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 price caps in the generation market, saidVirginia 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. Virginia Power goes a step further – it wants FERCto even wipe out the existing price caps in those two powermarkets.

In its May 17 notice of interim reliability procedures, FERCtook only “some minor steps” to increase access to existinggeneration during the summer months, Virginia Power said. It”unfortunately stopped short of eliminating the regulatory burdensimposed by price caps on the generation market. Price caps distortprice signals necessary to bringing new generation to market. Pricecaps inhibit new entry into 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 early last week amid fears that FERC maymove to cap power prices during periods of high electricity usethis summer. The concerns — which some insisted were unfounded— surfaced when the Commission in late May acceded to the NewYork Independent System Operator’s request to impose price caps onits 10-minute non-spinning operating reserves on an interim basis.This was a “very limited” cap for “only one ancillary service for alimited time,” a FERC spokeswoman stressed.

One company that felt some of the effect of FERC’s action wasDynegy Corp. Its stock lost five points on June 2 and about sixmore points last Monday, ending the day at 68 1/2. It began toregain some of its strength in trading later in the week. Otherenergy companies whose stocks took hits were Enron Corp., CalpineCorp., El Paso Energy and 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 will 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 truly effective, considering that a large portion ofthe on-site generation isn’t interconnected to the grid.

A DPCA member, Encorp, has estimated that 60 Gws of existingdiesel and gas generation in the United States aren’t 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 are 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 in order for all of this to work, it’s going to take timeand money. Time for distributed generators to obtaininterconnection approvals from their local utilities, investmentsin proper control equipment, and in some cases, retrofits so dieselengines can switch to natural gas as a fuel, the DPCA said. It’sestimated the interconnection/retrofit/upgrade costs will average$100-$150 per kW of installed capacity (for units of 500 kW orgreater).

In light of these costs, the DPCA called on FERC to expand itsemergency order to apply to distributed generation sold during thesummer for the next three years. “This would provide adequateassurance to the owners of on-site generation that they would beable to recover the cost of interface and control equipment, or toconsider unit replacement. We believe that a longer time framewould be reasonable, given the steady annual growth in demand forelectricity (as well as rising average temperatures around theglobe).

Susan Parker

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