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Business & Money

The collapse of wholesale markets has utilities once again making the purchasing decisions, and taking all the risks.
Fortnightly Magazine - June 1 2003

this more active role. In California, for example, the California Public Utilities Commission (CPUC) has been developing a new IRP framework for the state's investor-owned utilities.

"We have a history, prior to restructuring, of relying on non-utility power plants to meet California's resource needs," says Barbara Hale, the CPUC's director of strategic planning. "That approach will persist as we reinvigorate the resource-planning process. I don't think anyone expects the IOUs to stop contracting for power."

A primary goal of California's new IRP process will be to expand diversity in utilities' resource portfolios-specifically to increase by 1 percent per year the amount of renewable energy used and to prioritize demand-side management. Indeed, renewables and conservation have kept IRP processes alive across the country even as power markets have been restructured. But in California and other states, IRP seems to be evolving into a somewhat different animal than it was in the past.

"We've come to consider ours a hybrid market," Hale says. "We have a reliance on wholesale markets, a reliance on IOUs, and the opportunity for customers who have established a direct-access energy service provider to continue that relationship." California, like the rest of the country, is striving to maintain a delicate balance between old-world regulation and new-world competition.

How To Keep It Liquid?

Creating a hybrid market that works today while not impeding progress toward greater liquidity requires careful thought. At first glance, the state-mandated IRP approach seems to defy the goals of open, liquid power markets.

"There's a tension there," says Dick Watson, director of the power division at the Northwest Power Planning Council (NWPPC) in Portland, Ore. The NWPPC requires its member utilities to pursue IRP processes that date back to 1991. Idaho Power has already issued an RFP for new power supplies, and Pacificorp is reportedly planning a solicitation as well.

"The degree to which you recognize the market in your planning process is the crux of the issue," Watson says. "It is a tug-of-war."

Trends toward competitive bidding and IRP seem to be pulling the industry back toward its less-regulated state. This represents an unmistakable regression for an industry that only a few years ago was marching toward a generally laissez-faire market structure.

"Once you get back into that mode, there won't be a merchant industry anymore," says Roger Feldman, a partner with Bingham McCutcheon in Washington, D.C. "There will be a build-to-suit or tolling industry. That's all right, except that it doesn't necessarily add up to a coherent resource plan, which takes you all the way back to the '70s and '80s."

Regulators' new assertiveness doesn't bode well for open markets, unless regulators pursue a new, market-oriented IRP model rather than the prescriptive programs that IRP traditionally represented. "I'm not in favor of IRP in terms of what it used to be, because it was a substitute for the market," says Larry Eisenstat, a partner with Dickstein Shapiro Morin & Oshinsky in Washington, D.C. "On the other hand, if we're going to have an ISO or regulatory authority identify a problem and then put the solution