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Here are some of the major provisions of PowerChoice : First, Niagara Mohawk would be split into two separately owned and managed companies. One company would own all generating facilities. And at the same time, we would create a wholesale power market in our service territory under the supervision of the FERC. Our generating company would sell power into the spot market in competition with other power suppliers. The remaining company would be reconfigured into a holding company with regulated subsidiaries that would transmit and distribute electricity and natural gas; and unregulated subsidiaries that would engage in marketing, brokering and other new business ventures. Another essential step in creating a truly competitive generation market is the restructuring of our purchased power contracts. At their current contract price level, IPPs would not be competitive, and without them, we are concerned that an insufficient number of market entrants would not provide sufficient competition. We're offering to negotiate new contracts with the IPPs. But if negotiations are unsuccessful, we propose to take possession of these projects through the company's power of eminent domain -- condemnation. We would then resell the projects and compensate the owners as we ourselves separate our generation business from our wires business. The new owners would be able to sell electricity into the competitive pool at market prices. Because spot market prices for electricity are currently so depressed by the glut of capacity in the Northeast, the new generating company and the IPPs wouldn't be able to recover all of the costs of their generating plants in their sales prices for electricity. Some costs would be stranded. We propose that Niagara Mohawk and IPPs write off comparable portions of those stranded costs, enough to allow rates to be frozen over five years. The remaining stranded costs would be recovered through a fee tied to distribution services. We believe that this mechanism is in accord with the FERC's intentions for recovery. So far, we're encouraged by the reception PowerChoice has received since we announced it. The Public Service Commission has called for its careful consideration on an expedited basis, and the PSC staff has filed a very similar proposal in a generic proceeding which is examining the means to make the transition to competition. Many other parties to our rate case have also indicated varying degrees of support. The Governor's Office has urged a negotiated settlement of the purchased power contracts, and we've begun discussions with the IPPs in a process being facilitated by members of the Pataki Administration. Despite these initial developments, the success of PowerChoice is far from assured. Its rejection would not mean, however, that competition would be stopped. Competition is inevitable, but without adequate planning and preparation, the process will be slower and chaotic. So the path to competition in the U.S. will be rockier than in other countries that are privatizing state-owned utilities. And there will be winners and losers among incumbent utilities, and among new entrants, as the marketplace sorts itself out over the next decade or so. Our studies lead us to some other conclusions, in addition to those I mentioned earlier regarding the speed with which competition is coming, the disaggregation of traditional utilities and the shape of the marketplace. First, industry experience to date shows that a fully competitive generation market will yield greater cost reductions than advance analyses might predict. We should aloo take care to get pricing mechanisms right, to avoid the appearance of excessive profits and the threat of re-regulation. Second, deregulation will bring about a renewed concern on the part of customers for reliability and customer service. Customers who can choose suppliers will measure their service against all the things their traditional utility did for them in the past. And third, U.S. utilities will follow widely differing business strategies. While I expect continued disaggregation of vertically-integrated utilities, there is likely to be some consolidation in both generating and distribution companies. Some have predicted as few as 10 large generating companies, and 50 distribution companies by the year 2005, but that seems quite a stretch. Marketers, brokers and energy service companies will emerge, and many functions that are currently regulated -- meter-reading, billing, demand-side management -- will be delivered by competitive firms, such as Niagara Mohawk's future unregulated subsidiaries. Some retailers will try to market national brands of electricity -- several utilities are doing so even now. However, electricity costs have strong spatial and temporal characteristics. We believe that markets will be regional, rather than national, in scope. Therefore, it remains to be seen whether a branding strategy will succeed. In addition to choosing among generation, transmission and distribution and energy services as business lines, utilities also have geographical choices to make. Some will stay primarily within their old service territories and diversify the product line. Others will stay in the same businesses and diversify beyond their historic borders in search of opportunity in both the U.S. and worldwide markets. The latter trend already is well established, with U.S. utilities funding projects in Central and South America, and Asia; and lately taking equity positions in electric companies in the UK and Australia instead of just investing in projects. So in summary, it is clear that deregulation as a trend in the electricity industry, in the U.S. and worldwide, is on the upswing. How long before the pendulum starts to swing back from the free market to government administration depends on how well we reconstruct the marketplace in the next few years. We must all -- utilities, our unregulated competitors, public officials and all other stakeholders -- concentrate on securing for all electricity users the benefits of competition, while avoiding the pitfalls. If we do our jobs well enough, the pendulum need not swing back at all.
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