New Utility-Generator Coalition Misses Consensus

A proposal offering a partially united front to regulators supports Southern California Edison's unprecedented plan to spread the cost of new contracted power supplies beyond its ratepayers. The hybrid market reform pitch was the subject of secret meetings among California Energy Commission chair Joe Desmond, Edison, Pacific Gas & Electric, Duke, Dynegy, AES, Mirant, Reliant, and Williams. In addition to spreading the cost of new power supplies outside utility territory, the draft plan proposes ending current wholesale price caps and must-offer obligations. Edison floated the idea of spreading cost responsibility beyond its borders this spring. The plan was met with derision by California Public Utilities Commission president Mike Peevey ( Circuit , June 3, 2005) and some in the generator community. In the meantime, however, generators have become increasingly disillusioned with progress on the grid operator's market redesign and the commission's resource-adequacy workshops. A few generators are hooking up with Edison, which is usually considered their nemesis, apparently hoping to leverage some of their demands in a deal. Calls to Peevey for comment on the latest proposal were not returned. Almost all of those involved in the Coalition for California Energy Policy Reform contacted by Circuit avoided voicing the conclusion that backing Edison's cost-allocation proposal-hitched to its request for new supplies with long-term agreements sorely desired by generators-is a quid pro quo for ending the $250/MWh price caps and must-offer orders. Duke spokesperson David Hicks said, however, that the issues were not tied together. Mirant, one of the six companies listed on the draft document as "generator sponsors," insists it does not endorse the plan. "We are discussing it internally but have not signed on in any way, shape, or form," said Dave Thompson, Mirant spokesperson. Jan Smutny-Jones, Independent Energy Producers executive director, is not ready to embrace the energy policy reform proposal. "The heavy lifting is already happening" at the CPUC, the California Independent System Operator, and the Federal Energy Regulatory Commission, he said. IEP is still reviewing the draft plan floated last week, he added. Gary Ackerman, Western Power Trading Forum executive director, who attended the closed-door August 17 meeting, disagreed with Smutny-Jones, saying that the efforts of regulators and CAISO do not adequately tackle the need for new generation. The CPUC's resource-adequacy order, for example, extends only one year, whereas the draft reform "is a 10-year commitment," he said. A one-year deal will not attract much-needed financing for new power plants. Long-term contracts, preferably extending a decade or longer, are considered necessary for financing third-party generating contracts. Calls seeking comments from Desmond, Edison, and PG&E were not returned before press time. Most utility and generator lobbyists, along with legislators, were unaware of the meetings prior to last week, sources said. In addition to extending the costs of new electrical supplies beyond investor-owned utility boundaries, the tentative plan includes imposing a 15-17 percent supply cushion on all power suppliers, not just investor-owned utilities, similar to pending legislation. The supply mandate goes into effect for investor-owned utilities next June. A "competitive" capacity market would be created to meet that resource-adequacy obligation, with retail choice rekindled after its launch. Democrats in the Legislature and consumer representatives have vigorously opposed a revival of direct access since the energy crisis. The CPUC is in the midst of working out the resource-adequacy details and just before press time released its research results outlining how a capacity market might function in the state. "The draft document is a set of market principles intended to stimulate constructive conversation that will culminate in the creation of a market structure and rules that would produce a competitive and reliable grid system in California," said Dynegy spokesperson Jay Mandel. While CAISO "has no official position," it objects to immediately lifting the $250/MWh price cap and must-offer obligations imposed at the height of the energy crisis, said Gregg Fishman, grid operator spokesperson. The price cap is intended to keep a lid on the cost of energy even when supplies get tight, as during recent heat waves in Southern California. The must-offer obligation is a requirement imposed by federal regulators toward the end of the energy crisis. It calls for any generator that can supply electricity to do so if the grid operator requires it. CAISO supports raising the price cap to $1,000/MWh over four years and the eventual termination of must-offer obligations. If the proposed Coalition for California Energy Policy Reform manages to fly, it likely will be waylaid if the November ballot initiative to reregulate the energy industry is successful. If Proposition 80 passes, the effort is "largely irrelevant; the direct-access guys will be gone, and there will be no capacity market," Smutny-Jones predicts. V. John White, Center for Energy Efficiency and Renewable Technologies executive director?an outsider?slammed the deal. "It is AB 1890 without a bill," he said, adding that the generators involved in the plan "will sell their brothers if they get a deal." General points of the draft proposal include: Creation of "an open and transparent capacity market" that could handle multiyear bilateral deals. However, no capacity market deadline is mentioned. Subjecting all power suppliers?utilities, municipal power agencies, and direct-access providers?to resource-adequacy mandates and the 20 percent renewables requirement. Penalties for not meeting resource-adequacy mandates. Allowing utilities "full recovery" of costs related to debt equivalence?the risk premium that rating agencies assign power deals utilities enter into with third parties. The CPUC pegged it at between 10 and 20 percent ( Circuit , Dec. 17, 2004). Stating that resource-adequacy levels cannot be met with power linked to a liquidated damages contract. Liquidated-damages deals allow sellers of energy to pay cash in place of power delivered at a certain time and place. Skeptics note that the contract is not tied to a specified power source and thus is unreliable ( Circuit , May 27, 2005). Firm liquidated-damages energy contracts "will be appropriate for managing energy purchases and energy price risk on a continued basis, separate from LD counting," states the draft discussion. Wish List Set for Hearings on Edison 10-year RFO Parallel to the Coalition for California Energy Policy Reform's discussions, numerous parties commented on Edison's application submitted to the California Public Utilities Commission to extend the costs of new supplies beyond its doors to increase reliability. Comments submitted at the end of last week included calls for the hearing to include a closer look at reliability in the region, which old plants will be shuttered, and the cost of adding new generation. An analysis of whether all load-serving entities in the area have extra resources to draw on during times of high demand was also requested. The California Energy Commission and the California Independent System Operator have warned repeatedly that the southern half of the state is supply-deficient and the problem will only worsen over the next five years. San Diego Gas & Electric objects to picking up part of Edison's power tab, but notes?as does Edison?that it also has more than enough supplies on hand. The Office of Ratepayer Advocates wants the hearing to address the issues of the reasonableness and cost-effectiveness?to ratepayers in and outside Edison territory?of signed power-purchase deals. It also wants a breakdown of the price tag associated with the pricey reliability-must-run contracts, which ran more than a half billion dollars last year. The utility predicts that the cost of adding 1,000 MW of new power would be about $118 million a year. The Aglet Consumer Alliance "believes that SCE has raised some extremely important issues . . . and should be applauded for bringing these issues before the commission." Like many others, it wants an assessment of the accuracy of the CEC and grid operator forecast models.

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New Utility-Generator Coalition Misses Consensus

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