Long-Term Contracts May Answer "Alarming" Lack of Baseload, Says New Report by Steve Mitnick

The United States, particularly New England and the mid-Atlantic, are facing an "alarming" shortage of baseload construction, and efforts by FERC to stymie state-led baseload development will likely lead to a "breaking point" for state policymakers, said Steve Mitnick, president of Build Energy America.

Mitnick, formerly chief energy adviser to the Gov. Eliot Spitzer of New York, has authored a research report on states where new baseload investment is and is not occurring, detailing the best practices for new baseload construction.

The report notes that Texas, along North Carolina, account for one-quarter of all new baseload capacity.

Texas, with its energy-only market, was the only restructured state among the top 15 identified by Mitnick as having best practices attracting baseload investment. Texas, "offers a uniquely lucrative energy market to encourage building," the report notes.

In contrast, none of the states with an unbundled RTO administrative capacity payment were ranked as among the top states seeing new baseload construction, despite protestations that such supplemental payments are needed for generation development.

Mitnick noted that the short time horizon of the capacity payments (at most three years forward) are insufficient to attract investors given the long life of generation assets.

The report noted that "[s]tates that expect new plants to be built by non-utility energy companies retain potent mechanisms to spur investment in baseload."

"They may, for instance, encourage utilities in their states to award long-term contracts to non-utility energy companies who agree to build baseload plants. Utilities are promised a financial incentive, that they can include as a small part of utility bills, to fully compensate utility shareholders for any risks inherent in such contracts," the report suggests.

"One must acknowledge wholesale market purists, favoring the increasing authorities of the Federal Energy Regulatory Commission and its Regional Transmission Organizations, will protest such long-term contracts as market interventions that corrupt the free market. Notwithstanding these expected criticisms, states certainly have it within their rights to once again deploy their utilities and utility regulation to jump-start needed baseload construction. The value of long-term contracts is especially evident to support the most capital-intensive baseload proposals such as nuclear and advanced coal projects," the report continued.

Mitnick, in particular, noted Connecticut's development of new generation using long-term contracts as a successful strategy. Such contracts have thus far been implemented in a competitively neutral manner with respect to the retail market, with output sold into the market, and costs/benefits addressed on the distribution rather than generation side of the bill.

However, similar attempts at a retail-competitively neutral mechanism to build new capacity have been stymied by FERC (see New Jersey capacity contracts and FERC minimum offer price ruling, 4/13).

While not addressing the merits of any specific state actions, Mitnick stressed that FERC must not "overreach" into generation resource adequacy, which is a state matter.

Mitnick warned that should legitimate state policy mechanisms to build new generation be blocked by FERC, state regulators and legislators will reach a "breaking point."

It is clear that the retail market may be endangered if such a breaking point is reached (if it has not already).

For example, New Jersey, after already having one retail-competitively neutral mechanism effectively blocked absent a favorable court ruling, may be forced to pursue strategies that do affect the generation side of the bill and adjust the default service procurement, thus harming the retail market.

Speaking several weeks ago after FERC made revisions to maintain high capacity prices in the Reliability Pricing Model, N.J. Board of Public Utilities President Lee Solomon offered the following statement:

"[FERC's decision] does not address the failure of the PJM market to deliver new capacity which is desperately needed to reduce New Jersey's energy prices, and to replace aging, dirty, and inefficient generation facilities.

"PJM's pricing model causes New Jersey ratepayers to pay substantially higher prices for electricity than most other states in PJM. This is due, in part, to the extra 'capacity' and 'congestion' charges levied under PJM's Reliability Pricing Model ('RPM'). These charges have reached levels well over $1 billion per year," Solomon said.

"There are other options available to us that are outside of FERC's jurisdiction. At this time, it appears that we will be forced to pursue those options. It is our duty to protect New Jersey's ratepayers. I do not believe that New Jersey forfeited its sovereignty when PJM became the regional transmission operator," Solomon concluded.

Though New Jersey has not yet revealed any definitive plans, if states cannot reduce market capacity prices in the RPM auction, which allows for a retail-competitively neutral solution, the next logical step is to somehow serve default service capacity (and load as well) from dedicated sources, rather than sourcing such requirements from the auction.