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FERC Urged to 'Just Say No'To Power Price Caps

FERC Urged to 'Just Say No'To Power Price Caps

The interim measures proposed by FERC last month to alleviate reliability stresses on the electric transmission grid were a nice first try, but the Commission must be delusional if it seriously thinks they will be of much help this summer, power market participants say.

If it really wants to do some good, FERC should start by immediately ruling out price caps in the generation market, said Virginia Electric and Power and the Electric Power Supply Association (EPSA) in separate comments [EL00-75].

The "most valuable immediate action" the Commission could take to promote investment in new generation is to "reject calls for [further] price caps and other ISO market intervention measures that distort market signals and increase risk," the EPSA noted. Specifically, the group opposes the expansion of price caps into markets other than southern California and New England, where caps already exist. Virginia Power goes a step further - it wants FERC to even wipe out the existing price caps in those two power markets.

In its May 17 notice of interim reliability procedures, FERC took only "some minor steps" to increase access to existing generation during the summer months, Virginia Power said. It "unfortunately stopped short of eliminating the regulatory burdens imposed by price caps on the generation market. Price caps distort price signals necessary to bringing new generation to market. Price caps inhibit new entry into the market."

The message was the same from investors on Wall Street, where the stocks of energy companies that build peak-load generation facilities took a beating early last week amid fears that FERC may move to cap power prices during periods of high electricity use this summer. The concerns --- which some insisted were unfounded --- surfaced when the Commission in late May acceded to the New York Independent System Operator's request to impose price caps on its 10-minute non-spinning operating reserves on an interim basis. This was a "very limited" cap for "only one ancillary service for a limited time," a FERC spokeswoman stressed.

One company that felt some of the effect of FERC's action was Dynegy Corp. Its stock lost five points on June 2 and about six more points last Monday, ending the day at 68 1/2. It began to regain some of its strength in trading later in the week. Other energy companies whose stocks took hits were Enron Corp., Calpine Corp., El Paso Energy and Coastal Corp.

Dynegy declined to comment on its stock activity, but it made clear its distaste for price caps in comments to FERC. It urged the Commission to "resist the temptation to endorse price caps (and their functional equivalents), as they will only discourage future investment in generation and transmission, balkanize market participants and nullify meaningful market signals that would otherwise stimulate market participants to correct reliability problems in the short term."

In short, "rather than imposing economic burdens, pricing uncertainty and arbitrary rule changes on those who are willing to commit 'at-risk' resources to build the new generation required to meet the nation's increasing demand for power, Dynegy proposes that the FERC's efforts be designed to provide, not limit, the risk-takers with the opportunity to market their output to as many free and open markets possible."

In one of its interim measures, the Commission will allow businesses (such as automakers), which own on-site generation to supply their private power needs, to sell excess power at market rates to utilities or non-affiliate buyers during shortage situations without first notifying FERC of their intent. But the Distributed Power Coalition of America (DPCA) questioned whether this would be truly effective, considering that a large portion of the on-site generation isn't interconnected to the grid.

A DPCA member, Encorp, has estimated that 60 Gws of existing diesel and gas generation in the United States aren't grid connected. "This translates to several hundred megawatts within each U.S. metropolitan area" that are "precluded from flowing electricity back to the grid," the distributed generation group told FERC.

Although it recognized that interconnections primarily are a matter for state regulators, the DPCA said "positive steps by FERC to adopt interconnection standards for those transactions that involve sale for resale at the wholesale level would help speed this process."

In fact, it proposed that the Commission offer incentives to transmission-owning utilities that are willing to expedite the interconnection requests of on-site generators. For instance, a utility that provides a "fast-track" interconnection "could be allowed to charge an additional one percent above the filed [open access transmission tariff] during the summer program, and retain that amount as profit for its shareholders. This would create a win-win scenario for the utility and the [distributed generation] owner/operator," the DPCA noted.

But in order for all of this to work, it's going to take time and money. Time for distributed generators to obtain interconnection approvals from their local utilities, investments in proper control equipment, and in some cases, retrofits so diesel engines can switch to natural gas as a fuel, the DPCA said. It's estimated the interconnection/retrofit/upgrade costs will average $100-$150 per kW of installed capacity (for units of 500 kW or greater).

In light of these costs, the DPCA called on FERC to expand its emergency order to apply to distributed generation sold during the summer for the next three years. "This would provide adequate assurance to the owners of on-site generation that they would be able to recover the cost of interface and control equipment, or to consider unit replacement. We believe that a longer time frame would be reasonable, given the steady annual growth in demand for electricity (as well as rising average temperatures around the globe).

Susan Parker

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