Pass the Whale Oil: Will Politicians Leave New England in the Dark?

One of the greatest features of our federal system is the ability of each state to act as a “laboratory of democracy”, to try its own approaches to various challenges. Every state can then learn from the successes and failures of others—and usually has more to learn from the mistakes. <?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

One such mistake was <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />California’s fantastically botched attempt to control retail energy costs, which led to their infamous rolling blackouts a few years ago by starving power suppliers of revenue. This monumental policy error also starved the electricity supply system of adequate investment. All those missed chances to improve generating capacity have culminated in system operators in southern California recently having to issue a Stage 1 power emergency (meaning an operating reserve shortfall will occur within two hours). That means the canary in the coalmine isn’t dead, but it’s starting to cough.

So it’s not a stretch to suggest that what was tried in California should be avoided, since it just didn’t work. And yet California’s disastrous electricity experiment could become de facto policy throughout New England if a “consumer coalition”, including more than a few self-serving public officials, successfully pressures the Federal Energy Regulatory Commission (FERC) in an upcoming decision with national repercussions.

Specifically at issue is a proposal from the nonprofit corporation coordinating the region’s power supply, Independent System Operators-New England, to prevent a likely regional power crunch. Known as the “Locational Installed Capacity Plan” (LICAP), it would lift price caps and pass on expansion costs at the front end.

FERC sought this proposal, and for good reasons: Before electric industry restructuring, the establishment of new plants was determined by monopoly utilities and state regulators based on how much generation was required to meet demand. But regulators no longer control generation, so FERC sets reserve margins, or contingency generating capacity.

Currently, prices for capacity in New England are set on a region-wide basis. But while the region as a whole has, for the time being, electrical capacity exceeding peak demand, certain areas have much lower reserve margins, with transmission congestion also significantly limiting how much electricity can be imported. Some older, less efficient power plants in these areas have been ordered to continue operating in order to maintain reliability. They receive “reliability-must run” payments based on their operating costs, but these payments plus revenues from electricity sales no longer cover expenses, some owners have applied to shut their plants, and a capacity shortage is looming ever larger.

FERC is now considering replacing the temporary, reliability-must run charge with a permanent one (LICAP) to compensate providers for building newer and better plants. In the given regulatory context, it’s the most realistic and cost-effective way to address the potential shortfall in generating capacity. The necessary plants cannot and will not be built in the current system absent the certainty of sufficient investment.

Regrettably, FERC is hinting at delaying its decision. The public officials opposing this growth plan in the name of avoiding cost increases argue as if the revenues will serve as executive bonuses instead of funding construction. Such voices seem to only find fault in energy price hikes that weren’t their idea, being commonly behind most proposals with precisely that effect.

Consider the initiative of these very same Northeastern states to ration and otherwise raise the price of energy, leaked in a recent internal memo. That massive energy cost spikes would result is affirmed by the European Union’s experience with their similar plan, with brazen “price-gouging” inquiries initiated by responsibility-averse policymakers. Also, at least one corporation helping them try to block FERC approval of LICAP in the name of consumers is notorious in Washington for its advocacy of costly “global warming” policies.

Their Price Avenger rhetoric just doesn’t fit. They’re merely seizing a chance to score enough points with voters to last them until the next election.

FERC needs to get moving on the very same plan they solicited, and recognize the political opportunism that motivates the protests of so many officeholders. Being in the dark about what “public advocates” truly advocate is one thing. Being in the dark, period, is another.