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POOL LOOKING MURKY FOR WIND

If the power pool proposed by the California Public Utilities Commission (CPUC) is implemented as currently drafted there will be trouble for wind power. Such is the consensus of opinion among wind plant developers, the American Wind Energy Association, and others representing wind companies, following close perusal of the CPUC's proposal to restructure the electric utility industry via a British-style wholesale power pool. The proposal was put forward in May.

While lobbying efforts of some wind developers -- particularly the industry's allies in the environmental community -- have been focused on the shortcomings of the CPUC's original proposal for retail wheeling, released in April of last year, it appears the majority of the industry now finds some form of retail wheeling, or direct access to customers, preferable to the CPUC's wholesale pool proposal. Among the key issues are the ability of renewables, such as wind power, to bid into a power pool and the ability of existing electric utilities to dominate the new market pool.

Kenetech Windpower is a strong advocate for direct access. In comments filed on July 24 by Sara Steck Myers, a San Francisco-based attorney, Kenetech makes the following observation: "Until retail competition is opened to all energy suppliers on a fair and equitable basis, the environmental and diversity benefits of renewable resources and the economic and efficiency advances of renewable technologies are likely to remain unknown and unavailable to most utility customers." Myers adds that this lack of ability to sell directly to customers, when combined with the current emphasis on short-term electricity costs and continued utility ownership of power plants, creates huge roadblocks for wind power.

In contrast, Kenetech lauds the direct access proposal offered by CPUC commissioner Jesse Knight because it promises a fully competitive market by 1997. In the wholesale power pool offered by CPUC commissioners Dan Fessler, Greg Conlon and Henry Duque, it is not clear when real competition would arrive (1999 at the very earliest) and it could create a market even less attractive than the current command-and-control regime epitomised by the much discredited Biennial Resource Plan Update (BRPU), according to Kenetech.

A critical theme of Knight's proposal, states Myers, is that "divestiture [of utility power plants] is the only way to effect true competition with a minimum of government oversight or interference." Kenetech likes the fact that Knight's structure would calculate and allocate utility above-market stranded costs -- such as investments in nuclear power facilities -- prior to implementation of direct access. The company prefers a one-time, immediate market pricing of these assets. Myers notes that if such market power issues are not addressed initially, as would be the case in the proposed CPUC pool, "there will be continuing need for command-and-control government regulation."

Kenetech's testimony claims the pool could be even worse than the current status quo for wind and other renewables. The primary flaws of the wholesale pool are that it requires utility nuclear and hydro-electric resources to run before any independent power can be scheduled, has no set plan to assure that environmental standards are met and offers no incentives for retirement of polluting utility fossil fuel facilities.

Wind pool

The American Wind Energy Association (AWEA), in a joint testimony with the Union of Concerned Scientists developed by Berkeley-based consultant Nancy Rader, also raises questions about the pool proposal. To compensate for its insufficiencies, Rader puts forward the notion of separate renewables pool.

The primary problem with the CPUC's pool, she says, is that "any requirement that bids be submitted 24 hours in advance in one-hour or half-hour increments would not be practical for wind." She observes that in the UK pool, renewables such as wind were exempted from these requirements and are automatically dispatched when power is available. Additional shortcomings of a pool stem from the inability of such a market place to value wind power's virtues without explicit public polices. The focus on short-term costs and a lack of long-term power purchase contracts spells peril, too. "Without the long-term contracts that have been available in the past, higher financing costs will drive up the cost of wind and other renewable energy projects, making it difficult, if not impossible, for them to compete."

Nancy Rader warns that the California pool, as proposed, could result in the "gradual attrition" of existing wind capacity since the pool price would likely be "too low to allow repair or replacement of first-generation turbines."

Different strategies

Parting ways with Kenetech, AWEA argues that direct access, however, is not enough to stimulate wind power. Yet if a pool is retained, explains Rader, a separate pricing scheme would have to come into play if AWEA's "renewables portfolio standard," obliging utilities to buy predetermined amounts of wind power, is to work. And even under such a scenario, some existing wind projects might still have to be shut down if the pool price did not cover all of a project's operating cost. These facilities, however, would then be replaced by new, and lower cost, wind power suppliers in order to meet the renewables targets established by the standard. AWEA has proposed an initial 11.5% of the state's total in-state consumption of electricity.

Rader advocates that in the end, it would be advantageous to create a regional portfolio standard for the entire western region. In her vision, all regional retail suppliers of electricity would have to comply.

According to AWEA's renewables pool proposal, existing wind farms would be dispatched into the pool according to current contract terms. Other renewables facilities, including utility-owned geothermal and solar facilities, would also bid into the pool. Those independent facilities which have already moved beyond the ten year fixed energy payment included in their CPUC standard offer contracts would be paid the renewables pool price plus the fixed capacity payment included in current power purchase contracts. The difference in price between the renewables pool and non-renewables pool would be assessed to each utility and subtracted from the envisioned customer surcharges being contemplated. These surcharges, already included in a bill moving through the California Legislature (see story page 33), may finance a range of social programmes or be used to pay for subsidies needed for all power sources that exceed the going market rate.

In spite of its "renewables pool" proposal, AWEA acknowledges that implementing its "renewables portfolio standard" would be easier under a direct access regime since less bureaucracy would be necessary.

More suggestions

The only wind developer other than Kenetech to file separate comments was FloWind of San Rafael. David Simpson, with the law firm of Young, Vogl, Harlick & Wilson, does not take any position on the direct access/pool debate, but reiterates FloWind's support for AWEA's renewable portfolio standard: "Unlike the BRPU, there would be no ongoing state intervention between the sellers of renewable power and the purchasers. There would be no need to create artificial bidding rules or other regulatory constructs to allocate resources among producers. The market would establish the winners and losers among renewable producers, just as it will for conventional producers."

Simpson's testimony focuses on issues of CPUC compliance with existing laws designed to encourage development of wind and other renewable resources. He charges that California utilities' "failure over the last five years to replace substantial portions of their polluting power plants with renewable, clean plants has measurably increased California's air pollution." He points to a number of recent studies from universities to bolster this claim.

Comments submitted by the Center for Energy Efficiency and Renewable Technologies (CEERT), which includes both Kenetech and Zond Systems Inc as members, and the Independent Energy Producers (IEP), which includes these developers as well as Sea West, offer further consensus and contrasts on restructuring issues.

CEERT's testimony, also prepared by Sara Steck Myers, takes no position on the direct access versus power pool debate, partially because the group's

diverse membership -- renewable energy developers, environmentalists and energy conservation service companies -- could not agree. CEERT maintains the key to restructuring is treatment of stranded assets and that the CPUC was imposing a preference for utility-owned nuclear power plants. "Recovery of nuclear stranded assets or any other stranded assets must not exceed unrecovered sunk costs (unamortised book values), and such sunk cost recovery must not in any way be tied to continued operation of the nuclear facility. The goal should not be to foster continued power production from costly, dirty or inefficient sources of supply, but to encourage the expedient retirement of these facilities at the least cost to utility customers," reads CEERT's filing.

CEERT argues that 40-50 year old fossil fuel plants should also be retired and replaced with conservation and new renewable and gas-fired cogeneration capacity. Options include direct "green marketing" programmes along with setting statewide targets or standards like AWEA's.

IEP comments clash, in some respects, with those of CEERT and Kenetech. IEP supports the CPUC's proposal to allow nuclear and hydroelectric utility-owned power plants to run outside the pool. Reflecting the interests of its broader independent power industry constituency, IEP also encourages renegotiation of existing contracts in order to reduce the need for competition transition surcharges. Many gas-fired cogenerators believe they can lower prices and still turn a profit. IEP, nevertheless, urges adoption of direct access and utility divestiture of all non-nuclear and non-hydro power plants.

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