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.

Intrusive, costly rules

The new state oversight programs vary in structure and intensity. California’s, for example, imposes detailed plant O&M and logbook standards on all generators in the state.

Plant operators must respond to any request by the California Public Utilities Commission (CPUC) for information or risk being subjected to an enforcement process that includes fines and unflattering publicity, but is based on few definitive standards. The CPUC may compel the submission of competitively sensitive information without guaranteeing its confidentiality. Detailed “audits” of a plant may be initiated, diverting resources that could be used to keep it operating at peak efficiency. Unannounced site visits may occur at any time, including during unscheduled outages. During such emergencies, the operator’s first priority should be to identify and eliminate the cause of the outage ASAP—not to lead regulators on a tour.

The new rule requiring plant owners to notify the CPUC 90 days prior to an ownership change epitomizes the “regulation for the sake of regulation” philosophy that pervades these new state oversight programs. FERC’s exclusive authority to approve or reject a proposed transfer of facility ownership effectively denies the CPUC any possible authority to prevent or condition a sale. Moreover, the prospective seller typically provides the CPUC advance notice of plant sales by serving it with a copy of its application to FERC. The 90-day advance notice provision does nothing to ensure that the plant owner will not illicitly withhold power in the interim. In many cases, the 90-day “advance” notice is impossible to provide, either because the seller is legally or contractually precluded from prematurely disclosing the sale or cannot accurately predict its closing date.

Enforcement of detailed regulations governing day-to-day plant operations is already taking a financial toll on generators. In California, operators have spent millions of dollars responding to subpoenas and audits, monitoring the adoption and implementation of the new CPUC rules, and seeking relief from their more onerous mandates. Promulgation of the regulations has likewise incurred costs; after all, any spending by the CPUC diverts funds that could be used to address more pressing public needs, such as education and infrastructure.

New priorities needed

Much as generals fight the last war and lawyers litigate the last case, regulators inherently focus on the “last crisis”—even when the problem they seek to correct has already been solved or simply no longer exists. Regulators and politicians would better serve the public by seeking workable solutions to the myriad actual problems now confronting the U.S. generation industry.