by Dan Watkiss, Bracewell & Guliani
In a noteworthy and conflicting coincidence, the Department of Energy's (DOE) new multidisciplinary Energy Advisory Committee issued a draft report, "Keeping the Lights on in the New World," in which the committee bemoaned the lack of long-term integrated resource planning (IRP) in many, if not most, U.S. power markets. Concurrently the Virginia State Corporation Commission begrudgingly agreed with one of its hearing examiners that federal energy policy barred the commonwealth from using IRP to evaluate generation and demand-management alternatives to a proposed new high-voltage transmission line that would traverse some of the nation's most historically profound landscape. These two opposing takes on current U.S. energy policy beg important questions: Are current efforts to "keep the lights on" inadequate as the advisory committee contends? If so, then is that inadequacy caused by a real or perceived federal prohibition against IRP?
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The advisory committee case that generation supply growth is inadequate is compelling. As demand steadily increased, overall baseload generation construction declined during the 1990s and early parts of this decade. The committee illustrates this with a graph showing that 10-year growth rates have declined from a maximum rate of 4.08 percent in the 1970s to a 1.29 percent rate from 2000 to 2007.
The decline is attributable to what the committee (following the North American Electric Reliability Corporation) characterizes as "the industry's relatively recent shorter-term approach to resource planning and acquisition." Driving the industry's focus on the short-term has been the relatively short lead times and low cost of natural gas peaking and mid-merit plants, the investment risk accompanying longer-lead time and longer-lived investments in baseload plants, contributing to the boom-bust cycle of earnings on generation investments. This investment risk is exacerbated, according to the advisory committee, by political and regulatory uncertainty concerning short-lived production tax credits, the future course of emissions regulation especially as to greenhouse gases and the regulation and structure of markets for energy and capacity.
Central to nearly every one of the advisory committee's many prescriptions for reversing the trend toward inadequate generation reserve margins is some form of IRP. Not surprisingly, the recommended planning goes beyond simple integration of supply-and-demand resources over a forecast period.
"Letting the generation industry stumble along, finding its own way," the committee contends, "will likely result in market inefficiencies leading to reliability concerns, higher prices and a portfolio of facilities that serve only generator interests."
Specific recommendations include legislation and regulatory programs to minimize the investment risk and maximize returns through cost-recovery insurance pools, grants for investments in diversified low- or no-emissions technologies, creation of credit markets to fund generation planning and development, and pricing generation capacity to induce investment in markets where generation is not otherwise being built. Addressing organized regional transmission markets, the committee also recommends streamlining and expediting current cumbersome interconnection procedures, and "providing transmission owners and RTOs [regional transmission organizations] the ability to secure new cost-based generation to maintain reliability when it becomes the most cost-effective solution to help mitigate congestion and maintain reliability."
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Federal and state policies and initiatives would propel these long-term planning processes that the committee envisions. But if, as the Virginia commission concluded, federal energy regulatory law and policy prohibit Virginia utilities and their regional transmission organization, the PJM Interconnection LLC, from conducting integrated transmission, generation and load-management planning, then aren't the advisory commission's recommendations a dead letter? Fortunately, they are not a dead letter and can and should be delivered in both the near and long term. The Virginia commission's contrary conclusion is simply wrong, as the Federal Energy Regulatory Commission (FERC) explained in its recent Order No. 717. The Virginia commission and others in the industry have misconstrued the agency's standards of conduct as preventing IRP when, in fact, those standards are simply intended to enforce FERC's mission to police undue discrimination by barring transmission owners and operators from advantaging merchant affiliates by granting them preferential access to otherwise nonpublic information about the operation of the transmission grid.
The misapprehension of FERC's standards of conduct to prevent IRP likely has contributed to and exacerbated the declining rate of growth in generation reserves that the advisory committee details in its draft report "Keeping the Lights on in the New World." To reverse this worrisome trend, the advisory committee should be encouraged to finalize its draft report, and the next administration should instruct the DOE to act expeditiously on its thoughtful integrated planning recommendations. FERC, for its part, has made it unequivocally clear that IRP is not part of the day-to-day transmission operations that are the subject of the agency's standards of conduct, and energy policy makers and regulators are free to plan and influence energy investments and infrastructure on an integrated basis.
Author
Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and mid-market companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. You many contact him at Dan.Watkiss@bgllp.com.