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The fairness issue: participant funding vs. rolled-in pricing

Who pays? Power producers watching Energy Bill in Congress

Major power producers and merchant generator plant operators are closely monitoring the Energy Bill working its way through Congress, especially the language that would determine who pays for expensive infrastructure upgrades to handle the increased load from new power plants that have cropped up throughout the Southeast.

The source of industry controversy centers on a series of events that began nearly a decade ago, beginning with the expected nationwide deregulation of electricity rates by Federal Energy Regulatory Commission (FERC), as it had done to the more mature gas industry.

In 1998, a year after Curt Hebert Jr. was appointed to FERC, he met with a group of merchant generator plant operators who spread a map of the Southeast on his desk and began talking emphatically about the region’s pro-business environment for the energy industry and its wonderful labor markets.

“I told them we didn’t have any problems with people coming in and drilling for oil and gas,” he recalled. “That’s something we’ve always understood in the Southeast, which is why we have a literal spaghetti bowl of natural gas pipes down here.”

Hebert told the group that he knew the utility systems in the Southeast very well, having cut his teeth working for Entergy Corporation and Southern Company.

“It looks like you would have a lot of congestion with many bottlenecks (getting your electricity on the grid and transmitted to other parts of the country),” he told them. “I don’t understand why you would site there. It’s going to give you problems. Why not look at other areas and get closer to the load? Their answer was, don’t worry about it. We’re working out contracts. We’re going to make enough money to pay for the necessary upgrades to build out so we can export this energy.

“But 1998 was a very different year from 2005. After what happened with Enron, and the collapse of markets in the west and in California in 2000, the markets dried up. Now they’re in a crunch and are now trying to look for someone else to pay for the upgrades (to the power grids).”

Hebert, executive vice president of external affairs for Entergy Corporation and former chairman of FERC and the Mississippi Public Service Commission, is lobbying to retain participant funding language in the Senate version of the Energy Bill, an issue that has been off the national media’s radar because it primarily affects the South.

“The reason the benefit issue is important is because we have 50% reserves capacity in our service territory system wide,” said Hebert. “It makes sense for one to assume that a great deal of excess capacity would be exported from our region. How fair would it be for a consumer in Mississippi to pay for the upgrades associated with moving power outside Mississippi to allow someone to make unregulated market rates? Most reasonable people would agree that’s not fair at all, and that’s what participant funding is all about.”

Across the Southeast, electric utilities like Entergy Corporation and Southern Company have built — and own — power grids that transmit electricity throughout the region from power plants to substations to customers. In the late 1990s, when industry leaders expected the electric market to be deregulated, several companies built mostly gas-fired independent power plants to take advantage of the anticipated new environment.

A high percentage of the plants were built in the South because of the large number of natural gas pipelines running through the region. There are 13 operating merchant plants in Mississippi, with two under construction and nine in development, according to the Mississippi Public Service Commission.

The core of the multi-million dollar issue

When a power plant is built, it has to hook up to the electrical grid to move power to customers. A new plant cannot produce a huge amount of electricity to add to the grid without expensive infrastructure upgrades to handle the load. The issue becomes: Who pays for the work to the grid?

Most grid-owning utilities like Entergy or Mississippi Power believe the merchant plant producers should pay for the infrastructure to move the electricity to the grid. They favor participant funding. The merchant power producers point out that grid upgrades benefit the utilities, even though some of them ship electricity to other areas of the country for profit. They favor rolled-in pricing, which calls for everyone to pick up the tab.

Jolly Hayden, vice president for transmission operations at Calpine Corporation, an independent power generator with assets in 21 states, the United Kingdom and Canada, said about 93% of capacity at Calpine’s power plants within the Entergy system is sold within that region.

“It stays at home,” he said. “We don’t haul electricity from Mississippi to Massachusetts because it’s just not feasible. From a technical point of view, you can’t buy space, and more importantly, we’d lose money doing it. Besides, we’d be competing against ourselves.”

Calpine has a development site at Lone Oak in Lowndes County under its subsidiary, NewSouth Energy of Atlanta.

“We’re here to supply local load, bottom line,” said Hayden.

Last June, TAPS (Transmission Access Policy Study Group) released a white paper that pointed out over the last two decades, investment in transmission has fallen increasingly behind previous levels. The group said that participant funding is likely to delay needed construction and create new vested interests in maintaining congestion instead of efficiently expanding the grid to reliably meet the needs of all users and provide the infrastructure required for vigorously competitive generation markets. For generation competition to work for customers, the grid must be robust, not marginally adequate.

“Participant funding invites the game of chicken where would-be beneficiaries may sit back in the hope that others will step forward to bear the cost of an upgrade,” according to the white paper.

Hebert argued that it was unfair for Entergy to shoulder the cost of transmission upgrades system wide, which could reach $5 billion.

“I understand the goal of rolling-in these costs, that at some point all customers will theoretically benefit from an upgraded system, and in light of the blackout in the Northeast (in 2003), I appreciate the importance of an enhanced grid,” said Hebert. “However, I can’t seem to get past the fact that we’re asking those who can least afford it (Mississippi consumers) to fund these upgrades, when the merchants understood the risk with their investments and were rewarded with market-based rates in exchange for their risk, and all without the traditional regulatory handcuffs.”

The fine print

Aldie Warnock, senior vice president with independent energy generator Mirant, which filed a reorganization plan with the U.S. Bankruptcy Court in January, said he wasn’t necessarily opposed to participant funding.

“My biggest issue is for the Energy Bill to include a determination about who decides if the new transmission is to benefit customers or generators,” he said. “We’d request an independent person overseeing the grid to make that determination.”

Vito Stagliano, vice president for transmission policy at Calpine, also isn’t opposed to participant funding.

“There are certain elements of the language today that bring us concern,” he said. “The critical factor is who makes the decision on how to allocate those costs. If it is the utilities that own the transmission system, there is an inherent conflict of interest in attempting to fairly distribute the burden. If the decision is made by an independent third party, there is a greater chance of fairness and equitability to be embedded in the process of assigning the costs.”

It’s not clear who would make that call, perhaps FERC, some sort of regional transmission organization (RTO) or another entity, like the ICT (Independent Coordinator of Transmission).

“We would not like to see that job assigned to Entergy’s own proposed ICT,” said Stagliano. “We continue to be concerned about how independent ICT would be … but we’ll make judgments not on generalities but on the details being proposed.”

Hebert insists it’s a fairness issue.

“Entergy feels strongly that we should fight the good fight for our customers,” he said. “We have three regulators who have stood their ground and not moved an inch on that issue and have really helped us. In Washington, Congressman Chip Pickering, vice chairman of the House Energy & Commerce Committee, reached an agreement with Committee Chairman Barton to discuss participant funding language when it goes to conference. Sen. Trent Lott has led the fight in the Senate for Mississippi by insisting the Senate version have participant funding language. We’re proud and appreciative of their hard work. It’s a tough issue to grapple with, and one not easily understood. If any issue could further undermine the public’s confidence in our handling the American electric infrastructure, this issue of profit without cost would be it.”

Contact MBJ contributing writer Lynne W. Jeter at lwjeter@yahoo.com.

About Lynne W. Jeter

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