New York may well face a significantly increased risk for a major blackout during the summer of 2007 due to an arbitrary and detrimental rule change that holds the potential to destroy or emasculate emergency demand response programs in New York City and the state, according to ConsumerPowerline (CPLN), a strategic energy asset management firm.

The proposed rule change, which would result in the reduction of specific power plants’ “price-cap” from $105 kW/yr to $85 kW/yr, is now in front of the Federal Energy Regulatory Commission (FERC), and a ruling is expected by the Commission in early March. The New York Independent System Operator (NYISO), with the backing of Consolidated Edison (Con Edison) and the New York Public Service Commission, proposed the changes.

While calling the move a seemingly small and inconsequential regulatory change — CPLN holds it would actually create “a major disincentive” to consumer participation in the program, adding that the reduction could potentially generate an enormous negative impact on the city’s ability to call on needed energy during a power emergency.

Calling demand response an “electricity lifeline” that has kept the lights burning when the electricity grid was on the brink of failure, CPLN is urging FERC to immediately halt NYISO’s efforts to gut the program, and appealing to FERC to protect New York’s energy security. The company said efforts to gut demand response are in direct opposition to two recent government reports — one by FERC and the other by U.S. Department of Energy (DOE). Both recommend implementing emergency demand response programs nationwide to provide relief from an overloaded electricity transmission system and to reduce the likelihood of blackouts.

“This proposed reduction would likely cut demand response capacity by a minimum of 25% and by as much as 100%,” said Mike Gordon, ConsumerPowerline’s founder and president. “A substantial, but unknown number of participants would drop out of the program, putting hundreds of thousands of businesses, homes and hospitals at risk. The impact of just a 25% loss in program participation translates to 150 MW of lost emergency power capacity — or enough power to support 125,000 homes.

“If the entire program folds, we can almost guarantee a major blackout in the event the summer of 2007 even approaches the severity of last year’s temperatures,” Gordon added. “Without a robust emergency demand response program in place, and with unanticipated load-growth, we’re truly on red alert. There is a real prospect of blackouts this summer that would make the 2006 Queens blackout look like a walk in the park.”

The city’s demand response program relies on participation from large energy users that shed power and thereby resupply the starved electric grid when the threat of a power outage looms, CPLN explained. The program was widely credited by Con Edison and others with helping to keep the lights on throughout most of the city, during last summer’s triple-digit heat wave. Despite selective failures that struck portions of Queens, Westchester County and other parts of New York, the firm said demand response saved millions of dollars in lost business revenues and hundreds of thousands of families from going without power.

Following the 2006 Queens blackout, CPLN applauded the emergency demand response programs and called for a “louder call” for them throughout the city and state. At that time, Gordon also said new rules were needed to permit “the little guy” — small business and building owners — to be part of the program.

The firm added that organizations that supply electric power to the grid during an emergency say if the FERC regulation goes through, they will be hard pressed to guarantee continued participation in the emergency demand response program.

“We believe our hotels in New York City have contributed to the grid’s reliability by participating in demand response programs” said John Lembo, senior director of energy for Starwood Hotels & Resorts Worldwide Inc. “To us, participating in demand response programs helps ensure that the lights will be kept on for all New Yorkers. It’s good business and good corporate citizenship. It requires an additional investment in our infrastructure so that we can safely and effectively run our establishments while participating in a scheduled event. The incentives available for participating in demand response programs help offset some of the additional costs necessary to participate in the program. If FERC allows this proposed market change, market revenues will fall, and our hotels will have to reconsider participating in demand response.”

The FERC now has less than a month to review the proposal, and Gordon says all New Yorkers should pay close attention to what FERC decides.

“We need for the NYISO, [Con Edison] and the PSC to immediately stop playing Russian roulette with our emergency electrical power needs. They are using a meat cleaver approach to operate on the power market’s heart. If they do not work with market participants to apply the proper scalpel, they will gut demand response programs, perhaps beyond recovery,” Gordon said. “I do see some hope, though, in the fact that the current proposal was driven late last year, by an outgoing PSC commissioner, without proper consultation with market participants, and without an analysis of the potential impacts. It opens up the possibility that the new commission will reverse course.”

In addition to the greater likelihood of blackouts, Gordon said the proposed changes could also lead to long-term rate increases for consumers due to construction of fewer power plants, and the increased use of costly “peaking” power plants to bail us out in a power emergency. “The economic analysis of this rule change would have been laughed out of any high-school algebra classroom,” said Gordon. “We all know that it’s more cost-effective to buy two bars of soap for a dollar than it is to buy one of those same bars for 90 cents. Similarly, consumer groups’ analyses of the lower cost of capacity took price into consideration, but failed to consider the greater quantity of power that will need to be purchased under the new rules.”

CPLN said that beyond the immediate critical challenge to demand-response on its plate, FERC should support rule changes that would expand demand response from its current 600 MW size to 1500 MW — enough energy to power more than a million homes or businesses.

Gordon said, “To accomplish this, we need to ensure that demand response is a key component of the state’s emerging renewable energy portfolio. We proposed, in our submission to FERC, that the agency support an effort to set aside emergency resources that are not powered by fossil fuels. Without this addition, consumers will be forced to pay higher rates, and suffer through a less secure system.”

Renewable portfolio standards (RPS) mandate a state to generate a certain percentage of its electricity from renewable sources such as wind, geothermal or bio-energy sources. “The requirement that a certain amount of such resources need be available in an emergency will secure the electrical power grid against natural and man-made disasters that interrupt the supply of such resources as natural gas, which is provided from outside of the area, via pipeline,” Gordon added. “Now is the time to expand on, and cement the demand response resource in the Big Apple, not cut it to the core. If anything, this program saves the city millions, keeps the environment cleaner, and when adequately expanded, would provide the level of energy security the city critically needs.”

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