State monitoring fails the cost/benefit test

     
Steven F. Greenwald and Christopher A. Hilen

Utility regulators in California and other states have begun subjecting power plants to extensive oversight of their O&M activities. These oversight programs are a response to allegations that generators purposely shut operational plants down to drive electricity prices up during the 2000–2001 energy crisis.

These state initiatives are redundant, intrusive, and costly to implement, and they will not achieve their objectives. The Federal Energy Regulatory Commission (FERC) already has exclusive jurisdiction over power plants’ sales into wholesale electricity markets. If “strategic shutdowns” remain a real concern, existing criminal penalties, federal-regional regulations, and reform of utility capacity procurement programs more effectively address them. The “benefits” that the oversight programs offer are cosmetic and political “feel-good.” But the unnecessary costs, inefficiencies, and distractions from real problems that they generate are real.

Safeguards already sufficient

Perceptions persist that generators conspired to shut down power plants to drive up prices in 2000–2001. However, even if a few “bad actors” did exacerbate the crisis, the new state O&M oversight initiatives constitute legislative-regulatory overkill. Existing laws and regulations—and market forces—already eliminate any possible incentive for a rational generator to withhold power:

• Criminal laws provide an effective and low-cost deterrent to intentional withholding. The steep fines and prison sentences imposed on energy crisis malefactors send a more direct and powerful message than an obligation to fill out forms. Passage of the Energy Policy Act of 2005 also helped, by infusing FERC with more power to punish possible withholders and increasing penalties for violations of the Federal Power Act.

• Many state oversight requirements duplicate or conflict with regulations already enforced by other agencies. For example, plant operators must submit daily status reports to the entity that controls the local or regional grid—be it an independent system operator (ISO), regional transmission organization (RTO), or control area utility. Significantly, these entities actually use the information in the reports to discharge their responsibility for ensuring grid reliability. In contrast, state regulatory commissions, though now insisting on the data, do not use it to enhance grid reliability but do increase generators’ costs (and retail electricity prices).

• Withholding power only rewards generators participating in “irrational” markets dominated by spot market sales (such as California’s in 2000–2001), and then only for short periods. Renewed reliance on long-term power contracts (which limit price volatility and impose financial penalties for failures to deliver power) and greater scrutiny of plant shutdowns by purchasing utilities, ISOs, RTOs, and FERC have further reduced any possible economic incentive to withhold power. In a rational market in which utilities have balanced supply portfolios, capacity withholding is simply not a viable business strategy or tactic.