As Independent Merchants Reorganize, Power Market Sees Sparks Fly
...never wanted to stop building," he says. While every state has laws governing regulated utilities, many allow them to earn a rate of return on their assets, but not on power purchases. That encourages the utilities to prefer the regulated model.
The Federal Energy Regulatory Commission opened wholesale power sales to competition in 1996, requiring utilities to give up control of their transmission systems to a third party to foster competition. But some state regulators, particularly in the Southeast and West, challenged FERC's model and were successful. As a result, the federal regulatory process never gelled and came to a standstill two years ago. One merchant power executive, who asked not to be identified, calls it "stillborn."
|Fuel Switching. Nuclear and fossil fuel power could gain new acceptance. (Photo byThomas F. Armistead for ENR)|
Some parts of the U.S., such as the Northeast and Mid-Atlantic, are well regulated and very competitive. Others, particularly the Southeast, have been slower to split transmission from generation and allow transparent operation, in essence, crippling competition, says Yorgos Papatheodorou, an energy economist and CH2M Hill's director of strategic analysis.
In a report last year, the Louisiana Public Service Commission said that Entergy has more than 14,000 MW of relatively inefficient gas or oil capacity, most over 30 years old. In contrast, there is more than 17,000 MW of new independently produced generation in Entergy's region, most of which is uncommitted.
|(Photo courtesy of Cleco Corp.)|
Calpine has about 5,000 MW of the total, of which 2,000 MW essentially is a stranded investment. Sources say Entergy has refused to retire or mothball old, inefficient generation, and there is no transmission available to move the new power to other buyers. Independent producers claim that Entergy will not make upgrades to its transmission grid to allow for the additional load.
Replacing just 3,000 MW of Entergy power with merchant capacity could save Louisiana customers nearly $100 million a year, the commission claims. Non-performing assets loaded firms like Calpine with debt that only a bankruptcy filing could eradicate. "Calpine resisted until it was no longer avoidable," says the merchant power executive.
Independent producers also had to absorb high natural gas prices, while Entergy and other utilities passed them to customers through fuel adjustment charges. But that practice may be in for trouble, as regulators hear from irate constituents up in arms over electric bills.
At the Jan. 18 commission meeting, Entergy CEO J. Wayne Leonard was pressed hard on the utilit''s plans to reduce electric rates in the state. Commissioners want the utility to upgrade its transmission system, diversify its fuel mix and retire old "clunkers." Commission Chairman James Field insisted that Entergy open its upcoming RFP seeking new capacity to proposals that independent producers can meet.
But with gas prices as high as they are, it is unlikely that regulators will allow Entergy to buy too much gas-fired power from the market. Fuel diversity is a recurring theme among many regulators.
The volatility of natural gas prices has regulators and generators alike considering risk issues when planning power supply, says Brown Thornton, vice president of R.W. Beck, a power consultant in Boston. "More people are looking at the probability that gas prices will go up,” he says. Natural gas-fired powerplants, which once priced at $5 per million BTUs to build and operate could reach to $150 per million BTUs. "No CEO wants to be caught with gas when it goes out of sight,” says CH2M Hill's Zabilansky.
Coal-fired plants, once costing about $50 per million BTUs to build and operate, now seem like a more reliable bargain, especially in coal producing states, says Zabilansky. "The horizons for new load are close enough now to begin building," Thornton adds (see chart, next page). WGI's Nash sees demand for coal-fired plants in most parts of the U.S., ex-cept California, with stiff environmental rules and New England, where coal transport is tough.
Engineers and builders have good backlogs now, Zabilansky says. "Our business model is strongly influenced by the coal market now," says Nash.
The industry also is hoping that the nuclear power market will make a comeback. But with technical and political obstacles ahead, it could be up to a decade before new powerplants take shape. "There are a lot of issues that have to be addressed," says Zabilinsky. WGI's Nash, watching nuclear relicensing trends, is more optimistic. "New nuclear generation will be initiated in the U.S. by 2009 or 2010," he says. "We don't believe fear will be an issue. The industry is tremendously safe."
Power participants also have not yet ruled out natural gas-fired plants, if fixed-price power supply contracts are not involved. Teton Industrial Construction, an Atlanta-based subsidiary of PCL Constructors Inc., Edmonton, Alberta., is building a 540-MW combined-cycle, gas-fired plant for utility Pacific Corp. in Provo, Utah, set to finish in 2007. "There are still pockets for gas-fired plants," says Peter Stalenhoef, president of PCL's heavy industrial unit. WGI is handling engineering, procurement and construction for two, 545-MW, gas-fired plants in Port Washington, Wis., for We Energies.
With independent power on the ropes, observers are doing some post-mortems. Merchant developers are not just innocent victims of regulators. Some were opportunists who took advantage of gaps or loopholes in the system and in the power grid, says CH2M Hill's Papatheodorou. In California, Enron could create shortages for generation and transmission capacity through phantom orders for both. It was paid billions of dollars for relieving that congestion, he says.
|Turn It On. Gas-fired plants, such as this 545-MW unit in Wisconsin, will still be constructed. (Photo courtesy of Washington Croup Inc./Graph by Nancy Soulliard for ENR)|
Monopoly utilities bought power at deregulated prices, but could not, by law, raise consumer costs and were forced to sell power at regulated prices until they went bankrupt. "The whole idea of deregulation was discredited for a decade. It was a fiasco," says Papatheodorou.
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The power industry also was not doing its homework, says LSU Energy Center's Dismukes. During the early years of deregulation, industry was not paying close attention when regulators failed to keep up with the changing market, he says. At the time, the economy was strong, there was a massive growth in demand for power and new market players built plants without long-term contracts to hang them on.
The independent market's unraveling began when the recession and the 9/11 terrorist attack converged with rising natural gas prices and state regulators who found FERC regulations to be a "power grab,” says Dismukes. "It was a recipe for catastrophe.”
The U.S. now is struggling to find the right power model. The Energy Policy Act of 2005 reaffirmed FERC's lack of authority to impose market structures that states don't want. Merchant producers belatedly are trying to convince state regulators to encourage competition in the best interest of ratepayers.
Having learned some lessons, merchant producers emerging from bankruptcy will be tighter, more risk-averse firms that will not build plants to sell power on spec. "They will be more niche oriented unless things change on the regulatory side," says Dismukes. "Now, it is part regulated and part not, but I don't think that will change.