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For the last five years, Lakewood Mayor Anthony Caprino has had a dream of creating a separate electric utility that could deeply slash power costs for the Chautauqua County village.

Today, he's got sticker shock.

The state Public Service Commission last week took a lot of the appeal out of Lakewood's plan to create a municipal utility when it ruled that the village would have to pay Niagara Mohawk $14.5 million if it started its own power company.

That's $7,228 for each of Lakewood's 2,000 electricity customers, and about $9.5 million more than village officials initially had hoped to pay. And that's on top of the estimated $1.5 million it would cost Lakewood to buy NiMo's power lines and other facilities within the village.

Caprino said the price is too much. "It's a little bit too high at the present time," he said. "It's a little bit higher than we expected."

The PSC's decision -- its first ruling on how to calculate exit fees included in Niagara Mohawk's rate plan -- also casts a shadow over the viability of other efforts, including one in Buffalo, to reduce electric rates by forming municipal utilities.

"It sends a message to other communities, especially smaller ones, that it's not economically feasible to do this," Caprino said.

State Sen. Alfred T. Coppola, D-Buffalo, who had championed the idea of forming a municipal electric utility in Buffalo when he served as the Delaware District's representative on the Common Council, agreed.

"With the PSC's decision, they put this whole process in limbo," he said.

The PSC's ruling was being watched closely by industry officials and municipal power advocates because it was the commission's first decision that showed how much it would cost communities that want to leave the Niagara Mohawk system.

With Niagara Mohawk charging rates approaching 12 cents per kilowatt, many officials such as Caprino and Coppola looked at municipal systems in cities like
Jamestown, which charges 3 cents a kilowatt, and saw a way to slash electricity costs that have been blamed for helping to stifle economic development in Western New York.

But the economic realities of forming a municipal utility make it easier said than done. No New York community has formed a municipal utility since Massena did it in 1981.

The PSC decision involves the "exit fees" owed by customers leaving the NiMo system to start their own power companies. Those exit fees cover expenses that Niagara Mohawk took on years ago, with the blessings of state regulators, and was expecting to gradually collect from its customers over the next dozen years.

By bolting from the NiMo system to start their own power company, utility officials said the communities were trying to dodge their fair share of the costs and place an even greater burden on their remaining customers, who would have been forced to pick up the slack.

"If a community were to leave, it effectively shifts costs from one customer to another," said Stephen F. Brady, a Niagara Mohawk spokesman. "It should send a message that the commission remains very consistent in its approach against cost shifting."

To prevent that, state regulators agreed to a provision in Niagara Mohawk's 1998 PowerChoice rate plan that instituted the exit fees. But until the PSC's decision last week, there was widespread disagreement over what those exit fees should be and how they should be calculated.

As a result, estimates of what those fees could be have varied widely. For instance, Lakewood argued that it should pay slightly less than $5 million to leave the NiMo system, while the utility initially told the PSC it was seeking $18 million. Other early Niagara Mohawk estimates, based on a different formula used by federal energy regulators, had valued the exit fee as high as $39 million.

In Buffalo, supporters of the proposed municipal utility have argued that the city should be able to buy out all of Niagara Mohawk's facilities and systems in Buffalo for about $270 million. But that figure includes no money for NiMo's so-called "stranded costs," which the exit fee is designed to recover. In contrast, NiMo officials have estimated the exit fee for the city to be $900 million.

Brady said it would be difficult to say what Buffalo's exit fees would be if the PSC used the same formula the commission used in the Lakewood case because each community has different characteristics that would affect the calculation. Comparisons would be especially difficult between a rural village of 2,000 customers, like Lakewood, and a city the size of Buffalo.

And Brady said the PSC ruling shows that the commission intends to allow Niagara Mohawk to collect exit fees from departing customers to recover a portion of the revenue that the utility will lose if a customer leaves its system.

"Those who have said that exit fees were just a scare tactic or that exit fees weren't real, I think it shows that that's not true," Brady said. "It certainly sends the message that this is a real issue that needs to be dealt with."

As for Lakewood, Caprino said the village is expected to start looking at other options to help reduce electricity rates for its residents, although he declined to say what those alternatives might be.

The PSC, "given the magnitude of Lakewood's exit fee," directed its Office of Consumer Education and Advocacy to help the village and its residents if they are interested in trying to lower their electricity costs by banding together to form a group that could purchase power in greater volume, and possibly, at lower prices.

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