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WASHINGTON, D.C. - In a letter to the President and CEO of ISO New England, Senator Joe Lieberman (D-CT) today voiced concerns about the proposal by the operator of the New England power grid to establish a new electricity billing system, known as Locational Installed Capacity, that could increase electricity costs for Connecticut consumers and reward existing, air-polluting power generators rather than support the building of new, energy-efficient ones. ISO New England is finalizing its proposal on Monday.
“I am deeply concerned about a proposal being developed by ISO New England (ISO) to establish a new system of electric utility charges known as Locational Installed Capacity (LICAP) that could add hundreds of millions of dollars in additional cost to the bills of Connecticut’s electric customers,” Lieberman wrote. “I am especially concerned that in an effort to create incentives for the construction of new electric generation capacity, the ISO’s plan will simply reward existing generators - whether baseload nuclear plants or old, air-polluting, oil-fired peaking plants - without actually creating the financial support for construction of new, efficient electric generation or investments in conservation and demand-side management technologies.”
In his letter, Lieberman called upon ISO New England to reconsider its proposal. “If the ISO has indeed determined that existing, economically marginal electrical generation capacity needs to be retained in the short-term and new capacity developed in the long-term, then let us develop a comprehensive plan that will ensure that this is accomplished with the least cost and environmental impact,” Lieberman wrote.
The full text of Lieberman’s letter appears below.
February 26, 2004
Mr. Gordon van Welie
President and Chief Executive Officer
ISO New England Inc.
One Sullivan Road
Holyoke, Massachusetts 01040
Dear Mr. van Welie,
I am writing because I am deeply concerned about a proposal being developed by ISO New England (ISO) to establish a new system of electric utility charges known as Locational Installed Capacity (LICAP) that could add hundreds of millions of dollars in additional cost to the bills of Connecticut’s electric customers. I am especially concerned that in an effort to create incentives for the construction of new electric generation capacity, the ISO’s plan will simply reward existing generators - whether baseload nuclear plants or old, air-polluting, oil-fired peaking plants - without actually creating the financial support for construction of new, efficient electric generation or investments in conservation and demand-side management technologies.
While I appreciate the fact that the ISO has been working to develop this LICAP plan ever since it was ordered to do so by the Federal Energy Regulatory Commission (FERC) last April, I am deeply concerned about the lack of public discussion and consensus surrounding this proposal, which could have substantial economic impact for Connecticut and other parts of New England. Some estimates, for example, indicate that LICAP would result in hundreds of millions of dollars in higher electric bills for Connecticut customers. The fact that the ISO is expected to submit this plan to FERC in a matter of days and that it is supposed to take effect on June 1 only makes this lack of certainty and understanding more regrettable.
Earlier this month, Attorney General Blumenthal wrote a letter to you raising a series of concerns regarding the ISO’s LICAP proposal, which I share. For example, the Attorney General argued that imposition of LICAP in addition to rate increases already imposed on Connecticut, such as Locational Marginal Pricing (LMP) and reliability-must-run (RMR) agreements with generators in Connecticut, is duplicative since these other measures already produce significant financial rewards and “price signals” to generators to sell power in Connecticut. At the same time, because the LICAP payments come on top of these other increases, the combined impact of these new charges will result in excessive electricity costs to Connecticut consumers. They could also result in an unjustified financial windfall to existing generators, such as owners of base-load nuclear power plants.
Even more troubling, the Attorney General pointed out that while LICAP is designed to incentivize the construction of new capacity through the artificial imposition of higher prices, there is no guarantee that ratepayers in Connecticut or elsewhere in New England will, in fact, receive anything for the additional money they pay. There is simply no requirement or assurance that the additional payments to utility companies will find there way into new investments. Similarly, the promise of higher prices is only one of many factors that impact a decision by a prospective investor to build a new electric generation plant or upgrade an existing one. In truth, there are a number of issues that need to be addressed before new capacity can be built including environmental siting issues, air and water permits, fuel supplies and other factors.
In addition, many have argued that the parts of Connecticut where the LICAP proposal seeks to impose higher prices lack adequate electric transmission capacity to allow new capacity to be sold economically on the grid. New transmission projects in Southwest Connecticut are under development, but in their absence it is counter-intuitive to presume that higher LICAP payments could overcome this obstacle to generation siting and investment. While the ISO may not have control over these other siting factors, it is wrong and overly simplistic to design a rate system, like LICAP, which presumes that the only factor preventing new investment is that the price of electricity is too low and that by artificially establishing high electricity prices it can ensure that new capacity will be built.
In addition to the issues raised by the Attorney General, I am also concerned that the additional LICAP payments will encourage the continued operation of old, inefficient oil-fired plants located in Connecticut that have long been identified as major sources of air pollution. These plants are not economically competitive, but because of their unique location, provide electricity during peak demand. The LICAP payments appear to be aimed toward encouraging the owners of these plants to keep them in operation despite their inefficiency and environmental problems, but would not require them to make environmental or efficiency improvements as a condition of receiving such payments.
While I am sympathetic to the difficult situation that the ISO finds itself as a result of FERC’s orders, it would be unfortunate indeed for the ISO to propose a new pricing scheme that artificially inflated electric consumers’ bills and generators’ profits without returning any benefits to those consumers. If the ISO has indeed determined that existing, economically marginal electrical generation capacity needs to be retained in the short-term and new capacity developed in the long-term, then let us develop a comprehensive plan that will ensure that this is accomplished with the least cost and environmental impact. The ISO’s LICAP proposal offers no assurance that any of these goals will be achieved.
Sincerely,
Joseph I. Lieberman
United States Senator
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