Serious issues confront the wholesale energy marketplace, and without major improvements and enhancements within the current regulatory structure across the country, “there’s the potential for a hard landing in the supply situation,” a top Reliant Resources Inc. (RRI) official warned Thursday.

Stephen Naeve, COO of Houston-based RRI, understated what has become obvious: stability is needed across the board. Without some improvements to current regulatory requirements, “marginal units will shut down. There’s a very significant amount of capacity…30-40% in PJM and the Midwest…and if they cannot recover the value of price volatility and they have a substantial amount of capacity, needed maintenance may not occur; reliability will suffer.” But, he added, “It doesn’t have to be this way.”

Speaking at the Merrill Lynch Global Power & Gas Leaders Conference, Naeve noted that the current markets are trading below marginal markets in off-peak months. “This just cannot occur,” he said. “In the peak months, there is some headroom on a cost basis. The problem is, in many markets, they’re not able to realize that headroom.”

Naeve said, “If you consider our current situation, we have inconsistent rules across the markets. There’s uncertainty on the timing of further restructuring…there’s a lot of intervention in the markets. Clearly, we need certainty in these markets, if the markets are going to function, if the investors are going to bring capital. There is substantial capital at risk in the current market environment.”

Capacity markets and payments are also “issues” that need to be addressed, he said. “If we move toward more managed markets, we will be required to plan forward capacity. This would bring a certain amount of stability to the industry. If you do it on a forward basis, you’ll have to look out three years plus for some of your contracts.”

In the near-term, some markets are not competitive, he conceded, noting that the state of New York was an example of how price mitigation can work “if it’s reasonable. It cannot work if mitigation does not allow full recovery of costs. It leads to plant closures. Where we’re going to have mitigation is something that occurs before the market opens…you can’t have mitigation where you run our plants, try to do the right thing, keep them going, and then later figure out if you’ve made money or not. Markets are not going to work based on that approach.”

To work through the problems confronting his company as well as others, Naeve said he has had “significant conversations” with some of the independent system operators where RRI has generation. “The problem has to be dealt with here. Some sort of capacity value has to be there.” For instance, he noted that RRI is being paid “nothing” for ancillary services in California today, but is hopeful that the California ISO will respond to an order by FERC to implement capacity payments.

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