December 2, 1998
The Honorable Clifton A. Woodrum
Member, Virginia House of Delegates
P. O. Box 990
Roanoke, Virginia 24005
Subj: Inputs for the SJR 91 Drafting Group Concerning HB 485, Public Utilities; Qualifying Small Power Producers (Carried Over)
Dear Delegate Woodrum and the Ladies and Gentlemen of the SJR 91 Drafting Group:
I'm Michel A. King, President of the Old Mill Power Company, a Charlottesville-based company recently formed for the purpose of generating electricity from low-environmental impact primary energy sources such as water power from small hydroelectric facilities, solar power, landfill gas, biomass, wind, etc. I'm writing to you while you are in the midst of drafting the Electric Industry Restructuring Act of 1999 to encourage you to include in that Act statutory language similar to that proposed by HB 485, a bill which was carried over from the 1998 session. The HB 485-like language must become effective as soon as possible in order to minimize the devastating effect of sharply declining wholesale prices for electricity on the Commonwealth's small power producers, and in order avoid putting the Commonwealth's small power producers at a competitive disadvantage relative to foreign power producers who will become eligible, in just a few days, to use Virginia and federal taxpayer dollars to build subsidized solar power plants of up to 350 kW each in neighboring states.
The Virginia and federal taxpayer dollars will be provided under Phase III of a program administered by the Virginia Alliance for Solar Electricity (VASE). VASE Phase III is scheduled to go into effect on January 1, 1999. The presence of a highly profitable retail market in nearby states for "premium" types of electricity, such as electricity produced by the sun in small or medium sized solar arrays, makes it very attractive to build Virginia-subsidized solar power plants in those states. Conversely, the absence of a functioning retail market for premium types of electricity produced by small power producers based in Virginia makes it highly unlikely that a firm would build such plants in Virginia until restructuring legislation takes full effect (currently scheduled for January 1, 2004). By that time, the VASE program will have expired, thus small Virginia power producers trying to do business in the Commonwealth in 2004 without the benefit of the substantial (50% or more) VASE subsidy for their power plants may very well find themselves competing with foreign-based solar power plants that were built in 1999 with the help of VASE dollars.
If passed, HB 485, or an Electric Industry Restructuring Act containing HB 485-like language that goes into effect immediately, would create the kind of domestic retail market for premium types of electricity that would enable small power producers to build power plants in Virginia in 1999, while VASE money is still available, and to operate them profitably while waiting for full industry competition to arrive. And there is no doubt that the additional generation capacity is needed, or could be absorbed by the domestic electric industry with minimal impact: The entire VASE program (all three phases) calls for just 1.12 MW of solar power to be installed. By comparison, in application PUE980462, which is currently under review by the State Corporation Commission (SCC), Virginia Power has asked for permission to install four new 150 MegaWatt combined cycle gas turbine generators to go on line by July 1, 2000, and to install a fifth unit of equal size to go on line by July 1, 2001. That's 600 MegaWatts of additional generation capacity that Virginia Power believes is needed to serve the Virginia market within the next 18 months, or 750 MegaWatts of additional generation capacity needed within the next 2 ½ years. So establishing an effective retail outlet immediately for Virginia's small power producers would have a major impact on the affected small power producers, but very little impact on the incumbent utilities.
During the 1998 legislative session, Delegate Mitchell Van Yahres introduced HB 485 for the purpose of liberalizing the existing provisions of § 56-232 which currently exempt small hydroelectric power producers from regulation as public utilities if they meet some very restrictive criteria concerning their number of customers (no more than five), customer class (non-residential), and capacity (20 MegaWatts or less). HB 485 would also require incumbent utilities to open their transmission and distribution systems to qualifying small power producers who wish to conduct retail electricity sales, thereby removing an ambiguity in the statute that has effectively prevented any eligible small power producer from taking advantage of the exemption in § 56-232 that was approved for their benefit in 1984.
The intended effect of HB 485 is to provide relief to a very small segment of the Commonwealth's electric power industry-about 30 MegaWatts of qualifying small hydroelectric power, or 300 MegaWatts of total small power producer contracts based on the 1996 data that I have readily available-whose revenue stream has been declining sharply for decades as a direct result of the "avoided cost" formulas used to calculate the value of the small power producers' electricity when sold at wholesale to incumbent utilities under PURPA. Based on conversations I've had with small power producers who have been in business for decades, these avoided cost rates have declined from approximately 12 cents per kiloWatthour in the late seventies and early eighties to less than 2 cents per kiloWatthour today. During this same period, retail prices for electricity have not declined proportionately.
Because the small power producers who would be helped by HB 485 are currently barred from effective participation in the retail market by what the Old Mill Power Company perceives to be shortcomings in § 56-232 that were enacted in 1984 when the intent was presumably "to encourage the utilization of the water resources in the Commonwealth to the greatest practicable extent" (Code of Virginia, § 62.1-80), these small power producers have borne the brunt of the economic impact of the decline in wholesale prices, while the incumbent utilities, who are authorized by law to participate in both the retail and wholesale markets, have benefited tremendously from the growing spread between wholesale and retail prices. HB 485 would "level the playing field" for small power producers by allowing them to sell their product at the same 400% to 500% mark-up over avoided cost currently enjoyed exclusively by incumbent utilities.
An additional benefit of HB 485 is that, by expanding the definition of eligible producers to those who would operate "Qualifying Facilities" as defined by the federal government, it would promote the development of alternative energy sources, and alternative energy industries, within the Commonwealth. Let me cite just one example that would provide an immediate and direct stimulus to development of the Commonwealth's solar panel manufacturing industry, which has been lagging behind the Commonwealth's expectations for what should be a high growth industry:
Solar panel manufacturing is a segment of the Virginia economy that the General Assembly has been trying to stimulate since 1995 through a $22.5 M incentive program known as the Virginia Solar-Photovoltaic Manufacturing Incentive Grant (SMIG) program. In recent years, SMIG funds have been combined with $1.3 M from Virginia's solar panel manufacturers, $2.4 M from the federal government, and up to $3.6 M from prospective owners of 50 kW-350 kW solar plants through a program known as the Virginia Alliance for Solar Electricity (VASE). As Phase II of VASE approached its regularly scheduled closing date earlier this year, only about 1/3 of the money allocated for the development of solar power projects had been claimed, and the program had to be extended, due to an apparent lack of interest within the Commonwealth for the near-term construction of in-state solar plants. (Money from VASE Phases I and II was available exclusively for the construction of in-state power plants.)
Phase III of the VASE program is currently scheduled to begin on January 1, 1999 and, according to VASE officials, will be open to proposals for the construction of solar power plants in other states due to the low in-state response to Phases I and II. The Old Mill Power Company believes that the lack of interest for in-state development of solar power plants in Phases I and II was due, at least in part, to the statutory barriers preventing entrepreneurs from marketing, at retail, solar power generated within the state to Virginia customers of all rate classes who are already "grid-connected".
Here's how HB 485, or similar language incorporated into the Electric Industry Restructuring Act, could help the Commonwealth achieve its stated objectives for the solar panel manufacturing industry as well as for the efficient utilization of the Commonwealth's water resources:
The Old Mill Power Company has been negotiating for the lease or purchase of generating assets and/or power from two Virginia corporations that own small hydroelectric generating plants on the Rockfish River in Nelson County. These are:
Due primarily to the economic and statutory issues discussed above, these plants have been idle for several years.
If-under the current provision in § 56-232 for small hydroelectric power producers-the Old Mill Power Company were to attempt to bring the Rockfish River plants back into production in order to serve retail customers, Old Mill would be faced with the inevitable prospect of having to discontinue service to its retail customers during the summer-a traditionally peak period for electricity consumption-due to the fact that the flow in the Rockfish River, like the flow in virtually all tributary rivers in Virginia, decreases dramatically during that time of year (see Figure 1).
On the other hand, as shown in Figure 2, the summer months are a peak time for solar insolation.
Figure 3 illustrates how the peak period for solar insolation coincides with the annual decrease in flow on a typical Virginia tributary such as the Rockfish River.
If Virginia law were such that small power producers were able to use solar energy to supplement their small hydro plant production when generating electricity for sale to retail customers, the Old Mill Power Company believes that the Commonwealth's solar panel manufacturing industry as well as its small hydro industry would be major beneficiaries. Note that the benefits to small power producers would be essentially the same if small hydro could be supplemented with virtually any other form of electricity generated by a Qualifying Facility, although the benefits to each alternative energy industry in the Commonwealth would, naturally, depend upon which primary energy source was used to supplement the small hydro.
Concerning solar panel manufacturing and solar power production within Virginia: Phase III of the VASE program has not yet begun, but once it does, administrators expect no more than six months to pass before the current VASE funding is exhausted, principally due to the fact that the program will be open to proposals to build solar plants out-of-state, where there seems to be a lot more interest in solar power production and consumption than in Virginia. Indeed, the Old Mill Power Company has been told by knowledgeable officials of a company doing business in Pennsylvania that the demand for solar power is so high there that some short term contracts to provide solar power at 38 cents per kiloWatthour have been signed. With that kind of incentive in other jurisdictions, it seems likely that the Phase III VASE money will be quickly exhausted by applicants from other states. Thus, we face the prospect that Virginia money may be used in the next year or two to build solar power plants in neighboring states…plants that may, in turn, be able to wheel their Virginia-subsidized power back into the Commonwealth to compete with the domestic solar power industry when Virginia's restructuring eventually takes place. By making HB 485 or equivalent language in the Electric Industry Restructuring Act effective immediately, the General Assembly can place Virginia's small power producers on the same competitive footing as those who would build solar power plants in other states using 1999 VASE funds.
Concerning pilot programs for retail competition within Virginia's electric industry: Proposals for pilot programs for retail competition within Virginia's electric industry should take into account the fact that it can be technically difficult and cost prohibitive to wheel small amounts of electricity (less than 1 MW) through one or more transmission systems. Thus, the financial success of small power plants such as Harris Bridge (400 kW), Walker Mill (425 kW) or of any Virginia-based solar power plant developed under VASE (which can be no larger than 350 kW) may very well depend upon the owner's ability to market all the power produced by such a plant within a single distribution circuit, thereby avoiding the cost and scheduling problems associated with using one or more transmission systems. Thus, any scheme to distribute pilot program customers throughout the Commonwealth, or throughout an incumbent utility's service territory should not be purely random. Statutory or regulatory provisions should be made to enable small power producers-those producing less than 1 MW on average-to market all of their power within the distribution circuit serving their power plant. Otherwise, by diluting their marketing efforts and by unrealistically boosting their transmission and distribution costs, pilot programs will provide little, if any, relief to the Commonwealth's small power producers. Note, however, that if HB 485 or similar statutory language is approved in the upcoming legislative session and is made effective immediately, this concern about the possible adverse effect of pilot programs on small power producers becomes a moot point.
HB 485 was drafted and submitted before it was known that the Energy Industry Restructuring Act was going to be developed because immediate relief from the very restrictive language of § 56-232 concerning retail sales by eligible small power producers was necessary to make it profitable to restart currently idle small hydro plants, and to enable the operators of such plants to be able to offer other forms of Qualifying Facility electricity to their retail customers during annually recurring periods of low river flow. The need for immediate statutory relief has not diminished since HB 485 was submitted. Indeed, when viewed within the context of the rapidly approaching date when Phase III VASE funding will become available to fund small solar power projects in other states, the need for the requested statutory relief is even more urgent now than it was a year ago. I urge you to make HB 485 or equivalent statutory language effective immediately.
Thank you.
Sincerely,
(original signed by)
Michel A. King, President
cc: Delegate Van Yahres