Guest Editorial: Open, Transparent, Competitive Electricity Procurement?Why Not?

By Published On: January 31, 2004

<i>By Steven Kelly Independent Energy Producers Policy Director</i> Seems like an open-and-shut case. Why wouldn?t consumers and market participants seek energy procurement processes that are open, transparent, and competitive? After all, isn?t this how most governments procure mundane yet indispensable products such as paper and pencils? On the other hand, what happens when procurement is sole-sourced? Think DMV (computers), Oracle (computers), Halliburton (whatever was lying around, apparently), or a whole host of procurement processes that went afoul when they were not open, transparent, and competitive. Last year was characterized by planning processes and procurements that were heavily redacted to everyone except a very small group of non-market participants in the Procurement Review Group (PRG). The PRG, officially sanctioned by the California Public Utilities Commission to review utility procurement, is composed for the most part of individuals without extensive expertise on detailed procurement matters and the energy marketplace. While varying according to utility, a utility?s PRG may include consumer groups (e.g., The Utility Reform Network, the Utility Consumers? Action Network, the Office of Ratepayer Advocates), environmental groups (the Union of Concerned Scientists, the Natural Resources Defense Council), labor unions (the Coalition of Utility Employees), and state agency representatives (the CPUC and the California Energy Commission. What types of quality products and services did we get? Unfortunately, it?s hard to tell because little is transparent and open. However, we did find out the following either just before or after a regulatory approval: The TrueSolar power-purchase agreement (PPA) was the least cost-effective bid in Southern California Edison?s interim renewables solicitation. The deal involves a grid-connected 5 MW solar project near Barstow. TURN has estimated the total cost at $0.0625/kWh, which exceeds the commission?s $0.0537/kWh renewables market-price ?benchmark? by an estimated 17 percent. Would anyone not in the Procurement Review Group have known this if the Energy Division had not released some materials just prior to the commission?s approval? Clearly not. Edison purported that the 1,054 MW Mountainview project was cost-effective. But, one has to ask, compared to what? Calpine Corporation, a California-based generator, has stated in an affidavit to the Federal Energy Regulatory Commission that it could have saved more than $300 million for state ratepayers if it had been given an opportunity to bid on the equivalent products to be provided by Mountainview. Edison itself identified in its FERC Mountainview application (unredacted) at least two projects in Southern California with lower capital costs. This represents potentially $300 million in additional costs borne by ratepayers due solely to the lack of an open, transparent, competitive procurement mechanism. Would anyone have known this if the Federal Energy Regulatory Commission did not require a more transparent filing? Clearly not. This trend is ominous. Some folks, including regulators, seem oblivious to what these procurement processes and approvals signal: The utilities will get first shot at building essentially risk-free generation. Independents (those still around) will ?compete? for the scraps while assuming all the construction and operation risks themselves. Does anyone remember that Edison?s San Onofre Nuclear Generating Station Units 2 and 3, roughly 2,000 MW, had an initial cost estimate of $436 million (in 1971)? What did the cost of these nuke units come in at? A cool $4.51 billion (in 1986). Do the math. That?s a cost overrun of 1,030 percent borne by ratepayers. Yet, in spite of this history, some California legislators and regulators advocate for the utilities owning and operating 70 percent of the generation assets in California because they say it?s in the ratepayer?s best interest. I can understand why the utilities would want to hearken back to the good ol? days of redacted procurement processes. I can?t for the life of me, however, understand why consumer groups, policymakers, and regulators would support utilities going back to that closed, noncompetitive environment. If planning and/or procurement processes are not periodic and transparent, then no one (except the buyer) can begin the long process of planning new generation. (Periodic means occurring in a timely manner, such as every two years, in order to limit risk in pre-development.) It takes years to develop a new site, negotiate with landowners, obtain necessary permits, and so on. Knowing the needs of the utilities (where, what, when) provides the necessary information to start this process. Knowing that the utility will have an open, transparent, competitive procurement in the future sends the proper signals to developers to continue this work. The alternative, conducting ?just in time? procurements, only serves to foster infrastructure development in a crisis mode where the state, by necessity, is forced to bounce from one fleeting opportunity to another as energy and capacity shortages loom immediately on the horizon. This should not be the policy foundation for needed energy infrastructure development in California, but it appears to be the case. From the ratepayer?s perspective, why not open up the competition to allow more, rather than fewer, supply offers? Why not make the planning and conduct of a procurement transparent, so that market participants can plan for participating in a utility procurement, thereby enabling them to devote the years of work to developing the best, lowest-cost sites for new generation? Why not make the procurement process competitive, so that all sellers are forced through market pressures to offer the best deal to consumers and then live with the deal that they bid? It has been argued by some that utility planning and procurement information must be shielded from the public, or else market participants (i.e., ?the sellers?) will use the information to their advantage and to the detriment of the ratepayers. Yes, some information should be shielded. But shouldn?t this shielding be limited to truly proprietary and confidential bid information? For example, actual bid data should not be revealed prior to selection of a winner. But why not afterward, particularly in the context of a long-term contract award? Similarly, market-sensitive heat rate data, essentially measuring the operational efficiency and competitiveness of a generation unit, should be held confidential. But, on the other hand, should utilities? projected energy and capacity needs 5 and 10 years out be considered confidential? Is the real objective to preclude competitors from having sufficient information to plan competitive alternatives? Without basic information, the utility steps in, offering its own projects as the sole means to prevent future price volatility and/or power shortages. Sound familiar? Does anyone really believe that the Mountainview project is the sole project out there? The real question to ask is: Why would consumers not want to know what competitive alternatives are available? Why would consumers not want competitive pressures to drive pricing down and value up? Why would consumers not benefit from being better informed about energy choices before the choice is made for them? And, most importantly, why would regulators and policy makers not want this as well? <i>?Editors’ note: The views expressed are those of the author and are not necessarily the views of</i> Energy Circuit.

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