Western regulators and industry stakeholders face ''some great challenges ahead'' in ensuring an adequate energy infrastructure for the region, Chairman Pat Wood III said Wednesday. While some participants at a FERC-sponsored conference in Denver said electric generating capacity is overbuilt generally within the region, others expressed concern about a return of a power crunch to California.
Memories of the power outages in California a few years ago ''are still fresh with me,'' said Wood. He touted regional planning of transmission and generation needs, including adoption of the resource adequacy rules laid out in the standard market design proposal, as an important tool for avoiding future pitfalls.
State regulators participating in the conference, which was held in conjunction with the National Assn. of Regulatory Utility Commissioners' summer meetings, offered diverse of opinions on regional planning.
Washington Utilities and Transportation Commissioner Richard Hemstad spoke of ''renewed interest'' in regional planning among regulators in the West. He suggested that his colleagues should ''think regionally and act locally.''
However, Colorado Public Utilities Commission Chairman Gregory Sopkin said he is not ready to embrace the regional state committees discussed in FERC's white paper on market design. ''I'm not preparing to concede the issues of regional generation, transmission rates, energy efficiency and demand response to an RSC,'' Sopkin declared.
The lack of regional planning in the West is one reason there will be many plant cancellations in the coming years, said Peter Moritzburke director of the Western energy office at Cambridge Energy Research Associates. While he was among speakers to suggest ''Western markets are overbuilt now,'' Moritzburke expects power supply and demand ''will come back into balance by 2008.''
The conference was convened by FERC to examine the electric generation, transmission and natural gas infrastructure needs in the West. In an opening presentation, the Office of Energy Project's Jeff Wright reported that from January 2000 to May 2003, generating capacity in the West increased 15%, with the desert Southwest leading the way with additions of 7,657 Mw, a 32% jump.
''Western markets are overbuilt, but not as much as the rest of the country,'' said Todd Filsinger, senior partner with PA Consulting.
Looking out to 2010, the Electric Power Research Institute sees plant additions reaching 4.5 times the announced and projected plant retirements, said Jeremy Platt, manager for power and fuel markets at EPRI. Trajectories of reserve margins appear to exceed 30% for some sectors of the region over that period, he said.
But a San Francisco-based business group painted a darker picture, asserting that California faces a critical need to add new generation to avoid supply shortfalls in the near future. In a statement submitted for the record at the conference, the Bay Area Economic Forum said reserves could fall to levels that threaten to bring on another energy crisis in the California.
Without new facilities, ''California does not have the reserve electricity on hand or within sight to comfortably meet potential demand in the years ahead,'' the statement said. ''Of particular and immediate concern is the need to promote reliability by implementing capacity reserve requirements.''
The lack of a capacity market, ''which provides a mechanism to compensate power generators for maintaining reserve capacity, limits new investment and makes it less likely that older plants will stay online to provide insurance against power shortages,'' the group said.
The head of California's independent power producers endorsed the statement following the conference. ''We need to rationally add new plants into the mix'' soon, because the state's generating fleet is aging and at least 2,000 Mw is expected to be retired next year, said Jan Smutny-Jones, executive director of the California Independent Energy Producers.
Wright said capacity additions in the West would drop sharply starting in 2004, with retirements exceeding 3,000 Mw in 2005. That could cause problems as demand rises, he said. California ''must build more generation in-state'' or it will be forced to rely more on imports from neighboring states, he said.
On the power transmission side, the region's grid ''is showing symptoms of stress'' with voltage instability and other incidents during peak periods that threaten reliability, said Vickie VanZandt, vice president of operations and planning at Bonneville Power Administration. ''Grid operators are getting nervous about several near misses this summer,'' she said.
BPA is adding transmission facilities for the first time in about 15 years, VanZandt said. ''We need an improved planning function,'' she told the gathering.
Increased reliance on natural gas as a fuel source for generation has caused pipeline infrastructure in the region to be tested as well, Wright said. Natural gas could replace hydropower as the top fuel source in 2005, he said.
As producing basins in the Rocky Mountains develop, increased pipeline capacity will be needed to send the gas to markets in the West and Midwest, Wright said. Since 2001, FERC has certificated 28 projects adding 6.5 Bcf/day of capacity in Western states, and five pending projects have projected capacity of 819,00 Mcf/day, he said.
For such supply-area projects, producers ''will need to step up and take capacity'' under long-term contracts if they want to ensure their gas gets to market, commented Kirk Morgan, vice president of marketing and regulatory affairs for Kern River Gas Transmission.
However, not all producers are willing to sign long-term deals and FERC should allow short-term contracts to back up new projects, countered Brian Jeffries, vice president of marketing for Western Gas Reserves. Contracts of less than 10 years are needed, and FERC could allow pipelines to use market-based rate mechanisms to shoulder the risk of projects in the outer years, Jeffries suggested.
Morgan said such a scenario is not realistic because pipelines are long-term investments and ''they're risky enough'' without such regulatory interference in their financing. While Kern River has offered capacity contracts with varying terms, from 10-15 years, it just spent $ 1.2 billion on an expansion and ''we can't get that money based on three-year contracts,'' he said.
Another way FERC could help ensure sufficient pipeline capacity gets built would be to more flexible in applying the shipper-must-have-title rule and allow pipelines to hold capacity for producers, Jeffries added.
The potential for Canadian production to fill any gap in increased demand in the Western U.S. has been minimized with decreasing production in Alberta, said Bill Bingham, acting business leader for Canada's National Energy Board. Last year marked the first decrease in Canadian exports to the U.S. in a long time, and producing capacity is expected to remain flat to the end of the decade, he said.
Drilling activity in Canada has picked up this summer in response to recent price climbs, but ''the days of easy production increases in Canada may well be behind us,'' Bingham said.
Prospects for liquefied natural gas to fill any void in production capability can be improved if prices are above $ 3.50/MMBtu, said Darcel Hulse, president of Sempra Global.
By 2009, 5.3 Bcf/day of gas may be available to California from eight LNG import terminals that have been proposed in the state, Wright said, though he acknowledged all of those facilities might not be built. However, if gas prices are sustained above $ 3.50/MMBtu, said Hulse, ''plenty of LNG will make its way to Western markets.''
He suggested that regulators expedite the permitting process for new LNG import facilities and adopt uniform pipeline quality specifications so that LNG shipments from different countries can be accommodated.
