Battle of Dunkirk
Utilities rush to save their last tenuous hold over the power plants they so smugly sold off.
Last year, when Niagara Mohawk Power Corp. sold off its 600-megawatt, coal-fired Dunkirk generating station, hard on the Lake Erie shore in southwestern New York state, it probably figured that, at the very least, it could still profit by selling electricity at retail to the new plant owners. To operate the plant, the owners would need power from outside the station for a host of perfunctory applications, such as heating, lighting, and air conditioning of plant control rooms and offices, fuel handling, pumping and treating of cooling water, emissions control and related monitoring equipment, and, of course, starting up the plant following any planned or unplanned shutdown.
Like the father of the bride, Ni-Mo wouldn't lose an asset. It would gain a customer. It would marry itself to the needs of the new owners. Yet some weddings don't go as planned. In this case, the new owners had different ideas.
The buyer of the Dunkirk plant was NRG Energy Inc., a subsidiary of Northern States Power Co. At about the same time NRG also had acquired the Ni-Mo's 760-MW coal-fired Huntley plant, and the much larger 1,700-MW Oswego station, fired by fuel oil and natural gas. It planned eventually to assemble a large fleet of power plants throughout the Northeast. (At press time, NRG claimed to own more than 15,000 MW in total generating capacity in North America, either operating or under construction.)
With so many resources, why pay retail for on-site power? After all, Dunkirk (and the other plants) would need only standby power, since NRG could always fall back on output from its own units while they were operating. Why not acquire power at a much cheaper wholesale price, from the various regional spot markets for bulk power, such as those run by independent system operators (ISOs) in New York, New England, and PJM? Why not just "net" this station power requirement against the plant's output, and altogether avoid paying retail rates to utilities?
To put muscle behind its threat, NRG petitioned the Federal Energy Regulatory Commission for relief, asking the FERC to allow netting of station power.
Of course, you can already guess where this battle is going. If a power producer can bypass the local utility and purchase power from the ISO and the regional power exchange, why not a suburban homeowner with a diesel generator in the back yard?
That's exactly what NRG's opponents are saying, including a host of retail electric utilities and several state public utility commissions (PUCs). They see this netting of "station power" as a step down the slippery slope to a serious bypass of retail utility rates, with all the included subsidies and surcharges for stranded costs, resource planning, and renewable energy. To bolster that view, on Sept. 29, the New York state commission flatly rejected the idea of netting. Honoring a petition filed by Con Ed, the state commission asserted full authority to regulate standby station power as a retail service.
Nevertheless, there's an added wrinkle-one that makes this case so much more interesting than your common turf battle between states and the feds. In this new Battle of Dunkirk, a key third party has entered the fray. And that third party is the PJM ISO, the FERC's shining example of innovative restructuring in electricity markets.
Back in August, in a separate case, the PJM ISO had proposed its so-called "Attachment K." That move would amend PJM tariffs to give power producers the option to acquire station power from the PJM Interchange Energy Market instead of from utilities at retail. PJM saw the netting as "an appropriate adjunct" to regional transmission service and the "interconnected operations" of generators.
Will the FERC bow to state regulators, or endorse PJM's innovation?
"The same utilities that are now trying to impose retail tariffs on their divested generation benefitted from netting right up until the time those assets were divested."
That's NRG speaking, and the comment sums up the feeling of many power producers, such as Duke Energy, AES, Orion Power, and others: That by netting station power the new plant owners are only doing what the vertically integrated utilities used to do under full cost-of-service regulation.
PJM admits as much: "In the case of an integrated utility, [station] energy typically was supplied by its other generation stations or, if the utility was part of a centrally dispatched power pool such as PJM, by the pool's then-available energy supplies."
But the utilities and PUCs cite this "did-it-before" defense as out of touch with competitive markets. PPL Corp. explains why:
"The benefits and costs of providing power to the vertically integrated utility's generating plants were internalized. ... Distribution-side losses were countered by generation-side gains ... leaving customers whole. ... [But] now that the vertically integrated structure no longer exists, the practice PJM seeks permission to perpetuate is infeasible."
The utilities and regulators also complain that PJM's rule giving plant owners the option to acquire station power from regional spot markets would bypass the so-called nonbypassable surcharges imposed by state PUCs to recover stranded costs from unprofitable generation. Yet the generators and their allies have a strong rejoinder. If generators must acquire standby power through retail rates that already include stranded cost surcharges, won't customers end up paying twice for the bailout? Listen to the PJM Industrial Customer Coalition, which counts among its members such companies as DuPont, Praxair, Bethlehem Steel, Boeing, Union Carbide, and Merck.
"Requiring a generator that had been divested by a formerly vertically integrated utility to pay retail rates, including any charges for stranded cost recovery, could lead to the absurd result of a generator being responsible for stranded costs associated with that generator."
And real dollars are at risk. In its protest against PJM's plan, Conectiv said that station power can add up to 5 to 10 percent of plant generating capacity. In the Dunkirk case, in a protest filed Oct. 20, Ni-Mo said NRG still owed over $8 million in disputed delivery charges on the retail utility bills for sale of station power to the Dunkirk, Huntley, and Oswego plants.
The real issue here is setting power plants free.
With the entire industry bemoaning the high cost and shortage of generation capacity-from San Diego all the way to the East Coast-why not give competitive power producers every incentive available to cut costs and build more plants? Isn't that what the new regional transmission organizations (RTOs) are supposed to do?
"The FERC should encourage other RTOs to create cost-effective and flexible arrangements for generators to obtain station power," says Duke Energy. "The removal of artificial impediments to [reducing costs] should be supported, not only in the PJM region, but elsewhere in the U.S." (On Oct. 25, the FERC accepted the PJM filing and suspended it for five months. .)
The goal ought to be to encourage power producers to be as innovative as possible; to trim costs and boost efficiencies. Not only should power producers have an option to buy station power in wholesale spot markets, such as the real-time PJM Interchange Energy Market, but also, as Duke Energy suggests, to purchase station power "through forward contracts."
By contrast, the utilities seem oblivious to the real issue. One utility, for example, fears that PJM's proposal might encourage generators to change their behavior. Says Conectiv, "It would provide substantial incentives for generators to abrogate their contracts and make new arrangements."
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