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Power Procurement: What's in Your Mix?

Why competitive markets are scaring regulators.

Fortnightly Magazine - November 2006

on Competition in the Wholesale and Retail Markets for Electric Energy (FERC Competition Report), Chapter. 4, and, Joskow, P.L. (2006), “Markets for Power in the United States: An Interim Assessment,” The Energy Journal, Vol 27, Number 1, International Association for Energy Economics.

2. We use the term “POLR” throughout to describe these services.

3. See, for example, FERC Competition Report at p. 21, and references cited therein.

4. Integrated resource plans examine company-specific supply/demand balances from time-to-time and establish going-forward strategies based on economic forecasts for meeting projected growth in demand.

5. For example, Avista, PacifiCorp, and Nevada Power recently have undergone an IRP review process.

6. Numerous utilities rely on RFP processes for selection of new generation. For example, Pacific Gas and Electric recently announced that it had selected several newly proposed generation projects resulting from an RFP process. Other states where utilities recently have used RFP processes to evaluate new capacity additions are Utah, Idaho, Florida, Nevada, Arizona, Minnesota, Kentucky, Washington, North Carolina, Louisiana, and Georgia.

7. We use the term “portfolio resource mix” to represent the mixture of resources a utility has available at any point in time to meet customer demands.

8. For a listing of various states’ fuel and wholesale power cost-recovery mechanisms, see Regulatory Focus, Fuel and Wholesale Power Cost Recovery, A State-by State Review, Regulatory Research Associates, An SNL Energy Company, Oct. 3, 2005.

9. We note that utilities making these commitments typically are forecasting reduced reserve margins indicating the need for new capacity additions.

10. We do not mean to under-emphasize the importance of ensuring transparent wholesale market structure, but instead observe that centralized wholesale markets’ structures are evolving to ensure that these broader, regional systems produce accurate locational price signals. We believe that these price signals from the wholesale electricity markets and fuel markets will result in competitive suppliers building efficient generation.

11. In fact, we are aware of many competitive wholesale suppliers that closely guard their methods for analyzing the energy markets and treat these tools as company secrets.

12. We note that there is some concern that these shorter-term supply arrangements are unable to provide sufficient incentives to build additional generation to meet growing electricity demands, but these concerns are thus far unproven.

13. These kinds of pricing experiences have been a major factor in restructuring the electricity industry.