Independent power producers face many challenges

Issue 4 and Volume 99.


Douglas J. Smith,

Senior Editor

Independent power producers face many challenges

Although there was a slowdown in the demand for electricity in 1994, the independent power industry added 3,000 MW of new capacity in the United States. According to the Electric Generation Association (EGA), independent power producers now account for more than 7 percent of the total installed generating capacity in the United States.

EGA, a Washington, D.C.-based national trade association, represents independent power producers and suppliers of goods and services to the competitive wholesale electric generation industry.

According to EGA, the electric power industry is moving, at a rapid pace, to full customer choice. Legislative and regulatory proceedings in many states are looking at open transmission access. With open transmission access independent power producers would be able to sell directly to customers. The end result would be more buyers and sellers of electricity and thus more competition for the product, according to B. Jeanine Hull, EGA president.

Because the electric supply industry is going through a period of transition, and the roles and structure of regulated utilities and the non-utilities are still being debated, EGA is not certain how they should treat regulated electric utilities. Hull asks the question OShould we treat utilities as our customers or competitors???

According to Hull, EGA was established on the principle that electric utilities are valued customers. For this reason EGA will continue to pursue policies grounded in this vision. EGA believes that all electric industry participants will benefit from competition and will take policy positions that expedite the transition to a fully competitive electric supply industry.

In her OState of the Independent Power IndustryO message, Hull said, OPolicy makers should ensure that innovative proposals allow all generators to compete under the same rules at the same time.

The innovative proposals being discussed in various proceedings on the benefits of competition will only work if they guarantee that all generators have an equal and simultaneous opportunity to be the preferred suppliers for their customers.O

EGA believes that all non-franchised generating companies have more similarities than differences. For this reason EGA will continue representing the evolving generation sector now and in the future, said Hull.

Although the electric industry is not truly competitive at this time, Hull said that electric power generation can and will be a fully competitive industry in the future.

Electric utility views

Sam Skinner, president, Commonwealth Edison, Chicago, Ill., believes that electric utility deregulation will occur in many states as an economic development issue. State governors all face the need to maintain, retain and recruit new businesses for job growth. One way governors can attract new business is by offering low cost electricity.

Some large industrial users are already receiving permission from state governments to buy electricity on the open market rather than from the regulated electric utility that serves the territory, said Skinner. In the opinion of Skinner, should this escalate and businesses start to relocate to save money then the regulated market will begin to collapse.

While industrial users of electricity will benefit initially from deregulation, Skinner sees the residential and commercial sectors also being allowed to choose their electric supplier. In addition, Skinner said that competitive pricing will turn nuclear colleagues into competitors. In his opinion, nuclear generating stations will compete with the ones next door, down the road and maybe halfway across the country. Consumers will pick their supplier based on cost-effectiveness and reliability, he said.

Recovery of stranded costs

At the end of 1994, the EGA filed comments with the Federal Energy Regulatory Commission to use contractual principles to govern the recovery of costs that have become stranded due to the transition to competition. EGA believes that this approach will not be a detriment to competition but would provide the best means for ensuring that electric utilities are compensated for their legitimate stranded costs.

However, for a cost to be considered stranded and eligible for recovery the cost should have been prudently incurred to serve a wholesale or retail customer. This also assumes that the supplier was obligated to provide the electric services pursuant to a contract or regulatory requirement, according to EGA.

Just as the EGA is for electric utilities recovering their stranded costs it also said that all purchased power agreements (PPA) should be honored by the utilities. EGA said that no independent power producer?s PPA with a utility should be unilaterally rewritten to accommodate a utility?s stranded cost concerns.

Stranded costs and open transmission access are only two of the many issues that must be resolved if the electric supply industry is to become a truly competitive industry. By 2000 there is no doubt in this editors mind that electric generation will be more open and competitive. END

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Barge-mounted independent power plant: Is this the future? Photograph courtesy of Wartsila Diesel.