Reject ISO New England’s ‘pay and pray’ energy plan

The Federal Energy Regulatory Commission (FERC) is poised to increase electricity rates in New England by as much as $13 billion over the next five years. On these pages recently, ISO New England made the case for the rate hike, which could cost Maine consumers $900 million over the next five years, representing an increase of 20 percent in the average Maine homeowner’s electric bill.

ISO New England claims the new regulations driving the cost increases are necessary to avoid energy shortages in the next few years. Electricity supply is adequate today, claims the ISO, but if regional demand for electricity continues to increase, then the lights could go out by 2008. So, the ISO recommends giving money to companies that own power plants in the region in hopes that they, or someone else, will build new generation when we need it.

But under the ISO’s plan no company that receives rate-payer money is required to generate electricity when supplies get tight. Existing plant owners could pocket the money now and close down in a few years, leaving us hanging. To make matters worse, there is no requirement for any company to build a single new power plant. In short, the ISO proposes that we pay generators today and pray that they will be there for us tomorrow.

Perhaps the greatest deficiency of the ISO’s pay-and-pray plan is its single-minded focus on building new power plants to serve increasing demand. Although the ISO made passing references to the benefits of electricity conservation in its defense of the pay-and-pray plan published in this paper recently, the ISO plan does not value alternative investments to building new power plants that may be cheaper. Chief among these omissions is energy-efficiency investment.

A recent white paper prepared for the New England Governor’s Conference reported that energy efficiency is 67 percent cheaper than the cost of building new power plants. The economic value of using less electricity is obvious to anyone – the cheapest kilowatt is the one you don’t use.

There is also a hidden risk in New England of simply increasing the number of power plants in our fleet, as the ISO wants to do. Since it is unlikely that the region would accept a new nuclear plant, and because there is not enough renewable generation to meet our increasing demand, any new power plants will probably generate electricity by burning fossil fuels like oil and natural gas.

Since more than 60 percent of the region’s power plants burn fossil fuel already, increasing the number of power plants in the region, as the ISO wants, will most likely increase our dependence on imported fossil fuels. Consequently our electricity prices would become ever more linked to fossil fuel prices.

Fossil fuel prices are volatile and have been surging lately. In Maine businesses are paying more than 20 percent more for electricity supply this year than last year because of the run-up in fossil-fuel prices. Increasing the number of fossil-fueled power plants will not decrease the cost or volatility of our electricity supply.

Energy efficiency, however, can insulate consumers from the volatility of fossil-fuel prices. Energy-efficiency investments also curtail pollution from fossil-fuel burning power plants and can make local industry more competitive.

The ISO’s pay-and-pray plan is wrong for New England and wrong for Maine. A much more straightforward approach would be for the ISO to hold an auction for the “services” needed to meet increasing demand. The “services” could include a portfolio of traditional power plants, renewable generation and efficiency projects. If properly designed, an auction for the “services” would allow market forces to craft an appropriate portfolio mix at the lowest possible price.

The advantages of this approach are numerous. “Service” providers would be required to be available as demand grows. Consumers would know what they were paying for. Market forces, not bureaucrats, would determine the level and kind of “service” that is most appropriate for the region. Cheaper alternatives to generation like energy efficiency could compete for investment, thereby eliminating the need for constantly adding to the region’s fleet of fossil-fueled generators.

This general concept was analyzed and considered favorably by the ISO’s own consultants a few years ago. There is broad support growing among the region’s regulators for a “service” procurement model. Unfortunately, FERC has refused to even consider this approach, or any other alternative to the pay-and-pray scheme. The ISO’s plan appears well on the road to completion, notwithstanding deep opposition from New England’s political and regulatory leadership. The Maine Public Utilities Commission hopes that the ISO will join in the movement to an alternative, workable approach to ensuring that generation resources are there when we need them.

Kurt Adams is chair of the Maine Public Utilities Commission.