The interim measures proposed by FERC last month to alleviatereliability stresses on the electric transmission grid were a nicefirst try, but the Commission must be delusional if it seriouslythinks they will be of much help this summer, power marketparticipants say.

If it really wants to do some good, FERC should start byimmediately ruling out all price caps in the generation market,said Virginia Electric and Power and the Electric Power SupplyAssociation (EPSA) in separate comments {EL00-75].

The “most valuable immediate action” the Commission could taketo promote investment in new generation is to “reject calls for[further] price caps and other ISO market intervention measuresthat distort market signals and increase risk,” the EPSA noted.Specifically, the group opposes the expansion of price caps intomarkets other than southern California and New England, where capsalready exist.

In its May 17 notice of interim reliability procedures, FERCtook only “some minor steps” to increase access to existinggeneration, Virginia Electric said. It “unfortunately stopped shortof eliminating the regulatory burdens imposed by price caps on thegeneration market. Price caps distort price signals necessary tobringing new generation to market. Price caps inhibit new entryinto the market.”

The message was the same from investors on Wall Street, wherethe stocks of energy companies that build peak-load generationfacilities took a beating earlier this week amid fears that FERCmay move to cap power prices during periods of high electricity usethis summer. The concerns surfaced when the Commission last weekagreed to the New York Independent System Operator’s request toimpose price caps during peak periods.

One company that immediately felt the sting of FERC’s action wasDynegy Corp. Its stock lost five points last Friday and about sixon Monday, ending the day at 68 1/2. It began to regain some of itsstrength in mid-day trading yesterday. Other energy companies whosestocks took hits were Enron Corp., Calpine Corp., El Paso Energyand Coastal Corp.

Dynegy declined to comment on its stock activity, but it madeclear its distaste for price caps in comments to FERC. It urged theCommission to “resist the temptation to endorse price caps (andtheir functional equivalents), as they will only discourage futureinvestment in generation and transmission, balkanize marketparticipants and nullify meaningful market signals that wouldotherwise stimulate market participants to correct reliabilityproblems in the short term.”

In short, “rather than imposing economic burdens, pricinguncertainty and arbitrary rule changes on those who are willing tocommit ‘at-risk’ resources to build the new generation required tomeet the nation’s increasing demand for power, Dynegy proposes thatthe FERC’s efforts be designed to provide, not limit, therisk-takers with the opportunity to market their output to as manyfree and open markets possible.”

In one of its interim measures, the Commission would allowbusinesses (such as automakers), which own on-site generation tosupply their private power needs, to sell excess power at marketrates to utilities or non-affiliate buyers during shortagesituations without first notifying FERC of their intent. But theDistributed Power Coalition of America (DPCA) questioned whetherthis would be effective, considering that a large portion of theon-site generation presently isn’t interconnected to the grid.

A DPCA member, Encorp, has estimated that 60 Gws of existingdiesel and gas generators in the United States are not gridconnected. “This translates to several hundred megawatts withineach U.S. metropolitan area” that are “precluded from flowingelectricity back to the grid,” the distributed generation grouptold FERC.

Although it recognized that interconnections primarily were amatter for state regulators, the DPCA said “positive steps by FERCto adopt interconnection standards for those transactions thatinvolve sale for resale at the wholesale level would help speedthis process.”

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

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

In light of these costs, the DPCA called on FERC to expand itsemergency order to apply to distributed generation sold during thesummer months for the next three years. “This would provideadequate assurance to the owners of on-site generation that theywould be able to recover the cost of interface and controlequipment, or to consider unit replacement. We believe that alonger time frame would be reasonable, given the steady annualgrowth in demand for electricity (as well as rising averagetemperatures around the globe).

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