Uncertainty zaps power-plant construction in California
The Sacramento Bee, Calif. --Sep. 2
Sep. 2--Three years after the energy crisis faded from view, California's electricity picture remains uncomfortably muddled.
But it's uncertain if California will see a big spurt in power plant
construction. Financial problems bedeviling some of the top generators, along
with California policy-makers' inability to complete a new structure for the
state's electricity market, have left a good many construction projects in
limbo.
It remains to be seen whether Gov. Arnold Schwarzenegger's expected veto of a
bill that would restore regulation in the industry will bring clarity or more
confusion to a situation that begs for clarity.
"There's still too much uncertainty," said John Olson, a Houston
investment analyst who tracks California's power industry.
Granted, more than 8,000 megawatts' worth of new plants, enough to power 6
million homes, have been built since the peak of the energy crisis in early
2001. Construction is under way on additional plants, including a new gas-fired
plant the Sacramento Municipal Utility District is building alongside the old
Rancho Seco nuclear plant.
And independent "merchant" generators such as San Jose-based
Calpine Corp., which builds plants and sells the power to utilities such as SMUD,
say they believe Schwarzenegger's veto will help set the table for a new
free-market era of plant construction.
"It leaves the market in better shape," said Calpine spokesman Kent
Robertson.
But hurdles remain. Olson said investors and lenders are still leery of the
power plant industry, which took a big fall in late 2001 after Enron Corp. went
bankrupt. They're particularly nervous about sinking money into California
energy projects, given the state's reputation for red tape and the
not-so-distant memory of Pacific Gas and Electric Co.'s bankruptcy
reorganization, said Olson, of Houston investment firm Sanders Morris Harris.
Finally, investors are awaiting the outcome of a showdown over the design of
the California market, a dispute pitting the free-market Republican governor
against Democratic legislators and their consumer-advocate allies.
Schwarzenegger is poised to veto AB 2006, by Assembly Speaker Fabian Nunez, a
just-passed bill that would have partly returned regulation to the electricity
business in California. The bill would have given investor-owned utilities like
Southern California Edison, which sponsored the legislation, a leg up on
building new plants by giving them greater assurance that construction costs
could be passed on to ratepayers.
The governor's veto would keep California on a path toward a free-market
system. It would keep intact a 2-year-old law requiring the utilities to hold a
kind of auction for new plants, giving independent "merchant"
generators an opening to bid for the right to build. The Public Utilities
Commission is expected to complete the bidding rules by year-end.
Merchants say they can build plants more cheaply than the utilities and are
eager to bid. But consumer advocates blame merchants for manipulating power
supplies and prices during the energy crisis -- and are threatening a ballot
initiative that would revive the gist of AB 2006 if Schwarzenegger follows
through on his threat to veto the bill.
"If the governor vetoes 2006, he'll have left us no other options,"
said Bob Finkelstein, executive director of The Utility Reform Network in San
Francisco. "This particular issue has caught the attention of California
consumers and, by extension, California voters."
For three years the energy market in California has been in a kind of
suspended animation. The investor-owned utilities have been getting big chunks
of their electricity via the long-term supply contracts that Gray Davis signed
with the merchant generators when he was governor in early 2001. As those
contracts begin to run out, the state is calling on utilities to develop their
own power-procurement strategies.
The PUC is requiring the utilities to have at least 95 percent of their power
locked up long term, either through their own plants or long-term contracts, so
they won't be at the mercy of the sometimes volatile spot market.
The PUC has also told the utilities they need a 15 percent reserve margin --
a cushion of available surplus power -- by January 2008 and soon will decide
whether to accelerate that requirement to June 2006, as Schwarzenegger has
urged.
That will require more power plants. But power plant construction of all
types -- in California and elsewhere -- has slowed in the past two years. That's
because of a slump in electricity prices and the fragile investment climate in
the post-Enron era.
Enron's stunning collapse caused headaches throughout the fraternity of
merchant power generators, as investors became alarmed about debt loads.
Companies like Calpine saw their stock prices fall and were forced to sell
assets and restructure their businesses as investors and lenders scaled back
their commitments. Mirant Corp. and NRG Inc., two generators with plants in
California, followed Enron into Chapter 11 bankruptcy reorganization.
The bottom line has been a chill on power plant projects. Although there are
enough plants under construction to serve more than 3.5 million homes, some
8,000 megawatts of planned construction have been scrapped or placed on hold for
financial reasons, according to the California Energy Commission. That would be
enough power to serve more than 6 million homes.
With the state adding a half-million people and issuing nearly 200,000
housing permits a year, officials believe California needs every new megawatt it
can find.
Consumption is up 6 percent this year, and the slowdown in plant construction
has made for an unsettling summer on the state's power grid. California broke
the record for electricity consumption five times even though the weather
overall was relatively mild. Although the state avoided rolling blackouts,
officials said the jump in demand leaves them worried about next summer and
beyond.
"Once again next summer, we'll be gambling on the weather," said
Gary Ackerman of the Western Power Trading Forum, an association of independent
generators. "All we need is some combination of weather factors and an
improving economy, and we could be in trouble."
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