Building a Billion Dollar Power Plant

Issue 6 and Volume 84.

Utilities want exemptions to competitive procurement processes

Across the country, vertically integrated utilities are arguing before their state commissions, sometimes successfully, that they should be allowed to circumvent established competitive bidding processes for building new generation resources to serve load, and that instead, the opportunity to build new generation should be given to the utilities themselves.

In seeking exemptions to state-mandated competitive procurement processes, utilities have relied upon a number of different arguments. Utilities in Florida and Virginia, seeking to construct coal plants in their respective states, relied on the following to urge their state commissions to forego a competitive bid process:

A request for proposal (RFP) process would fail to identify lower cost alternatives to the utility’s construction and operation of a generating project

No other entities in the region are qualified (or capable) to develop capital intensive projects utilizing advanced coal technology

An RFP process would cause delays in the development of a new generation project, increasing uncertainty for customers

The risks that a utility would face if required to respond to load needs by entering long-term contractual obligations instead of relying on a utility-built project, are too significant for the utility to bear.

Similar examples of utilities seeking to circumvent established competitive bidding rules have occurred in Nevada and Louisiana.

These arguments are typically raised with scant support, and the self-serving result of a utility receiving an exemption to competitive bidding processes from the state commission is the same: long-term investments in billion dollar facilities, with costs borne by ratepayers, without any opportunity for the market to identify superior alternatives.

Competitive bidding processes governing the development of new generation gained prevalence when competition in the energy market was introduced. The objective of competitive bidding never was to prevent utilities from constructing new power projects, which in certain instances may be the optimal way to meet load requirements. Instead, the objective was to protect ratepayers, by ensuring that these huge capital projects, the costs of which will be borne by retail ratepayers, are developed at the lowest cost. Competitive bidding takes away the utility’s natural inclination to award these opportunities to itself, and also promotes a robust competitive market, which fosters the innovations and efficiencies that further reduce costs.

The utilities’ secondary arguments are also groundless. The argument that only a vertically integrated utility can build or operate a coal or nuclear plant is untrue. Similarly, state commissions should reject arguments that “there simply isn’t time” to conduct an RFP where the plants in question take five to 10 years to build-hardly a scenario for avoiding a competitive bid process that might take only a few months and result in significant long-term ratepayer savings.

State commissions, which are charged with protecting ratepayers, should continue to rely on competitive bidding processes to identify the least-cost resources that address the particular needs of ratepayers. Competitive power suppliers should have an opportunity to compete against utilities for development projects, encouraging developers to investigate more advanced and lower cost technology that will serve the needs of customers.

Finally, competitive procurement processes serve the interests of the utility itself. By participating in an RFP process for procurement, i.e., developing detailed cost estimates as part of such a process, a utility will be better positioned to justify the prudence of the proposed project before its state commission and, if necessary, the FERC. Indeed, self-build utility power projects should be seen as agreements between affiliates, and should therefore have to satisfy a standard such as that set forth by FERC in its Edgar line of cases, starting with Boston Edison Co., 55 FERC ¶ 61,382 (1991), for reviewing affiliate agreements. As FERC explained in Boston Edison Co., in seeking approval of such affiliate arrangements, there must be an evidentiary showing to support the conclusion that the utility “has chosen the lowest cost supplier among the options presented.” FERC’s competitive procurement guidelines to protect against affiliate abuse call for transparency in design, well-defined products, unbiased evaluation of offers, and independent oversight. (Allegheny Energy Supply Co., LLC, 108 FERC ¶ 61,082 (2004).)

Utilities should face a steep burden of proof in requesting waivers of state RFP processes before their commissions. Exemptions should not be granted based on broad assertions such as those described above. Utilities’ self-build proposals should be tested rigorously against market alternatives, either through an all-source, independent procurement process, or a process whereby the market is given the opportunity to meet or beat the utility’s self-build option. Anything short of that will potentially saddle ratepayers with decades of costs that might have been avoided by simply testing the market at the front end.

Larry Eisenstat is head of the electric power practice and Andrew S. Weinstein is an energy associate with Dickstein Shapiro LLP. They can be reached at [email protected] shapiro.com and and [email protected], respectively.