Merchant power battles for Florida turf

W. Christopher Browder

Gray, Harris & Robinson, P.A.

Entrepreneurs in recent years aggressively pursued development of merchant power plants in Florida for the sale of wholesale electricity since projections are that the state may need as much as 8,000 MW of additional electricity over the next 10 years. Merchant plants are entirely funded and constructed by private equity investment and debt financing with no captive ratepayers to assure the repayment and recovery of the construction or operating costs. End users of electric power from merchant plants will only buy power from the merchant facilities if the cost of that power is at or below that offered by investor-owned utilities (IOUs) or municipal facilities. Merchant plant developers are betting they will be the low-cost energy providers of the future, but are fighting an uphill battle to get a plant built in Florida.

Duke Energy Corp. finds itself at the frontlines in its efforts to build a $160 million, 500 MW merchant power plant-Florida`s first-in New Smyrna Beach. If permitted, the plant could be built by 2001. The quest for permitting is only the first step in a complex process requiring tactical planning- and perseverance.

Running the obstacle course

Merchant plant developers have not been successful in establishing a toehold in Florida so far. While some parts of the country have embraced the concept of wholesale and retail competition, Florida has been slow to move toward a competitive market. This reluctance is in no small part due to the strong efforts of the state`s IOUs in preserving the status quo. A primary hurdle of the would-be merchant plant developer in Florida is that the merchant plant is not a species of electricity provider contemplated in the state laws. The legislation in place was written based on the mode of operation of a regulated utility. As Duke Energy Corp. is finding out, it is not just a matter of following the procedures, but rather, convincing state lawmakers and Florida Public Service Commission (FPSC) that a merchant plant can even engage itself in the process.

Siting and permitting a new power plant of more than 75 MW is governed by the Florida Electrical Power Plant Siting Act. The intent of the Siting Act is to allow one-stop shopping in the permitting and certification of a power plant. Under its terms, an application is submitted to the Florida Department of Environmental Protection (FDEP), which then distributes it. Each agency or government provides to FDEP all proposed variances, exemptions, exceptions or other relief, which may be necessary conditions of certification. FDEP then issues a detailed written analysis of the proposed plant to an administrative law judge appointed to co duct hearings on the application.

Once in the hands of the administrative law judge, a land use hearing in the county of the proposed site is held to determine compliance with the applicable land use and zoning ordinances. The administrative law judge will issue a recommendation as to consistency with zoning and land use plans to the Siting Board, consisting of the Governor and his cabinet. As the next step, a certification hearing is held by the administrative law judge wherein a final recommendation is issued to the Siting Board. The Siting Board will then either grant or deny certification. If granted, a proposed operation permit for a major source of air pollution is forwarded to EPA, and FDEP must then issue or deny any other permits required under applicable federal permit programs. Licenses issued by the Siting Board are valid for the term of the plant certification.

Sparring over the definition of need

Upon first glance, the Siting Act does not seem that unfriendly. The sticking point is in convincing FPSC that it should issue the certificate of need, which is required to allow the administrative law judge to issue his recommendation to the Siting Board. FPSC is designated as the “sole forum” for the determination of need. A determination of need must be based on a showing by the applicant that a plant is necessary for electric system reliability and integrity, the need for adequate electricity at a reasonable cost, and that the proposed plant is the most cost effective alternative available.

The need criteria are clearly written around the processes of the regulated utilities. A utility, with its designated service area, can show peak demand figures, outage statistics, operating and maintenance costs, the projected growth of need in its service territory and the existing portfolio of generating assets in support of a new power generation facility. The parameters are defined and the facts are fairly black and white. A merchant plant applicant must be a bit more creative to demonstrate need. As a first hurdle, the utilities have argued that since a merchant plant has no existing contracts for the sale of power, its developers are not even entitled to avail themselves of the need hearing with FPSC to seek a determination of need. Assuming that the merchant plant is entitled to a determination of need, the only real arguments that a merchant plant developer can make is that the overall reserve margins within Florida are below what they should be, that the newer plants will be more efficient than the existing fleet of plants owned by the existing utilities, and that the advanced emissions controls on the “cleaner” gas-burning plants will lower overall air pollution emissions. There is no specific need to which the merchant plant developer can point since there is no defined service area. The merchant plant developer has to argue that there is a general need within Florida that it proposes to fill. In addition, the merchant plant developer can argue that the cheaper power to be offered by the merchant plant will drive overall wholesale prices down, and as a result, lower retail electricity prices for consumers served by the wholesale purchasers of the power.

The real question one must ask is: Does it really matter if there is any need if consumers are not going to be forced to repay the construction and operating costs in the event the plant goes belly up or runs so inefficiently that it does not sell any power? Nobody will be required to purchase the power generated by the merchant plant. It is a risk borne solely by the investors and lenders backing the plant. The traditional need analysis is important because the retail users of power provided by regulated utilities are forced to live with the decisions of their providers. Thus, a bad decision by an IOU to build an inefficient power plant will burden the retail purchasers within that service area even if cheaper power is available elsewhere. With the merchant plant, there does not seem to be any such concern, except perhaps to the investors in the merchant plant. The state will, of course, be concerned about the viability of a power plant if its capacity is making up part of the required power reserves within the state, and later decisions are being made based upon that capacity being available. Still, Duke Power and others following in their footsteps are forced to work within the legal framework currently in place and therefore must go through the motions of demonstrating need.

Scrimmage for grid access

Gaining access to the electrical grid in Florida by a merchant plant is not nearly as hard as finding any grid in Florida. Florida is more or less an island in terms of power transmission lines, except for the two lines that come down from Georgia west of Jacksonville through Baldwin, Fla. The lack of suitable interconnections available for new power generation facilities illustrates why many developers tend to gravitate toward partners that have a strategic location with respect to the existing grid or possess established rights-of-way (ROW). If a partnership is not struck with an entity that currently has an interconnection, the process of siting new transmission lines is the next step.

The Transmission Line Siting Act sets forth a process very similar to that in the Siting Act. The Line Act will not apply for new lines of less than 15 miles, those that do not cross a county line, or those designed to handle less than 230 kV. The Line Act also does not apply to transmission lines developed in established ROW or to transmission lines previously approved under the Siting Act.

One of the best actions for a developer is to purchase an existing facility that already has its interconnection and ROW in place or develop a power plant with someone on its team who can provide established ROW. If that is not possible, it would be advantageous to locate the project near enough to the established grid to keep new transmission line construction under the 15 miles and within a single county. If it is not possible to fall within any of the exceptions, then getting the transmission lines approved while getting certification under the Siting Act would be the least painful way to gain certification if the developer is going through that process anyway.

Existing utilities within Florida are gearing up for competition. Most feel that it will eventually happen, even though they are fighting tooth and nail to delay its arrival. Utilities are looking at their portfolio mix of existing power generation facilities, transmission capability, and existing agreements for the purchase and sale of electricity.

The next few months will be a critical time in the direction of power in Florida. The City of New Smyrna is betting on Duke Energy`s proposed merchant plant for its future power needs. Florida Power & Light and Florida Power Corp. argued that the project should be canceled. At press time, FPSC planned to make a decision on the proposed plant by March 4. The outcome of this process can and will make the difference in whether Florida will become a viable marketplace for merchant power, or if the current status quo will continue until either federal law mandates change or another brave soul tries to show FPSC that merchant power has a place in Florida.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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