending on the time of year.