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United States

United States

OPPORTUNITY KNOCKS

Power market restructuring is being reviewed in 25 states after the publication of "Effective with the Public Interest," prepared for the National Association of Regulatory Utility Commissioners (NARUC). But for the wind industry to abandon the currently flat home market would, according to Jan Hamrin, be bad timing for American companies. Environmental and renewable groups have to be persistent to make a difference for a restructuring process that will take several years. Many utilities find it difficult to alter their thinking enough to accept that they can and should no longer meet the needs of large industrial customers who do not care about the source of their power as long as it is cheap. But today's political climate seems to be moving towards a dangerous reduction of environmental considerations among Washington DC politicians. In "Effective with the Public Interest," a wholesale market is envisioned in which the vertically integrated utility has been separated, by function, under independent owners and directors. Utility-owned generation has been divided among several companies, and inefficient generation plants have been closed.

When Jan Hamrin first started trying to convince utility regulators she should study their role in utility restructuring, it was an idea almost ahead of its time. After all, it was only last year that California stunned many observers by proposing widespread changes that, initially at least, were going to mean full-scale retail wheeling. But for those who have been watching the electricity market closely, it was no surprise. And as usual Hamrin, who was to receive a special achievement award at Windpower '95 in late March, did know what she was talking about. She was able to convince the Energy Foundation to help fund a study of how regulators might balance environmental with economic considerations.

When the report, "Effective with the Public Interest" for the National Association of Regulatory Utility Commissioners (NARUC), was published in November, some six states were either involved in regulatory proceedings or in active legislation to restructure. But by mid March the trend had ballooned so suddenly that some 25 states were seriously looking at restructuring.

Hamrin, now with Hansen, McOuat & Hamrin of San Francisco and formerly head of Independent Energy Producers, sees this as the very reason wjhy US wind companies should not now abandon their home market. "You've got to invest time and money," she says. It's tempting for American companies to abandon the market. "Well, there's not anything going onÉ we'll go off and play overseas and come back when it's better." But that would be foolish, says Hamrin, who was originally behind the Standard Offer Four contracts with California utilities. If the industry turns its backs to what is happening, wind will then not be at the negotiating table, she says. The biggest risk for wind is that companies will not support their trade groups now, in the current flat market, she says. Environmental and renewable groups have to be at the bargaining table with enough clout to make a difference for a restructuring process that will take several years, she says.

Hamrin does see the US market as having been dampened by several factors, including a February ruling by the Federal Energy Regulatory Commission (FERC) judging California's Biennial Resource Plan Update (BRPU) auction illegal under federal law (next story). Although the decision is currently being challenged, she says it is already having impact. "The damage is being done now, she says. "It gives utilities who don't want to be involved an easy excuse."

NARUC may appeal against the decision, she says. The American Wind Energy Association already says it will, while the California Public Utilities Commission (CPUC) is studying the matter and has said it sees FERC's decision as only advisory. But it might take a couple of years before legal challenges are decided, notes Hamrin.

Today's political climate appears to be reducing environmental considerations among Washington DC politicians. But she says the mood on Capitol Hill also could be seen as a move towards states' rights, the US political idea that individual states have weighty rights despite federal concerns. Hamrin agrees there is a retrenchment among utilities, government officials and politicians across much of the country. But she does not see politicians as able to change that much even with the sweep of the US Congress by the Republicans in November. "I think we'll hear all the rhetoric, but I don't think the American public will let anyone away with reducing the quality of life," she says.

Apart from the political mood, costs are being cut, and there is fear of an open market. "People are backing off in anticipation of competition," she says. Most pressure on utilities is from large users of electricity -- and utilities must look at how they might keep those customers. But since predatory companies will always offer lower rates, perhaps the utilities should cut their losses and concentrate on those who remain. Only 5-10% of customers might leave the system. And if utilities cancel renewables and demand side management, society loses anyway. Opinion polls consistently show that people want clean power and are willing to pay for it, she notes. At issue for many utilities, she says, is that it is hard to alter their thinking enough to accept they can and should no longer meet the needs of large industrial customers who are price-sensitive and do not care about the source of their power -- as long as it is as cheap as possible.

Hamrin, in mid March, predicted the CPUC would announce a scaled-back market restructuring at its March 22 meeting. "It will be business nearly as usual," she said. The CPUC is likely to bless performance based regulation, she says, and allow an experimental independent pool, based on Britain's, which is a co-operative entity operated by the transmission company and governed by a board representing distribution companies. The pool would act as market-maker and set price for short-term electric purchases -- and it may be on a voluntary basis. Utilities would stay vertically integrated and some costs would be transferred from big customers to ordinary rate-payers, she predicts.

A tough dry spell

Meanwhile, a dry spell is expected to continue in the California power market for three to five years, because of the restructuring and FERC's decision on the BRPU. Nationally, it will be tough, too, although much will depend upon the Environmental Protection Agency and how much clean air laws are maintained. There is increasing evidence, she says, of more harmful emissions -- from mercury to particulates -- from conventional power plants. But the two areas are not yet heavily regulated.

In "Effective with the Public Interest" , Hamrin envisions a wholesale market in which the vertically integrated utility has been separated, by function, under independent owners and directors. Utility-owned generation has been divided among several companies, and inefficient generation plants have been closed. Some reimbursement for stranded investments is paid to generation and transmission company stockholders. A transitional fee is placed on customers' bills -- but the closure of uneconomic assets has reduced rates more than the transition fee has raised them.

Poolco, operated by one company that also provides transmission control functions and consists of the bundled state utilities' transmission assets, incorporates environmental effects through the use of "feebates" , which place a pollution fee on power generated by polluting technologies and give rebates to cleaner technologies. Retail brokers and local distribution companies (Discos) develop portfolios of hedging contracts which translate customer preferences into wholesale market actions.

In the retail market, the Disco offers customers portfolio alternatives -- including renewables such as wind -- and should be able to obtain cost savings for itself through its demand aggregation abilities. Focused demonstration and commercialisation projects are funded through small fees on transmission and distribution service to aid introduction of new technologies with longer term benefits.

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