The draining of capital from the U.S. power industry needed to build new power plants and a lack of incentives from utility regulators to make better use of generation could lead to power shortages in certain parts of the country in the back half of this decade, an official with the Electric Power Supply Association (EPSA) warned on Friday.

“When this economy starts to turn around, at some point the oversupply of power right now in certain parts of the country is going to go away,” said Lynne Church, EPSA’s president, at a press briefing in Washington, DC, sponsored by the U.S. Energy Association.

She pointed out that in certain pockets of the U.S., such as New York City and southwestern Connecticut, “there already is a problem.”

From Church’s point of view, the power industry needs to “get in place a standard market design-type of approach so that you have the right incentives to builders of new plants to do that, because right now the generation sector is in such financial trouble that we’re pulling back.” FERC last summer rolled out its sweeping standard market design (SMD) proposal for U.S. wholesale power markets.

Church said that many of the plants currently under construction are expected to be completed and come online in 2004 through 2006.

“But the later years of the decade could see some shortages begin to crop up, simply because the financial strength [has been depleted], as the capitalization hasn’t been there to build the new plants, and because we haven’t provided the right incentives from a regulatory standpoint to efficiently use generation.”

EPSA is the national trade association representing competitive power suppliers, including independent power producers, merchant generators and power marketers.

Meanwhile, the public power sector is also clearly worried about whether the U.S. will have enough capacity to meet ramped up demand when the country’s economic engine once again clicks on all cylinders.

“It seems to me, one of the lessons we’re learning is investors want security in terms of what they’re putting their money into and a merchant plant that is not backed by long-term contracts is not the kind of security that investors are looking for,” said Alan Richardson, CEO of the American Public Power Association.

Richardson said that FERC’s SMD proposal “may or may not produce that stability with uniform rules across the country that Wall Street is now demanding. But it certainly isn’t going to produce it within the next year, the next two years, probably the next four years.”

The APPA official said that it will be another year before a final SMD rule is adopted “and another three years, at least, before the legal challenges are out of the way. Richardson said that “there will be legal challenges from the Pacific Northwest or from the Southeast, or both, or others, unless Congress steps in and gives its blessings to what the Commission’s doing and saying ‘Go ahead, you have the complete authority to do this, no questions asked.'”

Richardson said that “if you look at the curves, we come out of the surplus period in about 2005. Assuming everybody works out of their debt and all other good things happen, the economy turns around, we’re still a couple of years away from what I see as being a stable environment that will attract capital.”

Near term, Church said that this year “there’s such a surplus of power in most parts of the country that it should help keep downward pressure on prices.” The EPSA president said that the current power surplus for consumers “is good. It’s not great for our industry, but that’s life.”

She also noted that “we’re beginning to see some of the benefits of competition in terms of the environment, as older natural gas plants that can’t compete with the newer plants are being mothballed in California, Texas, New England.”

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