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HIGH UTILITY RATES ARE DRAINING LIFE OUT OF SOME BUSINESSES

Five miles south of one of the world's greatest sources of cheap electricity, Shirley Rogan stood beneath a single fluorescent light in her office each morning last fall.

Doing the books, she struggled to keep the light shining on her dream of owning her own business.

But it was no use. The lights went out and the doors were locked for good at Mrs. Rogan's Convenient Food Mart on Grand Island last Thanksgiving.

"It was always a struggle," Mrs. Rogan said. "Nobody told us to expect the electric bills we were getting -- $3,800 to $4,200 every other month."

Nobody told anybody in New York State to expect the electric bills they're getting.

They're the highest in the continental United States for commercial businesses and among the highest for homeowners and heavy industry.

And they're yet another reason why upstate remains downbound.

Those rates provide a damaging jolt to businesses that use a lot of power, from convenience stores to food processors to manufacturers.

Blame it on the State Legislature and the utilities themselves.

The state forced utilities to buy power they didn't need at prices they couldn't afford.

The state and localities piled taxes on the utilities -- about a fifth of your monthly electric bill goes to the government.

Finally, utilities such as Niagara Mohawk Power Corp. made one costly move after another.

Although the state recently approved a plan that will cut Niagara Mohawk's industrial rates 25 percent, that won't come close to solving New York's energy crisis: electricity prices that are more than 50 percent higher than the national average.

"Certainly, for some heavy industries that are highly dependent on electric power, cheaper prices will determine where they locate," said Jerome E. Haass, a business professor at Cornell University who used to be chief of research at the Federal Energy Regulatory Commission.

Power rates also determine whether some small businesses survive.

Jim and Shirley Rogan can attest to that.

They bought their convenience store in early 1993 and opened it with high hopes of making a good living.

It didn't turn out that way. They never lured as many customers as they expected, and the cost of running countless coolers overwhelmed them.

"It got to the point where I had to say: 'Who do I pay -- the electric company, the sales tax or the lottery?' " said Mrs. Rogan, 59. "I was robbing Peter to pay Paul. We started putting our money, our stocks, everything into that store. So we ended up losing not only the store, but all the stuff for our retirement."

Forced power purchase

The Rogans didn't know it, but they were treated to an accidental dose of electroshock therapy, thanks to the New York State Legislature.

In 1981, the Legislature passed a bill encouraging the growth of independent power producers. These small companies supposedly would produce more clean energy and help the state through any 1970s-style energy crisis.

To get these fledgling co-generation and hydroelectric plants going, the Legislature forced utilities to pay them at least 6 cents a kilowatt hour for the energy they produced -- even though electricity cost less than that at the time. In essence, the state bet that energy prices would keep growing, as they did through the 1970s, and that energy needs would grow, too.

Neither happened. That law was repealed in 1992, but not before it saddled utilities with countless contracts for energy they didn't need, at prices twice as high as the market rate. Forced to swallow all those contracts, Niagara Mohawk had to mothball some of its own, cheaper power plants.

Those contracts are the main reason why New York's electric rates -- which were close to the national average in the mid-1980s -- skyrocketed.

"The Legislature screwed up," said Christopher A. Cernick, an Albany lawyer who lobbies on behalf of big power users. "It wasn't intentional."

Niagara Mohawk will buy out many of those weighty contracts under its PowerChoice plan.

Factory owners are happy the plan includes a 25 percent industrial rate cut. But that doesn't solve the price problem, since Niagara Mohawk's industrial rates were 74 percent above the national average before the cut.

And PowerChoice offers a mere 3.2 percent rate cut for stores and office operations, which pay rates that are 39 percent higher than what factories pay.

"The trouble is, if you look at where the job growth has been, it's in those service businesses," said Keith M. Belanger, administrative vice president at Buffalo's M&T Bank.

PowerChoice and other restructuring plans do nothing to address the second big reason for the state's supercharged electricity rates: high taxes.

You know that old saying: "Don't tax me, don't tax thee, tax the guy behind the tree"?

New York's electric utilities are behind the tree. And you're paying their taxes without knowing it.

Taxes account for 18 percent of the typical upstate utility bill. That's more than three times the national average.

For starters, 4.25 cents on a dollar go to the state as the gross receipts tax -- which, according to energy experts, couldn't be more aptly named.

"It's a hidden tax that they don't even want people to know about," said Frank Dorkey, president of Forensic Economics, a Rochester business consulting firm.

Since utilities pay it, the gross receipts tax prompts little voter outrage -- which makes it look like a great idea to politicians, too. Buffalo charges a 3 percent gross receipts tax. Troy is considering doing something similar.

Prodded by Gov. Pataki, the State Legislature last year voted to shave a percentage point off the state gross receipts tax.

Yet that would do nothing to cut the biggest utility tax of all: local property taxes. If those were listed on the bill, the typical Niagara Mohawk customer would see that he or she pays 9 cents on a dollar to the local tax assessors.

Utilities often fight their assessments, usually to no avail. Instead, municipalities and school districts keep zapping them with higher assessments.

"I hear it from people when I'm out speaking," said Theresa A. Flaim, vice president of corporate strategic planning at Niagara Mohawk, which pays 1,400 taxing districts a total of $250 million in property taxes a year. "They'll tell me: 'We have to raise your taxes because we have major industry leaving the area, and we have to make up the revenue."

That only makes matters worse for the companies that remain.

Kaufman's Bakery of Buffalo struggles to break even while paying monthly electric bills that top $40,000. A competing bakery from Ohio -- where electricity costs 24 percent less -- underbid Kaufman's and temporarily won the contract to provide baked goods to the University at Buffalo.

"Here we are, right close to Niagara Falls," said Bernard Rosenberg, Kaufman's president. "And we're paying some of the highest rates."

There's a grab bag of reasons why cheap hydropower from Niagara Falls isn't enough to make electricity a bargain in Western New York.

For one thing, the New York Power Authority produces only a quarter of the state's power.

For another, cheap hydro power is spread across the state and isn't meant to just benefit the Buffalo area, said James Yates, director of business marketing for the Power Authority.

"And unfortunately, there's all this other baggage," said Maureen Helmer, deputy chairman of the state Public Service Commission.

For example, the state imposed some of the nation's most stringent pollution controls on coal-fired power plants. So when New York State Electric & Gas built its Kintigh station in Somerset, it cost nearly $1 billion. Gerald E. Putman, a senior vice president at NYSEG, said a third of that bill went to environmental protection.

Bringing rates down

Speaking of big costs, there's Niagara Mohawk's $6.4 billion Nine Mile 2 nuclear plant in Oswego -- which produces electricity at twice the cost on the open wholesale market. NYSEG owns 18 percent of the plant, so it boosts that utility's rates, too.

Beyond that, some customers see Niagara Mohawk as a bloated, wasteful monopoly. They note that the Syracuse-based utility is getting on just fine now minus the 2,600 workers that the company got rid of in 1994.

Those critics don't buy Niagara Mohawk's argument that the state deserves the blame for high rates.

"It's a smoke screen to cover decades of poor investment and bad management," said Warren Bartel, president of Outokumpu American Brass of Buffalo.

American Brass remains profitable despite electric bills that top $1 million a month. Because of a quirk that Bartel is trying to fix, his firm might pay more under PowerChoice.

In the face of such problems, the Pataki administration is working on two fronts to bring rates down. Both Kaufman's and American Brass will be receiving some cheap power under the Power Authority's "Power for Jobs" plan -- the first major new allocation of such power in years.

And all across the state, the Pataki administration is working with utilities to enact restructuring plans such as Niagara Mohawk's. Those plans aim to bring down rates and to open the electrical market to competition.

Eventually, electricity customers will be able to choose their electric company, just as you can choose your long-distance phone service.

That could take longer in New York than in other states. The State Legislature can't agree on a bill to deregulate the utility industry, so the state took the slower route of cutting deals with each utility.

"It will take another five to eight years before there will be a viable competitive market for the average New Yorker," said Carol E. Murphy, executive director of the Independent Power Producers of New York.

That's a long time to wait for people like Brian O'Shaughnessy, chairman of Revere Copper Products, which employs 500 in Rome.

O'Shaughnessy worked with Niagara Mohawk to lower his rates. He got some of that cheap "Power for Jobs."

"You'd think that, with all these special rates, our costs would be pretty comparable to our competitors in Iowa, Illinois and Pennsylvania," he said.

They're not. They're still more than $1 million a year higher.

WEDNESDAY: The great exodus.

Jerry Zremski's e-mail address is: jzremski@erols.com.

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