December 2000 Legal Stream

Peaker Plants Pique Water Utility Issue

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A product of electric utility deregulation currently advancing in many states is the mushrooming of new generating facilities commonly called "peaker plants." These are generators typically fueled by natural gas that spring up near natural gas transmission mains and electric grids.

Theoretically, a peaker plant fires up only to serve peak electric demands. However, many of the new generation facilities being proposed have the capability, or even intent, to be baseload plants. Frequently, in the mind of many people, the term "peaker plant" is used interchangeably to mean both peak demand and baseload plants. Therefore, this article will adopt that common interpretation.

The electricity generated by a peaker plant may not be used necessarily in the region where the plant is located. The existence of a plant can give rise to contracts for production that essentially are traded in a national energy commodity market much like soybeans or corn. The electricity may be "transmitted" anywhere the national grid permits or be used by "displacement." Therefore, analysis of the potential impact of a proposed plant should consider that the benefits of a plant may have no direct relationship to the burdens imposed at its location.

Peaker plants require water. Their demand for water can vary by the type of plant. For example, a small, simple-cycle plant intended solely to generate electricity in peak demand periods may use water only for cooling. On the other hand, a baseload combined-cycle plant can require water also to enhance combustion as well as to produce steam for generation of a portion of electricity. According to testimony presented in proceedings before the Illinois Pollution Control Board, a simple-cycle peak demand plant can use up to 2 mgd of water; and combined-cycle baseload plants can use 5 mgd to 20 mgd.

When a peaker plant is proposed to be located in or near the service area of a water utility, several issues can arise.

Capacity of the Water System

If a proposed peaker plant approaches a water utility for all of its water requirements, the water utility may not have the capacity to deliver the requested demand without a significant expansion of production facilities. Appropriate contractual arrangements must be developed to assure that the financing and construction of the necessary plant expansion will not cause cross-subsidization by existing customers or impose undue risks on them. The risks of the expansion should be shifted to the developers of the peaker plant, not to the present customers.

Impact on Source of Supply

A proposed peaker plant may choose to obtain its process water from its own source of supply and rely on the local utility only for domestic water, fire protection or back-up.

In such a circumstance, the existing utility must evaluate the potential impact on its groundwater or surface supply of such a heavy withdrawal of water by the peaker plant. The potential for adverse impact on an aquifer or waterbody is obvious.

If a particular state allocates sources of water supply, a water utility should seek to protect itself by monitoring or participating in the regulatory process. If a state does not regulate allocations, a water utility has an increased burden to monitor and, if necessary, litigate to protect its sources of supply.

 

Rates and Costs of Service

Whether a proposed peaker plant seeks to obtain all its water requirements from the incumbent utility or merely seeks a back-up supply, complex rate making issues can arise.

In the case of a peaker plant seeking all its water requirements from the local utility, a cost of service study should be implemented so that the costs of the demand and use requirements are properly allocated to the facility. Rate making also will have to consider whether certain water facilities are dedicated to the peaker plant or were paid for by the plant.

Where the local utility merely provides back-up, it should be appropriate to implement standby rates that reflect the costs to reserve capacity for the peaker plant.

Again, the objective is to develop rates that will not cause other customers to unfairly bear costs to serve the peaker plant.

Decommissioning Peaker Plants

Most, if not all, electric generating facilities being proposed are fueled by natural gas. Some also use oil as an auxiliary fuel. These plants, if constructed, may be economically feasible only as long as the price of fuel is low or there is a market for their electricity production.

The contractual relations between a peaker plant and a water utility should anticipate the decommissioning of these plants, either prematurely or at the end of their service lives. For example, if a plant is terminated, who will be responsible for resulting excess capacity in the local public water supply? Who will be responsible for capping the plant’s wells? Who will be responsible if leakage from the plant has contaminated the source of supply for the local water utility? Where is the accountability when these plants are closed down?

It would seem appropriate to provide for a decommissioning procedure to protect water sources and the water utility when these plants are removed from service. At the very least, there should be a procedure to assure remediation and restoration funds will be available if plant owners abandon plants without protecting water resources. Another possibility is a requirement that a surety bond or letter of credit be posted to secure the obligation to protect water resources.

Siting of Peaker Plants

In some states, siting of electric generation plants is considered a local issue. However, there may be siting concerns of a broader interest, as related to water use.

Recent proposals indicate multiple peaker plants in close proximity to each other. What is the impact of multiple draw downs on an aquifer at a particular location?

Another concern relates to soil conditions at a proposed site. How vulnerable are site conditions to a contamination spill? Could a shallow aquifer be adversely affected?

Water utilities should monitor these issues as they are considered through any regulatory process.

Watershed Protection

The importance of watershed protection is clear. Since water utilities are responsible to treat surface water that may be contaminated by others, it makes sense to discourage such contamination sources. Surface water resources need protection against potential adverse run-off from peaker plant sites and from untreated or inadequately treated waste disposal.

Cross-Connections

When an electric generation facility is partially served by a public water supply and partially served by the facility’s own wells, there should be assurance that no cross-connections will exist. For example, the public water supply may provide water for domestic use and fire protection, while the facility uses its own wells for process water. However, the public water supply also might provide back-up in the event the wells are out of service.

Local water utilities may not necessarily have staff with skills to constantly monitor for cross-connections in generating plants. Indeed, it is not clear that they even would have access to the plants. Who then will be responsible for policing for cross-connections and protecting the public water supply?

Conclusion

 

Water utilities should be diligent not only in structuring their contractual relationships with peaker plants but also in monitoring the environmental impacts and the permitting regulatory process. Service agreements should be crafted to assure compensatory rates as well as to assure that all risks imposed by a peaker plant are shifted to the facility.

Dan Kucera is a partner in the law firm of Chapman and Cutler, 111 W. Monroe St., Chicago, IL 60603; (312) 845-3000.

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