Cost-based rates will harm industry, Duke executive says

California's current price caps still provide enough incentive to developers to build new generation, says Brent Bailey, vice-president and general counsel of Duke Energy North America LLC, a unit of Duke Energy Corp. However, drastically lower caps or the imposition of cost-based rates will do more to halt construction of new generation than all of the regulatory barriers put together, Bailey said.


California's current price caps still provide enough incentive to developers to build new generation, says Brent Bailey, vice-president and general counsel of Duke Energy North America LLC, a unit of Duke Energy Corp.

Speaking at conference sponsored by the Electricity Consumers Resource Council, Bailey said the Duke unit could even support some of the tiered price cap structures presented to the California Independent System Operator because "we feel that some of the proposals still provide enough upside potential for developers."

However, drastically lower caps or the imposition of cost-based rates will do more to halt construction of new generation than all of the regulatory barriers put together, Bailey said. For the time being, he said, Duke is committed to going forward with the proposed 1,000 Mw modernization of the Moss Landing power plant in California. Committee hearings on the application are scheduled later this month by the California Energy Commission.

"But further commitment of capital on our part, and the part of other developers, is very much up in the air in light of the current price cap initiatives," Bailey said. "It is undeniable that most of California's problems stem from lack of generation and every proposal that is put forward should focus on ways to encourage generation, not discourage it as seems to be the case."

With respect to pure cost of service rates, Duke does not support the concept at all, Bailey said, "and we hope FERC (Federal Energy Regulatory Commission) feels the same way." Going down that road opens up a whole host of issues the industry is trying to get away from, including avoiding the necessity of long, protracted rate cases before FERC, which Bailey said would be the outcome if cost-bases rates are put in place.

The problem with caps and cost-based rates is that it takes a significant amount of capital to build a new power plant and such restrictions limit the ability of a developer to recover its capital costs, he said. Developers must be permitted to charge more than its marginal costs during certain times of the year to make up for the periods when plants sit idle because of low power prices, Bailey argued.

Developers will only make a decision to build when there is a high degree of certainty they will be able to sell energy and ancillary services at market-based rates and that revenues will not continually be subject to retroactive scrutiny and refunds, Baily explained.

He said the biggest problem with cost-based rates being discussed by investor-owned utilities in California is they "conveniently limit" any upside potential for power plant developers, while providing not downside protection whatsoever.

"This is hardly what we would consider a level playing field, and will go a long way to ensuring that no significant new generation is added in California," Bailey said.

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