Bad Policy, Big Bucks

How Pataki's Disastrous Energy Plan Fattened His Friends and Campaign Coffers

Every Gubernatorial poll makes the economy the top issue, every economist knows that one way a governor impacts on jobs is by influencing the price and reliability of power, and every analyst of George Pataki's energy policy, from the right and left, has reached the same sad conclusion: It's a disaster. Yet no one's talking about it.

The governor's deregulation scheme went into effect in late 1999, and energy prices in New York City and Rockland and Orange counties spiked 43 percent by the summer of 2000—one of the coolest in history, when rates were dropping in neighboring states. To stabilize prices and prevent outages in 2001, the State Power Authority had to rush to the rescue, spending $500 million to instantly add 400 megawatts to the city's generating capacity, a shocking admission of the almost instant failure of Pataki's "let-the-markets-rule" energy ideology.

The most recent statistics from the Energy Information Administration indicate that statewide costs are 70 percent higher than the national average, behind only Hawaii, and far worse than the 50 percent mark they hit when Pataki was elected in 1994. Billed also as a spur to competition, deregulation has instead led to little consumer choice, with even the number of investor-owned utilities dropping from seven to four.

While the governor's media allies are quiet now, a Daily Newseditorial blasted the plan just two years ago as "dopey," accusing it of "electrocuting the state's economy." In March 2001, the Post's "Electric Shock Treatment" editorial pointed out that when "the state began implementing a deregulation plan that required utilities to sell off their existing plants to independent power producers," Pataki "crowed it would lead to more competition and lower prices, but the opposite proved true."

Assemblyman Paul Tonko, the upstate Democrat who was once an engineer at the Public Service Commission and who now chairs the energy committee, issued a report last week that sounded an alarm, though the Albany Times Union and The Syracuse Post-Standard were the only papers to cover it. Revealing that a third of the state's generating capacity is now owned by junk-bond companies, several "in danger of bankruptcy," Tonko contended that Pataki's "radical deregulation policies, which encouraged complete divestiture, have left New Yorkers at unique peril," compromising "the reliability of the electric system." While the capital crisis is national, said Tonko, it has, when combined with Pataki deregulation, put "consumers at greater risk than their counterparts in other states."

Warning that "the financial community is running away" from the merchant generating companies that now control much of New York's power "on a scale not seen since the Great Depression," Tonko fears that plants will close or won't be built, noting the recent suspension of construction on a plant in Athens. With even the New York Independent System Operator—a new entity created by state regulators to oversee electric markets—saying that the system is in "persistent crisis," Tonko concludes that New York consumers may well wind up paying more "for the privilege of their lights going out."

That double whammy is "New York's Perfect Storm," the title of Tonko's ignored report, which faults the governor for rushing deregulation through by administrative fiat, without any legislative involvement, "before workable wholesale and retail markets were in place." Of course, the advantage of doing a deal of multi-billion-dollar proportions alone is that there's only one place to go for those who want to buy influence in the process. The one commodity this scheme did generate was lobbying and campaign cash, energizing the governor's gang—from his top political advisers, Kieran Mahoney and ex-senator Alfonse D'Amato, to his former law partner Bill Plunkett, and even to the Public Service Commission chair who crafted it, John O'Mara.

This is the story of how bad policy earned big bucks—including at least $376,505 for the re-election campaign of the governor who enacted it, collected from the disgorging utilities and the acquisitive new merchant generators. With New York's new generators—like Mirant, Dynergy, Reliant, AES, Entergy, Orion, Sithe, Calpine, Constellation, PSEG, and Pacific Gas & Electric National Energy Group, the California utility at the core of its crisis—contributing $177,750 to Friends of Pataki and the state GOP, the lobbying association they put together, the Independent Power Producers PAC, kicked in another $12,250. One producer who was vice chair of the PAC, Michael Tucker of Mercer Companies, donated a remarkable $19,880, adding another $23,100 to the assembly and senate Republican committees, and selling off three of his plants after deregulation.

And the utilities that divested their plants at exuberant prices also joined the Pataki sweepstakes, with upstate Energy East donating $10,950 through its Energy Action Fund and its directors, while National Grid and Niagara Mohawk (which merged) added $71,575, Rochester Gas & Electric $6900, and Con Ed another $16,750. Another major beneficiary of Pataki energy policies, Keyspan, which manages the Long Island network, has kicked in $59,200.

This tally doesn't include donations from the Albany lobbyists for the industry who are tied to the governor—like Davidoff & Malito, Bolton St. John's (whose partners include Armand D'Amato, the senator's brother), and O'Mara, who is now an attorney for at least one of the utilities he deregulated, Niagara Mohawk (NiMo). In addition to directly representing NiMo as a registered lobbyist, O'Mara has a consulting agreement with a Syracuse law firm, Hiscock & Barclay, that lists NiMo as a client. The firm has a state contract to handle Indian land claims, and O'Mara is paid to represent the governor in any casino negotiations. Plunkett, whose Westchester law firm once included Pataki as a partner, wound up representing Entergy Nuclear, which bought two of the state's nuclear plants at 70 percent of book value.

Even Mahoney, the campaign consultant who is now running his third consecutive Pataki campaign, joined the feast, forming a lobbying firm called Mercury Enterprises with Al D'Amato, Pataki's pollster Greg Strimple, and ex-D'Amato aide Kirill Gonacharenko. Their only registered client in New York until this April was Energy East, perhaps the state's biggest beneficiary of deregulation, whose skyrocketing return on equity has launched it on a recent buying binge, acquiring utilities all over the Northeast, including Rochester's.

Another D'Amato company, Park Strategies, represented Florida Power & Light, which signed a long-term, no-bid purchase agreement with the state's Long Island Power Authority to build a small plant in Far Rockaway after Enron pulled out of the deal. A third D'Amato lobbying firm, D&O Consulting, is a partnership with O'Mara, who's been closely associated with D'Amato since the first senate election in 1980. While O'Mara represents NiMo in his own name and the name of his Elmira-based law firm, Davidson & O'Mara, D&O does not report representing any energy-related clients.

Mercury, which lists Mahoney as its chief administrative officer, was retained by Energy East in 1999, more than a year after its original deregulation contract was negotiated with O'Mara and after D'Amato was defeated in 1998. The contract called for annual payments of up to $120,000, but also provided for "additional compensation"—to be negotiated—"regarding activities that Consultant may undertake in connection with possible acquisitions and/or mergers."

Energy East is not answering any questions about what Mercury did for it, but the lobbyists' state filings listed D'Amato and his son Christopher, and indicated that they lobbied the PSC throughout the period that the commission was considering both the Rochester merger and a new five-year pricing plan. A month after the merger and plan were approved on February 26, Mercury's contract was terminated. Not only did the PSC approve the merger, it allowed Energy East's wholly owned subsidiary, New York State Electric & Gas, to take a 15.5 percent return on equity, far more than the 10.3 percent simultaneously allotted to Central Hudson, a similarly situated upstate utility.

While the plan did result in a rate drop this year, its opponents, including Nucor Steel, charge that some rates will go up in January, right after the election, and that the agreement locks in artificially high prices and "extraordinary" profits for five years, longer than most PSC settlements.

The Tonko report also raised questions about another crucial consequence of the merger approval—Rochester, the state's best-run utility and the only one to insist on retaining control of their plants in deregulation, was pushed by the PSC to divest. The commission, chaired by Maureen Helmer, a longtime staffer for the Republican senate and assembly who was groomed for the PSC chair as O'Mara's counsel, ignored all the lessons apparent from the earlier sell-off of plants. Ratepayers, Tonko insists, "will be somewhat shielded from the crisis by [Rochester's] retaining its current corporate structure," controlling generation as well as transmission.

The other curious state action taken during D'Amato's representation of the company was SUNY-Binghamton's decision to pay $6.1 million for a 50-year-old Energy East office building located near its campus. University president Lois DeFleur, an Energy East director who lists the company as her only individual stock holding on state filings, says she recused herself on the no-bid deal, though her counsel concedes he kept her informed about it. Rejected at first by the PSC, the state comptroller's office, and the attorney general, the deal was revised and eventually pushed through on an emergency basis last June.

A letter from Assistant Attorney General Henry DeCotis two days before the deal's approval objected to paying $144,000 more than the value determined three years earlier by an appraisal DeCotis found unacceptable. It also assailed the special terms of the deal, which permit Energy East to continue using both the office and its parking space for $50 a year, and so constricted the university's parking access that it "might well make the building unmarketable." "What is the value of an office building in a suburban setting without adequate parking?" DeCotis plaintively asked.


Strangely, the gravest intrigue about the energy deals of this administration involves a telecommunications company based in Syracuse that no longer exists, Telergy. Founded in 1995, it, too, was represented by D'Amato. O'Mara became a "senior adviser" to the company, and a director with an option to buy 30,000 shares, a few months after he left the PSC in 1998. Pat Barrett, the former head of the state GOP who's donated $261,600 to Pataki and the party since 1998 (including his wife's donations), was the president until he, O'Mara, and Democratic National Committee chair Terry McAuliffe, who was also an investor and director, resigned in August 2001.

The company, which built a network of more than 2500 miles of fiber-optic lines, was liquidated, with over $600 million in liabilities, this January. Its business plan utterly depended, from the beginning, on its ability to join forces with utility companies so it could obtain the rights to build its network along the poles and underground transmission units that the utilities controlled.

Not only did Telergy sign exclusive contracts with the very utilities O'Mara cut individual deregulation deals with at the PSC—at least three utilities became Telergy partners. NiMo and Telergy joined forces first, with NiMo getting 25 percent of one Telergy subsidiary in 1996, and eventually investing $44 million that it had to write off when Telergy went belly-up. Two NiMo executives sat on Telergy's board.

Con Ed and Energy East also formed partnerships with Telergy in 1998, with Energy East a 50 percent owner of one subsidiary, Telergy East. These arrangements occurred just as O'Mara was leaving the PSC on April 15—right before he was listed as a Telergy director. O'Mara was at the time perceived as a continuing power in Pataki circles, with his ex-aide Helmer at the PSC helm and the governor naming him to chair his judicial screening panel.

Indeed, when Con Ed eventually broke with Telergy, it paid a stiff price at the PSC, an apparent indication of O'Mara's and the company's influence there. The commission found against Con Ed in May 2000, agreeing that Telergy's allegations of Con Ed's discriminatory and anti-competitive actions against it "generally have merit," that Con Ed "likely engaged in activities that caused undue delays" in granting Telergy access to its transmission facilities and rights-of-way. Con Ed was forced to comply with a Telergy/PSC-determined work schedule.

In June 2001, just months before Telergy collapsed, the PSC again found against Con Ed, requiring it to give Telergy a million-dollar credit even though Telergy was $4 million in arrears to the company. "Con Ed bears a heavy burden of demonstrating that its policies are reasonable and it has failed to carry that burden," Helmer and the commission ruled. The rulings—which preceded Telergy stiffing Con Ed for $13.8 million—were seen by industry insiders as confirmation of Telergy's favored position within the administration, one reason why the utilities dumped money into it in the first place.

Telergy, which also gave $2500 to the Pataki campaign, won contracts from the State Transportation Department to install fiber optics along the Thruway, the Northway, and other state highways, as well as a $1.3 million no-bid award from the State Office of Technology. It also had $4 million in contracts for high-speed service with the Office of Court Administration, $3 million with Parks, and a $304,000 deal with SUNY.

The Telergy intrigue may well be the invisible undergirding of the deregulation arrangements that have done so much damage to the state's energy market, a nest of interlocking relationships. NiMo was allowed from the outset to pass through increased power costs to industrial users, Con Ed to pass through all costs. NYSEG's initial deal allowed it to set profit records that hit 40 percent, and to hide all its earnings from plant sales in the coffers of its parent, Energy East.

One of the first official acts of the brand-new Pataki regime in 1995 was to shut down the state's energy office. The Times has reported that no state agency had the authority to issue environmental permits for new plants until 1999, and that the Pataki team "scaled back its energy conservation program, once the country's most aggressive, by more than 70 percent." The PSC under Pataki ended public rate hearings, and only does confidential pricing settlements with utilities.

The administration is so in league now with the new generating companies that John Cahill, the governor's secretary, helped install his own longtime deputy, Gavin Donohue, as the head of the Independent Power Producers, the lobbying group that represents them. Donohue, like O'Mara, had no prior energy experience before taking a key job, but he told the Voice there was "no undue pressure" on the IPP to pick him, and that his environmental background more than compensated.

The collusive contagion that has gripped state government since George Pataki took office has its costs—in nursing and adult homes, as the Times has shown in painful detail this year. It is also a threat to the vitality of the state's economy, which requires that its power be priced fairly and provided reliably, not jeopardized by the agendas of lobbyists and leeches. A governor who tells us every day how proud he is of what his administration has accomplished has in fact put the state on crisis watch, with its electric lifeline perilously uncertain.


Research: Sandy Amos, Yi Chen, Bobby Smiley, Will St. John, Clementine Wallace

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