Column: New York’s Energy Revolution
At the junction of Lake Erie and the Niagara River, Buffalo has been at the forefront of the electric utility industry since the late 19th century. As this city and others began to electrify, electricity markets took on two important characteristics: high barriers to entry and economies of scale. Large, centralized power plants and the myriad of transmission and distribution lines required significant upfront capital investment, and the cost of delivering power became cheaper with each new customer added to the distribution grid. As a result, New York State, among others, entered into what is known as the “regulatory compact” whereby the New York Public Service Commission (PSC) granted utility companies a protected monopoly franchise for the sale of electricity or gas to customers within a defined service territory. In exchange for this monopoly, the PSC regulates utility rates in such a way that balances consumer financial protection and the financial viability of utility companies. In order to promote electrification, the PSC granted utility companies a guaranteed rate of return on prudently incurred infrastructure investments. As a result, for the last century, utilities have been incentivized to rapidly build power plants, transmission lines, substations and distribution equipment with no incentive to minimize costs or create an efficient energy system.
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