The mid-Atlantic region should have adequate, even surplus, power supply for the summer months, the President of a power generation group told the Pennsylvania Public Utility Commission this week.

Douglas L. Biden, president of the Electric Power Generation Association, listed a number of variables that affect reliable supply. “Obviously, we need adequate generating capacity, transmission and distribution facilities, as well as adequate fuel and water supplies. We also need viable markets, including a forward looking capacity market, market-based demand response, equitable and predictable environmental regulations, and investor confidence to invest.”

However, Biden cautioned that new generation construction is rapidly declining, older units are being retired faster than new generation is being constructed, and forced outage rates of existing generating units is on the rise in PJM, increasing from 4.8 percent to 8.0 percent from 2001 to 2004.

In addition to market rules, Biden cited pending environmental initiatives and the impact they could have on future generating plant retirements. These include the U.S. EPA's March 2005 Clean Air Interstate Rule (CAIR), the Clean Air Mercury Rule (CAMR), the Northeast Ozone Transport Commission's "CAIR-Plus" proposal, and Pennsylvania's decision to adopt a "go-it-alone" strategy with respect to controlling mercury emissions.

The "CAIR-Plus" proposal, Biden said, "is so stringent, that it would virtually eliminate SO2 trading, and would require retro-fitting nearly all coal-fired generating units in the Ozone Transport Region (OTR) with capital-intensive flue gas desulfurization (FGD) and/or selective catalytic reduction (SCR) technologies. Dozens of units and many thousands of megawatts would likely be forced to retire or dramatically reduce their operating hours."

Compounding this situation for generation owners, Biden said, are at least three factors: capacity market prices at or near $0/MW Day (and not expected to recover soon), many generating companies in the OTR have below investment grade bond ratings and thus limited access to capital markets, and the recent entry of regulated entities into PJM with the ability to rate-base environmental investments. On this last point, Biden cited a study which showed that a regulated generator enjoyed as much as a $10/MWH advantage over a merchant generator.

Biden also focused on Pennsylvania's recent decision to adopt a state mercury rule, rather than participate in the federal CAMR and its cap and trade program. The details of the Pennsylvania regulations have not yet been released.

However, Biden cautioned that "Pennsylvania has more than 22,000 megawatts of coal-fired generating capacity. If the rest of the nation can participate in a cap and trade program and Pennsylvania cannot, that will be a significant source of competitive disadvantage for electric generators in this state, and a likely cause of more plant retirements here."

Although Biden stressed that physical generation, fuel and water supplies certainly appeared adequate for summer 2005, he urged that "investors in generation need a stable, predictable forward price signal, "Without it," he cautioned, "they will wait for that politically untenable combination of sustained shortage and very high prices before investing in the next round of capacity expansion."

He also encouraged PJM, the PUC or the North American Electric Reliability Council (NERC) to study the potential impacts of the multitude of environmental issues facing the generation sector on future reliability and fuel diversity.

EPGA is a regional association of electric power generators comprising Allegheny Energy Supply, Cogentrix Energy, Exelon Generation, FirstEnergy Generation, Midwest Generation, Mirant Corporation, PPL Generation, Reliant Energy and UGI Development Company.

EPGA members own and operate more than 122,000 MW of generating capacity, half in the Mid-Atlantic Region, and approximately one-third in Pennsylvania.

For more information visit the Electric Power Generation Association website or call 717-909-EPGA.

6/12/2005