Just steps away from a splashing creek, the compact hydropower plant in Stephen F. Formel's backyard was supposed to teach his six children to think creatively about energy. Instead, he said, it became a lesson in red tape.Mr. Formel must connect his hydropowered generator to the local utility, New York State Electric and Gas, to start the process of producing electricity for his farmhouse and a 1763 sawmill that is being restored. But a new state regulation requires him to buy $1 million of insurance coverage against damage or injury to the utility or its customers.