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The economic axiom "there is no such thing as a free lunch" has been around for some 160 years, popularized more recently as the title of a 1975 book by Nobel Prize winner Milton Friedman, according to the Columbia World of Quotations. But as hot weather spreads across the nation this summer, its truth seems to have been forgotten by those expecting reliable power delivery during periods of high demand. The free-market forces unleashed by deregulation did attract power plant investments, resulting in significant overcapacity in generation across most of the nation. At the same time, the Federal Energy Regulatory Commission's 2004 State of the Market Report points out that urban areas where high costs limit construction of new power plants or transmission lines suffer from inadequate capacity. The report from FERC's Office of Market Oversight and Investigations calls these needy areas "constrained regions" and says that there are six of them in the U.S., including Southern California and the San Francisco Bay area. Just because capacity—to produce or deliver power—is not growing in these constrained areas does not mean that demand is also stagnant. Rather, there's been a growth in power demand that has not respected the various barriers to electricity delivery, leaving utilities with little choice other than to decide who will have to do without. As California has demonstrated over the past five years, the resulting curtailments are not popular. The question has become "How unpopular?" What are people willing to pay to have electricity every time they flip the switch? Federal regulators have tried to answer this question by mandating increases in the prices paid for electricity during periods of high demand. Economists theorize that this will reduce demand by pricing some users out of the market and increase supplies by attracting investments in generation, admitting that most of the hope is based on funding new power plants to meet these peak demands. For California, FERC's prescription came in an order quadrupling the state's price limits—called market caps—from $250 to $1,000 per MWh in steps to take effect over an extended time period. Many months earlier, however, the same commission decided that high prices alone were not enough and adopted an incentive called locational installed capacity, or LICAP. This promises payments to anyone willing to build a power plant and have it ready for operation during periods of peak demand. These payments would be in addition to payments for a plant's electricity output and would be greater the closer the plant was to an area of high demand. The payments would be recovered as part of the cost of all power distributed in the area protected from power interruptions by the standby capacity. Just as Nobel Prize winner Friedman adopted an old phrase in naming his 1975 tome, the idea of paying for standby capacity is not new to the utility world. In the days before deregulation, utilities were allowed to earn a return on the capital used for any equipment approved by regulators—whether the equipment was used one hour a year or 90 percent of the time. But deregulation did away with guaranteed returns, increasing the cost of borrowing the capital needed for such investments for both utilities and private developers by as much as 50 percent, according to Joseph Somsel, a former Pacific Gas & Electric official. A nuclear engineer, he is currently involved in construction of a nuclear power plant in Asia. The new way of financing standby capacity became a political controversy in mid-June when a FERC law judge approved the LICAP plan put forward by the New England Independent System Operator, the area's power distributor. The same day, the New England grid operator released estimates that the decision would increase its six-state region's cost of electricity by some $10 billion to $13 billion over the next five years. Before dismissing New England as a far-away place featuring strange accents and succulent crustaceans, consider that the Northeast corner of the U.S.—like the Southwest corner—includes two of FERC's six designated constrained regions: Boston and southwest Connecticut. While declining to discuss FERC's locational capacity market theories, California Independent System Operator spokesperson Gregg Fishman said, "We agree with the concept of capacity markets," pointing out that the agency is "in the early stages of looking at a capacity market here in California" ( Circuit , Oct. 8, 2004). Another coast-to-coast similarity is the political reaction. While Californians are floating a ballot initiative to reregulate electric industries, Connecticut?s legislature opened the same door by allowing utilities—which had to sell their power plants a few years ago—to build and own up to 250 MW of peaking capacity. The bill sent to Governor M. Jodi Rell last week would provide conservation and power plant construction incentives aimed at bolstering the state?s inadequate power reserves and offset an estimated $300 million to $600 million a year in higher power costs seen as the state?s share of New England's LICAP pricing. While $600 million doesn't sound like much to Californians, it is another $120/year for an average residence in southwestern Connecticut just to ensure that there will be power to cook the year's 365th lunch—a stark reminder once again that the last megawatt needed to supply electricity on demand leaves no such thing as a free lunch, even if it is microwaved crustaceans.

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