The report comes as many states and regions have put generation reserve requirements or resource adequacy policies in place or are considering them. The report notes, "Regulators now express concern about power shortages, price spikes and volatility, and rising (not falling) energy costs." The typical response is more generating capacity.

But that response is too costly, concludes the study - Resource Adequacy and the Cost of Reliability: The Impact of Alternative Policy Approaches on Customers and Electric Market Participants. The result is an over-abundance of generating capacity, argues the study and "concerns about insufficient generation capacity appear unwarranted, at least from a national and large regional perspective." The report argues, "Current and historical reserve margins produce unnecessarily high prices for customers and impede the development of efficient markets."

The engineering approach, argues the study, leads to inadequate transmission and distribution investment and works against demand response that is driven by demand, not regulation. "Historically," says the study, "the electric sector has considered load a given, and not subject to efficient pricing and demand response."

Instead, says the report, a market-based approach to reliability would lead to more efficient resource allocation and lower overall costs. "In more competitive approaches," says the report, "substantial increases in demand or losses in supply are met by supplying more energy and by allowing demand to respond to price. With floating prices, resource adequacy is no longer a physical constraint, because demand is always met at some price (or voluntarily reduced in response to higher prices)."

Said Ronald Sutherland, one of the two authors, "The value of improved reliability due to reserve generating capacity is much less than the cost of providing this capacity." The report recommends:

*Replacing annual capacity requirements with "a short-term capacity reserve margin, and match capacity reserves to expected peak generation plus a reserve margin, during a short planning period (months, not years).

*Eschew "rule of thumb" reserve margins and instead link the marginal cost and marginal value of reliability to customers.

*Allow wholesale prices to float and "accurately reflect the marginal cost of supplying electricity."

*Eliminate barriers to price-driven demand response.

Concluded Nat Treadway, the other author of the report, "Economic efficiency and consumer benefits cannot be achieved if we attempt to build a competitive market on top of the foundation of an inefficient capacity market."

The study is available at no charge by contacting Jamie Wimberly at jwimberly@defgllc.com. DEFG and CEAM are hosting a two-hour web cast/conference call Feb. 22 from 2-4 p.m. EST to discuss the study. Regulators, public officials and journalists can join the event at no cost. Other industry stakeholders will be charged $195. To reserve a spot and get a PowerPoint version, contact Treadway at ntreadway@defgllc.com. [KM]