Interesting ideas on Reliant and Orion asset transfer.

Jim
 -----Original Message-----
From: 	"PennFuture" <pennfuture@pennfuture.org>@ENRON  
Sent:	Thursday, November 08, 2001 5:29 PM
To:	Friends of PennFuture
Subject:	PennFuture's E-cubed - When is Bigger Better?


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November 8, 2001
Vol. 3, No. 21
When is  Bigger Better?
The Acquisition of Orion by Reliant
The  possible acquisition of Orion Power, the owner of many plants that serve the  Pittsburgh area, by Reliant Resources is the fifth major transaction affecting  Pennsylvania's generation and electric service since 1996. Reliant Resources'  attempt to buy Orion Power, however, raises issues not seen before in other  transactions. 
Those transactions - the PECO Energy and Unicom merger,  the GPU and First Energy merger, the sale of GPU's power plants, and Duquesne  Light Company's swap of plants with First Energy and subsequent purchase by  Orion - did not increase the market power of a particular generation owner.  
Why not? All the other transactions involved companies operating in  different markets, or companies that did not own generation, or sale of power  plants from one company to one or more companies. In fact, taken together these  transactions reduced consumer costs, protected rate caps, and decreased stranded  costs. They also led to important environmental improvements like new pollution  control investments and support for renewable energy.
Reliant Resources,  however, already owns generation within PJM and the purchase of Orion would add  generation to its PJM share, once Duquesne joins PJM West. For this reason, the  transaction should be carefully reviewed and used to formulate a new policy  concerning consolidation of generation assets within a single  market.
Specifically, regulatory bodies should make increased demand  response a condition for any transaction that increases generation consolidation  as demand response strongly mitigates market power. Funds should be devoted to  ensuring that all consumers with a load of 50 kilowatts and above are equipped  with time-of-use meters. This measure is necessary, as the single biggest  regulatory mistake to date in electricity restructuring is the failure to make  demand response a central part of restructuring. Without it, workably  competitive markets will not develop or be sustained.
Apart from  increasing demand response, regulators and the Office of Consumer Advocate  should get answers to the following questions:
- Will Reliant Resources  permit Duquesne Light Company, the local distribution utility, to offer in its  service territory a competitive default service (CDS) program modeled after the  successful CDS program operating in the PECO Energy service territory? 
-  Will Reliant Resources exercise market power within local markets and should  particular plants be excluded from this acquisition to eliminate market power?  
- Will Reliant Resources commit to supporting economic demand-response  programs within PJM, instead of voting against demand response as it has done  recently?
- Will Reliant Resources acquisition help finance installation of  time-of-use meters for all customers with demand more than 50 kilowatts within  the Duquesne control area?
- What will Reliant Resources do to clean up some  of the heavily polluting plants that it owns now or will acquire from Orion?  
Reliant owns portions of Keystone and Conemaugh and Shawville power  plants. It would buy from Orion the Cheswick unit. Keystone and Cheswick have no  scrubbers installed to reduce sulfur dioxide emissions, while Shawville has been  scrubbing one out of four boilers. In 2000, Keystone, Shawville and Cheswick  respectively released 153,490 tons, 48,243 tons, and 44,908 tons of SOx into  Pennsylvania's air. Keystone is also the biggest emitter of mercury in the  entire country and all four plants spew huge amounts of nitrogen oxide - at a  rate more than double the modern standard of .15 lbs/mmbtu. That's not all - all  four plants produce an amazing 30 million tons of carbon dioxide, helping  Pennsylvania to contribute 1 percent of the entire world's human-induced global  warming gases.
Reliant can begin cleaning up by implementing in the  Duquesne area the equivalent of the PECO Service Territory's CDS program, which  includes a Renewable Portfolio Standard that increases annually the amount of  renewable energy that must be supplied to customers. CDS customers there are  served by New Power and Green Mountain Energy at 5.56 cents per kilowatt-hour  (kWh), more than three cents less than the 8.65 cents per kWh PECO Energy  charged its residential customers in 1996 for coal and nuclear power.  
Market Power Issues
In addition to environmental  issues, market power issues must be examined. Such an inquiry hinges on defining  the relevant market and products. 
Nationally, total generation capacity  is approximately 800,000 MW, with most of it subject to base rate regulation in  the retail market. Despite regulation at retail, wholesale generation  transactions are generally price deregulated in all 50 states, whether or not  the entities engaged in the transactions are deregulated generation owners,  regulated public utilities, municipal utilities, or electric cooperatives and  whether or not necessary market institutions required for workably competitive  markets exist. 
Orion Power has been participating in the deregulated  wholesale market. It owns 81 power plants in New York, Pennsylvania, Ohio, and  West Virginia, producing approximately 6,000 MW and has another 5,000 MW under  construction. Orion has done an exceptional job, improving the forced outage  rates, especially among its New York City resources.
The proposed  acquisition of Orion Power by Reliant Resources will form the nation's second  largest deregulated power generation owner, controlling 17,279 MW, or 6.15  percent of the deregulated generation market that totals 281,000 MW of the  country's total capacity. Reliant Resources has a smaller share of the nation's  total generation capacity. 
Yet these small national shares do not  guarantee that Reliant Resources could not have market power in portions of the  PJM Market. 
Prior to this proposed acquisition, Reliant Resources owned  about 7 percent of total PJM generation, or 4,262 MW of generation capacity  within the 58,000-MW PJM market. These facilities include 2,009 MW of base load,  803 MW of intermediate load, and 1,450 MW of peaking capacity. They are quite  old and formerly owned by GPU and Sithe (see table in attached document).  Reliant Resources is also developing another 1,316 MW within PJM. 
These  numbers would indicate that regulators should focus on possible market power  within the Duquesne Control Area of the units that Reliant Energy is purchasing  from Orion. The Duquesne Control area is scheduled to become part of PJM West in  2002, but regulators and the Office of Consumer Advocate should ensure that no  plant is strategically located within the transmission system so that it  possesses market power even after incorporation of the control area within PJM  West. If any plants that would give Reliant Resources market power are  identified, they should be removed from this acquisition.   
Addressing Market Power
The combination of large  generation owners creates concerns over market power that can only be identified  and addressed by sound regulatory action. In all three of the Northeastern ISOs,  there have been incidents of market power which have resulted in numerous rule  changes. There are several reasons that the electric industry is sensitive to  market power. First is the inability to store energy. In many other industries  surpluses can be built up in low demand periods and used to fill in gaps during  high demand periods. In the electric industry, energy is produced and consumed  virtually instantaneously. Second, there are barriers to entry in the electric  industry, including discriminatory interconnection practices and other incumbent  advantages. Third, historically the demand for electricity has been inelastic  and creates the opportunity for inflated prices. Inelastic electricity demand is  not surprising when most customers see average prices and do not have metering  or the ability to respond to prices.
For these reasons, concrete steps to  combat market power in the electric industry must be taken. For starters, the  existing market mitigation measures, such as PJM's $1,000 price cap, should be  examined to determine if they are sufficient, while not being burdensome as to  limit new generation resources from entering the market. 
Secondly,  barriers to entry should be reduced, especially for distributed generation and  environmentally beneficial grid technologies like wind energy. 
Lastly  and most importantly, demand-response programs can and must be developed.  California has shown that energy efficiency can preserve reliability and break  the market power of generation owners. Changing the demand for electricity is  the biggest and best protection against market power. 
A Deeply  Troubling Tale
Unfortunately, Reliant Resources did not support  PJM's Economic Demand Response programs, voting against them last year in the  Members Committee. It had company, with all generation owners voting as a block,  with one exception, against demand response. Three cheers for the exception:  Edison Mission. 
In the face of the mass opposition of generation owners,  PJM wobbled but did not cave. It changed but submitted demand-response programs  to FERC which were approved for the summer of 2001. 
The moral of this  tale is that the public interest needs regulators, the PJM Board, and other  interested parties to further demand-response initiatives, because generation  owners will likely be roadblocks. In particular, real-time metering, residential  air conditioning and heating programs, and wholesale markets all need to be  developed. 
It is time for strong action on these points. Regulators must  begin by requiring Reliant Resources to finance the installation of time-of-use  meters for all customers with demand of 50 kW or more within the Duquesne  control area. This is especially important as the transition there may be  completed by 2004. 
 
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PennFuture (www.pennfuture.org ), with offices in Harrisburg,  Philadelphia and Pittsburgh, is a statewide public interest membership  organization, which advances policies to protect and improve the state's  environment and economy. PennFuture's activities include litigating cases before  regulatory bodies and in local, state and federal courts, advocating and  advancing legislative action on a state and federal level, public education and  assisting citizens in public advocacy.
 
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 - vol3no21_110801.doc