Utility industry ‘fixes’ seldom go as hoped

I worked in corporate planning at Niagara Mohawk (now National Grid NY) during the 1980s and 1990s, when the industry restructuring you describe so well began to take hold. (“Exploring a community utility, Rochester Beacon, Sept. 28, 2023.) That was what I’ll call a second wave of regulatory change in the utility industry—certainly well-intentioned, whatever one thinks of the actual results.

The first wave of change was in the late 1970s and early 1980s, and its logo was the federal Public Utility Regulatory Policies Act of 1978 (PURPA). Following the oil embargoes and price shocks of the 1970s, dozens of electric utilities across the country were building nuclear generating plants and running up breathtaking cost overruns on them. Legislators and regulators at the federal and state levels alike envisioned PURPA as a way to reduce dependence on conventional, costly, environmentally caustic modes of generating of electricity. It offered, among other things, a stimulus for development of alternative energy resources and energy conservation programs, including conservation of natural gas as well as electricity.

Regulators in certain states including New York, enthused about developing alternative energy sources, overlaid PURPA with a requirement that electric utilities pay premium rates to buy the output of PURPA-qualified generation—boosting the incentive to develop alternative energy sources, or so they thought. New York State utilities found themselves paying a government-mandated six cents per kilowatt-hour for electricity from those alternative sources, almost double the PURPA standard of marginal costs. That was pretty attractive cheese for independent ESCOs, and by the early 1990s, New York was awash in new, PURPA-inspired generation that was mostly … guess what? … powered by natural gas. One of the commodities PURPA was meant to conserve. That glut of online generation capacity led directly to the second wave of change: the restructuring.

I relate that history only to underscore a point: Adventures in the utility business seldom go as hoped, even when taken up by the best and brightest people in the industry.

It’s a complex and lumbering industry. Even in the restructured market, one doesn’t just buy some distribution utility’s assets and—poof—suddenly deliver higher competence and lower prices.

As New York State approached the restructuring, Niagara Mohawk’s planners did a lot of research with consumers, trying to find the best ways to manage the transition. We did surveys, focus groups, and even in-market pricing experiments to see how actual customers would respond to actual prices that more closely resembled underlying costs than the flat rates per kWh we’d always known.

Unsurprisingly, we found that utility customers’ wishes are pretty basic: reliability, reasonable cost, simplicity, and trust. They appreciated that there would be competition for some of their energy dollars, but weren’t thrilled with the idea of being pitched by more than a dozen ESCOs, none of which they’d ever heard of, for a supply contract when they’d never had to shop for that before. Separating “delivery” from “energy” and, good grief, a “systems benefit charge” sounded like so much double talk to most. Mostly, consumers expressed skepticism of the ESCOs’ savings claims—especially if they were less than 5-10 percent per year, which is where most estimates fell.

Word to Metro Justice: You’re acting a lot like those ESCOs, and consumers will want to know why they should trust your proposition. Best be certain and factually convincing of what you’re proposing to Monroe County residents. Me? I doubt a public entity could improve on RG&E’s operation (not that it doesn’t need improvement), and as the saying goes, I’ll want to know whose throat to choke if a community utility turns out to be, let’s say, a costlier version of the “fast ferry.” As a City of Rochester resident and taxpayer, I think there are better things the city could do with the money it’s spending on this study.

Marty Nott

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