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Wood Hopes SMD Offers Power Investment Recovery Assurances
A standard market design (SMD) for U.S. power markets, which FERC is set to unveil for comments next week, will hopefully go a long way in offering clear “rules of the road” to energy market participants nervous about whether they will be able to recoup money they put into the development of new generation assets, FERC Chairman Pat Wood told federal lawmakers on Wednesday.
Wood made his comments before a Senate Energy and Natural Resources Committee hearing looking at electricity infrastructure issues.
Wood said that when it comes to assuring reasonable recovery to infrastructure investors, “that’s easier to guarantee on the regulated side, i.e., the pipelines and the transmission line side, than it is on the competitive side, which is the gas production, the power plants in particular.” He also noted that FERC is seeing the emergence of more at-risk transmission projects.
“I think the most important thing missing from the picture today that would be needed to ensure a reasonable recovery of investment in the competitive part, i.e. the gas production and power production segment, would be some steady and relatively dependable rules of the road,” he told the Senate hearing.
“There are no standard rules of the road now. I think we can, by having clear rules, reduce what we call regulatory risk quite a bit and I do hope that that’s what we can achieve by the proposed rulemaking that FERC will put out for comment next week and by the already released proposed rulemaking on hooking up of new power plants in the standard interconnection process.” FERC has placed the SMD NOPR on the agenda for its next regularly scheduled meeting on July 31.
Wood also articulated his hope that SMD gives greater clarity to energy market participants in an exchange he had with Sen. Jon Kyl (R-AZ).
Kyl asked Wood whether he’s concerned that the cumulative impact of a series of FERC-related actions will actually deter development of additional needed generation in the West. Kyl specifically mentioned the possible modification of western power contracts, price caps and broad refund provisions on market-based rate transactions in the West.
“I would definitely say that they do not help the situation,” Wood responded. “I wish I had come to a different state of facts than existed when we came a year ago, but the price caps, the contract hearings and the refunds, all that did emanate from a set of facts in late 2000, early 2001 that I think evinced a broken market or one that was pretty close to being broken that impacted not just Californians, but people across the West.”
The FERC chairman went on to say that “I would have loved to have never been down that path and, quite frankly, a big part of our standard rulemaking that we’re putting out next week is to make sure that we never do go down that path again, but have clear rules up front that tell people up front what their expectations are on both the customer and the supplier side.”
Meanwhile, Sen. Frank Murkowski (R-AK) expressed concerns over the parallel trends seen in certain U.S. power markets of increased demand coupled with a lack of new energy infrastructure being built. “Where’s the light at the end of the tunnel? Or do we even have a tunnel?” asked Murkowski.
“We’re in a tunnel. I would say certainly we’re in a tunnel,” Wood responded. “I think it is a long tunnel and I do think it’s important to understand that a lot of the expectations that underpinned the future for a number of investors in new power plants assumed a less robust market and higher prices than have actually come to bear.
“I think it’s important to remember that there has actually been a lot of power plant construction across the country in the last three to four years. Not everywhere…but by and large, there has been a substantial amount of construction of power plants.” That surplus of power plants “has put significant downward pressure on future prices,” the chairman said.
“I think a lot of the expectations of investors in the current companies that are building power plants is that there would be a shortage in ’03 and ’04 and that the forward prices of power were going to be substantially higher than they are looking to be today,” Wood continued. “Of course, a big part of that has to do with the general economic slowdown in the country and the commensurate reduction of growth in power usage.”
But with an “extra bubble, as we saw in the gas industry after gas got opened up in the ’80s and ’90s, if there’s a big bubble there, prices do stay down. While that benefits customers, it does not help those who want to invest in the future,” Wood said.
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