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The U.S. electric power industry is a very mixed bag of some 3,500 entities. About 250 vertically-integrated investor-owned utilities control about 80 percent of the electricity generated in the U.S. The rest is generated and delivered by public agencies, ranging from huge federal power authorities to small rural cooperatives and municipal power authorities. The industry is regulated at the wholesale and interstate levels by the Federal Energy Regulatory Commission, and at retail and intrastate by 50 public utility commissions. The state commissions administer widely divergent regulatory systems, ranging from laissez faire to activism. In other words, some states have more regulation to undo than others. Additionally, states are moving at different speeds in pursuing different transitional strategies. So it's at least possible we could wind up with 50 different programs at various stages of development over the next few years. Utilities in the states that finish early and plan best could have significant advantages over those that lag. Exacerbating the problem of making the transition is a glut of generating capacity in some areas of the country, most notably the Northeast U.S. The same situation prevails in Eastern Canada, including Ontario . Due to this excess generating capacity, the gap between average utility generation costs and wholesale market generation prices is at an all-time high. In high-cost regions of the country, customers want access to that cheap power. The clamor of customers for more choice increases the pressure to open markets quickly. But doing so would cause a price collapes that would create a several-hundred-billion-dollar stranded cost problem for utilities. The stranded cost problem in the telecommunications industry was alleviated by offsetting revenue from new products and services, but no such potential exists in the electricity marketplace. Moreover, the stranded cost problem is asymmetrically distributed across the country. Some utilities with low-cost generation, principally in the Midwest and South, would actually see a windfall gain. Others, mainly in the Northeast and West, face revenue shortfalls two to three times larger than their shareholder equity. It is clear that any transition plan that does not contemplate cascading bankruptcies among utilities must find a solution to the stranded cost problem. And in fact, the FERC has stated in its proposed electric power industry restructuring regulations, that utilities should be compensated for stranded costs. But the lack of jurisdictional clarity between the FERC and state legislators makes a national solution far from a sure thing. The gap between wholesale market price and utility generation cost, and consequently the stranded cost problem, is as severe in New York State as anywhere in the country. Utility costs in the state have been raised by a state government propensity to levy taxes through utilities. An even more significant factor has been a combination of Federal and State law that requires utilities to buy power from independent power producers at prescribed prices. Unfortunately, the forecasts on which the price were based did not anticipate the energy price drops of the late '80s. The above-market price attracted a number of IPPs, many of whom settled in Niagara Mohawk's service territory. Our bill for this purchased power this year will top $1 billion, more than $400 million above our costs in the absence of IPPs. While some of our strandable costs are attributable to our own generating capacity, most consists of IPP contracts that we would be unable to honor if the sudden onset of competition sent electricity prices into a freefall. Our pricing problems have led a number of customers to investigate other supply alternatives, and have certainly been a factor in the continued weakness in Upstate New York's economy. We have been weakened, as well, by flat sales and falling profits. Our situation is approaching a crisis point, and we have seen no solutions advanced either by government or any other quarter sufficient to head it off. So, after long and intensive study, which included analysis of the UK privatization model and developments in other countries, we crafted our own proposed solution, which we call PowerChoice . We believe that, given the rapid advance of competition, wholesale competition will be widespread in the U.S. within the next couple of years, and that many retail customers will have their choice of suppliers by the year 2000. When that transition is complete, the vertically-integrated utilities of the monopoly age will be under great pressure to disaggregate, principally because of suspicion regarding self-dealing. We believe that generation will be fully deregulated, and it is well on its way even now. Transmission and distribution, providing as they do access to the marketplace, must remain regulated to prevent self-dealing. Marketing and related functions will be deregulated. Our PowerChoice proposal is based on those convictions. It is a plan that we are convinced balances competing interests -- our customers, our shareholders, the IPPs and potential competitors. It will create an open, fully competitive electricity market at least in Niagara Mohawk's service territory and we hope throughout the state. It calls for deregulation of electricity generation and for freezing or reducing electricity prices over the next five years.
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