Four hundred years after Don Quixote tilted at windmills in a Spanish novel, the European wind machines are back in the news and at the heart of one of the biggest debates in New York energy policy.
Iberdrola SA desires to own and operate wind farms in New York as it also seeks to buy Energy East Corp., the parent of Rochester Gas and Electric Corp. and New York State Electric and Gas Corp.
The Bilbao, Spain-based company, the world’s largest wind power developer, bid $4.5 billion for Energy East in mid-2007. Officials of the Federal Energy Regulatory Commission and the states of Massachusetts, Connecticut and Maine all said yes.
But so far the staff of the New York Department of Public Service has said ownership of both wind turbines and distribution-transmission lines is a no-no. The staff has opposed Iberdrola’s plan to build three wind farms in Energy East territory.
The staff’s position is important because it advises the five-member state Public Service Commission, which is to rule on the Iberdrola-Energy East deal this summer.
In short, the staff is saying that Iberdrola can deliver electricity and natural gas – what RG&E and NYSEG do now – but Iberdrola cannot also “make” the products, even if it uses the wind instead of coal or natural gas to generate electricity.
The staff’s position is part of New York policy on energy deregulation, but it has left Iberdrola officials feeling as if they are facing an unfathomable government demand, especially because the state has set a goal of getting 25 percent of its energy from renewable sources such as wind and hydropower by 2013.
Iberdrola officials said they will walk away from the Energy East deal if the PSC votes to approve it but also insists on separating Iberdrola from its three proposed wind farms in Energy East territory.
Central to the disagreement is a worry that Iberdrola could exercise too much control over the electricity market, which might thwart competition and harm consumers. RG&E and NYSEG ratepayers who attended public hearings on the proposed deal earlier this year urged that any sale of Energy East lead to lower, not higher, rates.
But supporters of Iberdrola – including many politicians and business groups such as the Rochester Business Alliance and Greater Rochester Enterprise – said they see nothing wrong with a company producing cheap energy and then selling it through its own power lines.
That type of “vertical integration” – when a company controls all parts of the manufacturing and delivery process – is evident in other markets such as food, oil and even European electricity.
Iberdrola points out that the United Kingdom approved its purchase of Scottish Power Ltd. in 2006. Iberdrola owns generation plants as well as distribution lines there.
Some observers said the state’s demand that generation and distribution be separated isn’t really deregulation but rather a restructuring of bureaucracy. All some states have done is replace one regulatory framework with another and call it deregulation, said Jerry Taylor, senior fellow at the Cato Institute think tank in Washington, D.C.
Taylor said it doesn’t always make economic sense to dictate to a power company that it can distribute energy but not make it. It’s like mandating that Ford Motor Co. buy its bumpers from a third party, he said.
But the public service staff is concerned that Iberdrola could use vertical market power against potential competitors. In a recent brief filed in the case, lawyers for the staff argued that Iberdrola would have motivation to block competitors’ connection to the electricity grid within Energy East territory.
Iberdrola countered that the state’s ability to levy fines and even seize profits serves as an ample deterrent to illegal and unethical behavior.
The company also said the state’s deregulation policy hasn’t always worked. Upstate has one of the costliest electricity delivery rates in the United States, said Pedro Azagra, Iberdrola’s director of corporate development.
Some consumer advocates agreed that divestiture of generating plants will do nothing to lower rates.
“There’s no reason to force the sale of the power plants,” said Gerald Norlander, executive director of the Public Utility Law Project of New York Inc., a nonprofit organization representing low-income power consumers. The organization hasn’t filed briefs on either side of the Iberdrola debate.
Norlander goes so far as to suggest Iberdrola shouldn’t have to sell RG&E’s coal-fired Russell Station generating plant in Greece, something Iberdrola has agreed to do.
Russell, as well as wind farms and hydroelectric plants, are low-cost generators, Norlander said. Forcing a sale of these assets would put them in the hands of third-party market forces, which could take the cheap power and sell it at higher prices, he said.
Some states don’t concern themselves with regulation of the ownership issue, and the federal government leaves the matter to the states, according to the Federal Energy Regulatory Commission.
11 July 2008
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