nanced. The downside of opening the NYISO markets to new classes of participants is the increased potential for gaming the markets, especially during times of tight electricity supply.

The NYISO currently plans to implement power trading by parties other than generators and retailers, participation termed "virtual bidding," by November 1, 2001. 86 The NYISO's explanation for the delay in instituting virtual bidding is that it needs to correct flaws in its current operating procedures and to develop appropriate software before adding virtual bidding to an already complex system. 87 FERC has accepted the NYISO's explanation. 88 The NYISO should develop the necessary software and make the operational improvements needed to implement virtual bidding as soon as practicable. At the same time, the NYISO should address the increased complexity that virtual bidding will add to its markets and strengthen its market monitoring capability to accommodate the additional market surveillance' that will be needed.

c. Exposure to Volatile Prices Must be Minimized Without Shielding Customers From Market Price Signals

We have seen in New York that highly volatile wholesale electricity prices can accompany the transition from regulated monopoly to competitive commodity markets, especially during times when supply is limited and demand irreducible. During the summer of 2000, Con Edison's customers experienced electricity rates 30 percent higher than during the comparable period in 1999, despite cooler weather in 2000 resulting in lower peak usage levels than usual In addition to the increased cost of oil and natural gas, an almost twelve-month outage at Con Edison's Indian Point 2 nuclear plant tightened supply in the downstate markets significantly, leading to higher wholesale prices in times of high demand. 89 If New York's summer weather in 2001 or 2002 is normal or hotter, wholesale price spikes remain a threat.

Con Edison's and Orange & Rockland's current rate structures permit them to pass through to their customers nearly all of the commodity cost of electricity, no matter how high. 90 Con Edison is a multi-billion dollar company serving over three million customers, and therefore has much more bargaining power than any of its residential or small business customers to control price volatility through negotiation of long-term contracts with generators, and through other hedges that manage

86See, e.g., NYISO, New York Independent System Operator, Inc. 's Report on the Implementation of Virtual Bidding and Zonal Price-Capped Load Bidding in Docket No. ELOO-90-000, FERC (February 2, 2001), p. 6.

87Id., p.4.

88 Some have protested to FERC that the NYISO's implementation of virtual bidding is taking too long. FERC rejected the initial protests as inconsistent with the prudent development of the NYISO's operations. FERC Docket No. ELOO-90-000, Order On Complaint, Morgan Stanley Capital Group, Inc. v. New York Independent System Operator, Inc., 93 FERC 61,107 (October 5, 2000). Certain parties have renewed their protests. See, e.g., Morgan Stanley Capital Group, Inc., Motion For Immediate Commission Action Regarding Virtual Bidding Implementation Schedule, Docket No. E100–90–000 (March 5, 2001).

89The Attorney General has taken NYISO analyses and examined the impact of the Indian Point 2 outage on the price of power in the wholesale markets. The unavailability of Indian Point 2's 41 MW capacity output from February 16, 2000 through early January 2001 required the NYISO to rely upon more expensive generators during times of greater demand, and thus increased the market clearing price for peak-hour power purchased by Con Edison. Indeed, it increased the market price throughout the State. The Attorney General, in a motion filed with the PSC has estimated that the outage cost Con Edison's customers $176.5 million and urged that Con Edison be required to reimburse customers for this increase in wholesale power costs. See, PSC Case 00-E-0612-Proceeding on Motion of the Commission to Investigate the Forced Outage at Consolidated Edison Company of New York, Inc. 's Indian Point No. 2 Nuclear Generating Facility, December 4, 2000 Motion by New York State Attorney General Eliot Spitzer For Complete Quantification Of Consolidated Edison 's Liability For Alleged Imprudent Management Of Its Indian Point 2 Nuclear Plant.

90 Con Edison passes through to its electric customers 90 percent of the difference between the company's forecasted and actual purchased power costs. (Con Edison, P.S. C. No. 9-Electricity, Leaf No. 163, Effective September 11, 2000.) Central Hudson Gas & Electric's rates permit an automatic pass-through, but this is ameliorated by the utility's long term supply contracts with the companies that purchased their former generation units. Rochester Gas & Electric has not yet progressed as far as the other utilities toward restructuring, and currently retains most of its own generating plants. LIPA, as a public authority, is not regulated, but instead sets its own rates. LIPA thus ultimately recovers from its customers any increased cost of power it purchases from generators, although the lack of automatic pass-through likely delays the impact.

risk. 91 To give an electric utility like Con Edison an incentive to hedge its risks in the wholesale market, the company must pay the price for bad market decisions. Recent experience in California demonstrates that completely insulating consumers from wholesale electricity prices can financially devastate the affected utilities, especially if, as in California, they must buy all their energy requirements in the spot market. While the New York market rules permit and encourage bilateral contracts and other hedging strategies, we cannot ignore the warning of the California experience.

As electric power supplies increase, customers ought gradually to receive more complete price signals to encourage more flexible and efficient demand. 92 Until we reach that point, however, we must ensure price stability for customers during volatile markets. The complete pass-through of energy costs, such as Con Edison and Orange & Rockland currently enjoy, must be modified. The PSC should cap Con Edison's rates once power prices reach a certain per kilowatt hour level. Below that level, customers would,pay the passed-through market price. Above that level, Con Edison would swallow a substantial portion of the difference. Such billing would limit customers' exposure to market volatility extremes while sending them appropriate price signals reflecting the market price of the electricity they use. At the same time, Con Edison would have an incentive to employ long-term supply contracts and other hedges to moderate the cost of power should market prices exceed the rate ceiling established. 93

VI. Demand for Electricity Must be Reduced to Minimize the_Environmental and Public Health Impacts of Generation and to Assure Market Competition and Stable Prices

Aggressive measures to reduce demand, together with construction of clean and renewable power plants, will greatly reduce the environmental and public health impacts of electricity generation and foster competitive markets and lower electricity bills. Reducing electricity use avoids the need for existing power plants to produce that amount of electricity, and the corresponding emissions. Over the long-term, an energy policy is sustainable only if it includes environmental factors among its objectives. When new, more efficient power plants start supplying electricity to the grid, the need for existing, dirtier power plants should be reduced. But only if demand is simultaneously reduced while clean supply is increased will the State ensure a net gain for the environment and for the consumer. 94

What appears like a small action to reduce demand can have a large impact. For example, replacing just one incandescent light bulb with a compact fluorescent bulb (which uses 70 percent less energy to produce the same amount of light) can save a consumer over $38, save 337 kWh of electricity, and avoid over 300 pounds of the greenhouse gas CO2 in 3 years. If all 6,766,000 households in New York State replaced just one bulb, over $260 million would be saved, 2.2 billion kWh would be saved (more than the electricity generated at an 100 MW power plant), and over one million tons of CO2 emissions would be avoided in 3 years. (See Appendix.)

New York already ranks as the second most efficient State in per capita energy use nationwide (in large part due to the natural efficiency of apartment living). 95 Nonetheless, opportunities for improved efficiency and conservation abound. A 1997

91Other New York utilities, such as Niagara Mohawk Power Corporation and New York State Electric & Gas Corp. currently operate under fixed consumer retail rates, and have been able to obtain long-term supply contracts.

92 Evidence shows that customers react to price signals by reducing demand, and often do so relatively quickly. For example, according to Hal R. Varian, economics professor and Dean at the University of California at Berkeley, when the electric bills of San Diego residents more than doubled last summer, power consumption dropped 5 percent within a few weeks. See, The New York Times, January 11, 2001, p. C2.

93The Attorney General opposes alternative bill mitigation proposals that would not accomplish these goals. One proposal would permit customers to postpone payment of that portion of their electric bills representing extremely high levels, and make up the difference during months when prices are below a certain threshold. This proposal would still expose customers to the full cost of power, albeit leveled over a year's bills. Others have proposed to keep rates at or below a certain pre-determined level throughout the year by offsetting higher summer peak market price levels with a variety of customer credits otherwise owed by Con Edison. Since customers are entitled to these rate offsets whether or not power prices rise, this approach to rate mitigation is unsatisfactory, and would conceal from customers what is occurring in the power market.

94If the growth in demand is not reduced, there will be a need for both the existing power supply and new capacity. The addition of even the cleanest natural gas plant will result in a net addition of emissions if the State does not ensure that older, dirtier plants are displaced by cleaner new ones.

95 American Council for an Energy Efficient Economy. National and State Energy Use and Carbon Emissions Trends. September 2000, Http://www.aceee.org/pubs/e001.pdf

study claims that cost-effective investments in energy-efficient technologies could reduce New York's electricity use by 34 percent. 96

New York State has several programs to compensate for market barriers that discourage energy efficiency. But existing programs are not sufficient to create the environmentally sound, reliable, and balanced energy portfolio that is in the State's best interests. The Attorney General recommends significantly expanding these programs (see Section I.D.). The Attorney General is similarly using his legal authority to direct litigation settlement funds to energy efficiency and renewable power investments. In addition, utility portfolio standards would over the long-term lead to significant savings-perhaps 1,000 MW through efficiency and 3,000 MW through renewable energy-that will shift New York's energy policy to a more sustainable framework.

Together, the funding proposals below would direct approximately an additional $120 million per year (on top of existing programs) to energy efficiency, conservation, and renewable energy programs in New York State. (See table 2.) This expansion could result in a savings of over 600 MW over the next 2 years-an amount sufficient to avoid capacity shortfalls-and a necessity if New York State's electric grid is to maintain reliability and to minimize price spikes. At the same time,-these energy savings will avoid enormous quantities of harmful pollutants-millions of tons of NOx, SO2, and CO2-and lead to substantial consumer savings.

If New York's funding levels for efficiency and renewables were increased from the current level of $242 million per year to $360 million per year, as recommended, New York will still spend less per capita than many other States in the Northeast. (See Table 3.)

Table 2

Summary of Attorney General's Proposals to Expand Funding for Current Efficiency and Renewable Programs

97Estimated savings from the funding proposals are based upon NYSERDA projections, see SBC Proposed Operating Plan For New York EnergySmart Programs (2001-2006) February 15, 2001, p. 2.

98 Estimated savings are based upon the past experience in New York and other States. Between 1990 and 1997, the State's investorowned utilities spent $1.2 billion on efficiency or demand-side management (DSM) programs, avoiding the need for over 1,300 MW of capacity. These programs included rebates for efficient appliances and lighting, consumer education, and low income weatherization projects. The NYPA spent $255 million on DSM investments between 1990 and 1996, avoiding the need for 84 MW of capacity. See, NYSEPB, New York State Energy Plan and Final Environmental Impact Statement. November 1998. p. 3-60, 3-62.

99 Estimated savings based on LIPA's current projections of 144 MW per $160 million spent over 5 years. See, LIPA, Clean Energy Initiative, May 3, 1999, p. 21.

Table 3

Comparison of Demand Side Management and Renewable Energy Spending Per Capita By State100

96 American Council for an Energy Efficient Economy. Energy Efficiency and Economic Development in New York, New Jersey and Pennsylvania. February, 1997.

Table 3-Continued

Demand Side Management and Renewable Energy Spending Per Capita By State100
Annual DSM Spending Per Capita

Comparison

State

100 American Council for an Energy-Efficient Economy. A Review and Early Assessment of Public Benefit Policies Under Electric Restructuring, Volume 2. Summary Table of Public Benefit Programs and Electric Utility Restructuring., Http://www.aceee.org/briefs/mktabl.htm. See also, U.S. Census 1999 population estimates, Http://quickfacts. census.gov/qfd/index.html.

A. Market Barriers to Energy Efficiency

Despite the financial and environmental benefits of efficiency, many opportunities are not taken due to the numerous market barriers to energy efficiency investments. Efficiency often requires a higher capital outlay (e.g., to better insulate a home, get a more efficient refrigerator or motor) and many consumers look only to the up-front cost rather than to the lifetime cost when making purchasing decisions. 100 Within companies, purchasing agents may be responsible only for initial costs while another person is responsible for utility bills. In home or office building and renovations, the person making the capital outlay (e.g., the builder) rarely pays the monthly energy bills, and thus has no incentive to build in efficiency. Stores with limited shelf space often do not offer more efficient products because they are usually more expensive, and thus take longer to sell.

Efficiency investments are also diffuse. Unlike a power plant, which can generate 100 or 500 MW, efficiency savings come in small increments of a few kilowatts or less. Thus, to "generate" efficiency savings of 100 or 1,000 MW, many actors must be involved, and each must reject the incorrect assumption that his/her actions won't make a difference. For these reasons, most programs to stimulate efficiency focus on information disclosure and subsidies (such as tax credits, mail-back rebates to consumers, or payments to sellers) to lower the initial cost, as well as efforts to encourage retailers to sell efficient products.

B. The Legislature Should Enact Tax Incentives to Purchase Efficient Appliances

Since major home appliances account for approximately one-third of residential energy consumption, the Legislature should pass a sales tax exemption 102 for all major home appliances having the EnergyStar label. 103 Past experience with shortterm sales tax exemptions suggests that retailers could show significant interest in this initiative. 104 During last year's sales tax exemption on clothing, for example, many stores offered a matching 8 percent-off sale.

If implemented before the coming summer, this incentive could impact air conditioner sales and thus summer peak demand. Other major appliances and products (i.e. refrigerators, clothes washers, dish washers, furnaces, efficient windows, and lighting) also use significant amounts of energy: While not purchased by any individual very often, the cumulative annual sales of these appliances in New York are significant. For example, according to the Association, of Home Appliance Manufacturers, 440,700 room air conditioners, 481,800 refrigerators, 297,700 clothes washers, and 133,400 electric clothes dryers were sold in New York State in 1996. 105

While it is nearly impossible to predict with precision the cost or impact of the sales tax exemption on efficient products, conservative estimates suggest a positive outcome. If, for example, an exemption steered only 10 percent of air conditioner purchases to more efficient models, it could save 8,814 MWh per year and would cost the State (in lost tax revenue) perhaps $1,762,800 per year, while saving ratepayers $1,181,076 per year.

The sales tax exemption would additionally draw attention to efficient products and show the environmental and economic benefit of purchasing such products. Con

101 Most consumers lack information on the energy, cost, and environmental savings that would enable them to comparison shop for more efficient appliances.

102 The Senate Majority Leader has introduced legislation that includes a sales tax exemption for efficient products and other products that promote conservation. See, S.0002-Bruno.

103 Energy Star is a voluntary partnership between the EPA, DOE, manufacturers, utilities and retailers. Partners promote energy efficiency by labeling qualifying products with the Energy Star logo. EnergyStar-approved products are 10-75 percent more efficient than the Federal efficiency standard. The NYSERDA is an Energy Star partner and promotes EnergyStar products.

104The sales tax exemption could also encourage consumers in neighboring States to buy appliances from New York State businesses.

105 Association of Home Appliance Manufacturers, Major Appliances-Estimated Distributor Sales by State. See http://www.aham.org/indextrade.htm.

sumer education on the impacts of energy conservation and each individual's ability to contribute is critical to implementation of energy efficiency programs.

C. The Legislature Should Create an Efficiency Portfolio Standard

Electricity retailers, unlike electricity generators, have direct contact with electricity consumers through monthly bills. This contact provides an opportunity to educate consumers. However, absent a legislative mandate, retailers lack incentive to conserve energy because the more they sell, the greater they profit, 106 The Legislature should bring retailers into the State's energy efficiency efforts by enacting an Efficiency Portfolio Standard, requiring retail sellers of electricity to achieve certain levels of efficiency improvements in their service area.

Retailers could achieve these gains through direct installation of efficiency measures and include the cost of the installation in their prices. They could also provide rebates, promotions or education. For example, using bill inserts and instructing employees (such as those answering telephone inquiries or installing equipment) to highlight efficiency and conservation opportunities, retailers could accomplish significant savings. A re-institution of the utility compact fluorescent bulb rebate program could be an important promotion. 107

While an EPS is a new concept, it has two strong antecedents. Many States have implemented a Renewable Portfolio Standard that requires utilities to buy a minimum percentage of electricity from renewable sources. In addition, before restructuring, utilities were required to achieve certain energy savings through rate conditions that effectively acted like an EPS. Indeed, before restructuring, utilities were able to reduce electrical usage through efficiency measures by over 1,300 MW over 7 years when State regulations granted utilities incentives to accomplish that result. 108 (A further precedent is provided by New York City's program to installat its expense-water conservation devices in hundreds of thousands of homes and apartments. This program successfully reduced water use significantly.)

D. The Comptroller Should Report Annually on Energy Efficiency and Renewable Energy Programs

Both to enhance public support for and understanding of efficiency and renewable programs, as well as to ensure that the money in these programs is spent most effectively, the Legislature should direct the Comptroller to prepare an annual report on the implementation of efficiency and renewable programs. As noted above, three major State programs currently operate the NYSERDA's EnergySmart program (using SBC funds), the NYPA's Energy Services programs, and LIPA's Clean Energy Initiative. While the PSC requires the NYSERDA to report on the implementation of EnergySmart, the NYPA and LIPA have no reporting requirement. In addition, there should be verification of progress on the Renewable and Efficiency Portfolio Standards.

The Comptroller's annual report, prepared in coordination with the NYSERDA, NYPA, LIPÀ, PSC and retailers, should include:

total funds expended on efficiency, conservation and renewable energy;
total MWh and MW saved as a result of the programs;

a running list of all completed projects and a list of all planned projects;
total energy cost savings to consumers;

comparative effectiveness of programs; and

remaining barriers to additional efficiency, conservation and renewable energy

projects.

Accurate accounting of efficiency and renewable energy projects is essential to understanding how future energy needs should be met. The Attorney General would commit to assisting the Comptroller with this report and in investigating opportunities to remove remaining legal barriers to a sound energy policy.

E. The PSC Should Improve Pricing and Revenue Signals to Encourage Flexible Demand and Conservation

In addition to tax incentives, Portfolio Standards, and direct subsidies through the NYSERDA, NYPA and LIPA, significant opportunities exist to amend pricing mechanisms to foster efficiency and conservation:

106 Since distribution costs are essentially fixed, higher sales lead to both higher revenue and proportionately higher profits. See also Section VI.E.3. for proposal to correct these existing market disincentives against efficiency.

107 Replacement of incandescent bulbs with energy efficient compact fluorescents has the potential to significantly reduce energy consumption and consumer costs. See Appendix A-1.

108 NYSEPB, New York State Energy Plan and Final Environmental Impact Statement, November 1998, p. 3-62. The demand-side management programs cost the utilities $1.277 billion between 1990 and 1997.