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Generation Roundtable: Power Flux

Generators struggle to plan for the future as they cope with an unstable present.
Fortnightly Magazine - December 2003

work, particularly with Canada.

PUHCA repeal might make merchant sales more challenging, because if people have the opportunity to purchase fleets and utility assets, it might make merchant plants seem even less attractive.

Also, with market incentives in place for consolidation, and with relaxation of Clean Air Act standards, there may be growing interest in plant life extensions and repowering of existing facilities. There is also an argument for more fuel diversity, to get off the volatility and hardships created by reliance on natural gas. I would not be surprised to see over the next 10 years that new generation will come from the regulated side, through consolidation, plant life extensions, and repowering. From a strategic perspective, these are all opportunities to build rate base.

The merchants will be in a very challenging environment until they see an improvement in their market capitalization.

Environmental Legislation: Clear Skies, Muddy Waters

Environmental regulation frequently has effects that extend beyond the environment. What happens with New Source Review (NSR) standards, for example, could alter the future for merchant power generators, most of which are relatively new facilities burning natural gas.

Their competitive position would be much different if, as the EPA rule change stipulates, existing plants can invest up to 20 percent of their replacement cost in upgrades without triggering the requirement to install best-available control technology.

Likewise, the resource planning calculus changes dramatically if federal or state agencies begin limiting greenhouse-gas emissions from power plants. For views on these issues, we turned to Thos. E. Capps, CEO, Dominion Resources; Chuck Wehland, partner, Jones Day; Michael Zimmer, a partner with Baker & McKenzie in Washington, D.C.; Bill Hall, executive vice president, Duke Power; and Eric Markell, senior vice president, Puget Sound Energy.

Fortnightly: Please explain the EPA's rule change over New Source Review. What is its status and significance?

Wehland: EPA is trying to bring some clarity to the identification of projects that would be considered routine repair and replacement, and not subject to New Source Review. The rule change does a fine job of that. It has clear, bright-line tests that you can easily use to determine whether a source is undergoing routine repair and replacement, or some other project that would have to be evaluated under NSR rules. It says that project is not significant unless it costs more than 20 percent of the capital costs to replace the whole unit.

That is clearly a departure from the EPA's previous position, which was to judge each plant on a case-by-case basis. The change is significant. There's no way to look at the rule without reaching the conclusion that more projects would be deemed routine under the new rules. The definition of "routine" would include many repowering and life-extension projects, as long as they wouldn't increase capacity and would cost less than 20 percent of the plant's replacement value.

The problem is that the rule would not immediately be effective anywhere-only in states that take action to approve it as part of their state rules. And most important is the litigation that was filed