Legal & Regulatory

How direct access would improve electricity supply


The debate over retail choice has resurfaced, triggering in the minds of many consumer advocates California’s failed deregulation attempt and its fallout—rolling blackouts, bankrupt utilities, and government bailouts with crippling long-term consequences. Before allowing a chorus of "oh no, not again" to cloud the debate, state policy makers should realize that allowing generators to sell directly to end users (direct access) would serve to make electricity supply more abundant, affordable, and reliable.

New plants for old

Delays and uncertainties associated with new power plant licensing and construction threaten system reliability, hinder the growth of renewable energy, and limit wholesale competition that puts downward pressure on retail prices. Much of the generating capacity of many utilities in the Midwest and South comes from coal-fired plants built in the 1950s and 1960s that should have been retired long ago. Yet state regulators have allowed the continued operation of these older, relatively inefficient, and inherently more-polluting plants, and essentially condoned the effective refusal by utilities to execute power-purchase agreements (PPAs) with builders of cleaner renewable-energy projects and other environmentally more benign resources.

The regulatory, institutional, and "economic" rationales for extending the life of old plants frustrate the development and construction of new ones. Non-utility generation projects require a signed PPA to be financed. Without the opportunity to market the output of a proposed plant directly to end users, a developer is left hoping that its project will win a utility resource solicitation; then it can negotiate a PPA and obtain financing and regulatory approvals for the project. In recent years, this has become an increasingly extended, expensive, and uncertain process. By comparison, giving project developers direct access to potential retail customers would produce more PPAs, and more new capacity would be timely constructed.

Bane or boon?

Thus far, the debate over direct access has focused almost exclusively on its perceived impacts on ratepayers. Consumer advocates oppose the concept with a somewhat convoluted argument. They say that because it would reduce utility power sales to industrial and large commercial customers, the utilities would recover these "lost revenues" by raising the rates they charge small commercial and residential customers.

Proponents of direct access counter that it would force utilities to become more efficient and price-competitive, to the benefit of all user classes. To date, the benefits of direct access to wholesale competition, and how they would flow to all ratepayers, have not been part of the policy debate.

Environmental benefits, too

Policy makers should consider the broader implications of direct access for regional and nationwide electricity supply. Direct access would encourage and enhance the ability of independent power producers to build plants by expanding the market for their output. These plants would offer retail customers two benefits that their local utility would be hard-pressed to match: low rates, and fixed-price supply contracts immune to the political vagaries of regulation.

Direct access also would allow more large users to participate directly in the move to cleaner plants with lower CO2
emissions. Many big national companies have stated a commitment to meeting a larger share of their electricity needs with power generated from renewable resources. Allowing these companies to buy directly from renewable energy plants would give developers a more-certain future revenue stream. The improved prospects—similar to the effect of securitization—may make it easier to finance and build proposed renewable energy projects. It could even allow some arguably "iffy" projects to go forward.

Win-win situation

The debate over the pros and cons of direct access should take into account how the policy would benefit electricity supply by facilitating the construction of more-efficient and cleaner plants. Electricity users will benefit, too.

New generating capacity is needed to meet increasing electricity demand. Technological advances promise to make the next generation of power plants more efficient and cleaner than ever. Policy makers and regulators should not miss the opportunity to allow direct access to deliver the inherent benefits of open competition—including increasing supply and lowering electric bills.

Steven F. Greenwald leads Davis Wright Tremaine’s Energy Practice Group. He can be reached at [email protected]. Jeffrey P. Gray is a partner in the firm’s Energy Practice Group. He can be reached at [email protected]. 

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