Message-ID: <31630802.1075849617786.JavaMail.evans@thyme> Date: Thu, 26 Jul 2001 10:57:00 -0700 (PDT) From: jeff.dasovich@enron.com To: skean@enron.com, linda.robertson@enron.com, james.steffes@enron.com, richard.shapiro@enron.com, christopher.calger@enron.com, tim.belden@enron.com, alan.comnes@enron.com, paul.kaufman@enron.com, susan.mara@enron.com, susan.landwehr@enron.com, sarah.novosel@enron.com, ray.alvarez@enron.com Subject: Power-Market Bear Mauls Plans For New Generators In West Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Jeff Dasovich X-To: skean@enron.com, Linda Robertson, James D Steffes, Richard Shapiro, Christopher F Calger, Tim Belden, Alan Comnes, Paul Kaufman, Susan J Mara, Susan M Landwehr, Sarah Novosel, Ray Alvarez X-cc: X-bcc: X-Folder: \Jeff_Dasovich_Oct2001\Notes Folders\Sent X-Origin: DASOVICH-J X-FileName: jdasovic.nsf FYI. Story on the effect of FERC prices on supply in PNW. Best, Jeff Power-Market Bear Mauls Plans For New Generators In West By Mark Golden Of DOW JONES NEWSWIRES 07/26/2001 Dow Jones Energy Service (Copyright (c) 2001, Dow Jones & Company, Inc.) NEW YORK -(Dow Jones)- The crumbling price of electricity in the western U.S., attributed by many to federal price controls, has forced power plant developers to cancel projects, calling into question whether there will be enough electricity to meet demand in the Northwest this winter. The cancellations of peaking plants and temporary, oil-fired generators - high-cost units that provide power needed only when demand is highest - have cut projected generating capacity in the Northwest by up to 1,000 megawatts, about 3% of the combined peak demand of Washington, Oregon, Idaho and western Montana. "The price caps have added uncertainty," said Scott Simms, spokesman for Enron Corp. (ENE) unit Portland General Electric Co. "If we look forward to this winter and you see a diminished supply scenario, you can see why we have concerns about regional reliability. That could put us in a position of having rotating outages in the region." About two weeks after the Federal Energy Regulatory Commission imposed limits on western power prices on June 19, Portland General halted installation of a new 45-megawatt gas-fired peaking turbine at its existing Boardman power plant. The utility was developing the extra generation both to meet its customers' needs and to sell some output to other Northwest utilities left short of hydroelectric supplies due to this year's drought. A turbine that size could power about 45,000 homes. "You can directly attribute that to FERC price controls," Simms said. After the FERC order, at least two utilities in Washington State ended negotiations with NRG Energy (NRG) for supplies from new plants that NRG was ready to build in time for winter. Both utilities - Tacoma Power and Snohomish County Public Utility District - experienced significant supply shortages in the past 12 months, paid very high prices in the spot market and had to raise customer electric rates by as much as 50%. But both utilities told NRG, and later Dow Jones Newswires, that they had no reason to sign long-term contracts to guarantee new supplies, because the FERC had practically eliminated the financial risk of relying on the spot market. NRG, as a result, scuttled plans to build peaking plants in Washington that could have added 300 megawatts. FERC's price controls, as well as supply-demand fundamentals, have dramatically changed the economics of selling power into the West's open market in the past few months. The current western U.S. electricity price cap of $98 a megawatt-hour covers the costs of generating power from easy-to-install but inefficient peaking turbines, but not the capital costs of buying and installing new peakers. In addition, the current price cap may soon be recalculated to a much lower level. The cap is based largely on natural gas prices, which have been cut in half since the cap was first formulated in June. Not Everyone Blames FERC The average monthly price for on-peak hours in the Northwest from August through March is $60 a megawatt-hour - a fraction of what it was three months ago. Many in the western electricity industry think that's because FERC's price controls have kept prices artificially low. A smaller group thinks the market is appropriately signaling that not all the planned gas-fired plants are needed, because some power plants are already under construction and consumers are conserving electricity. Jim Kemp, a senior executive for the Canadian utility TransAlta's (TA.TO) merchant power group, TransAlta (TA.TO), for example, doesn't attribute the cancellation of projects to price controls. "I see it as due to demand-side control and new units," Kemp said. "The market is sending out a signal that we have enough. Maybe this winter we will find that we don't have enough, but that's not the signal the market is sending now." The spot market for power has been far below the federal price cap for two months. Mild weather, a slowing economy and conservation efforts throughout the West have made power from expensive peaking plants unnecessary except for a few hours so far this summer. "Prices started to come down before the FERC mitigation plan started," said Tacoma Power supply analyst David Lucio, who was negotiating with NRG. "The need to try to execute a contract wasn't as great with the prices falling." Lucio said there should be enough capacity to get the Northwest through the winter, barring abnormalities like a long, extended freeze. Construction of dozens of peaking plants in the West is going forward in cases where developers sold supply contracts in advance. TransAlta is continuing construction of a 154-megawatt peaking plant in Washington, because much of the plant's capacity was sold months ago. "The number of announced projects is far and away more than what is needed within the time frame we're talking about," said Dick Watson, a director with the Northwest Power Planning Council. Still, several western utilities have asked the FERC to raise the price cap. Puget Sound Energy (PSD) told the FERC the cap "undercuts the Commission's efforts to ensure adequate supplies of electricity." As previously reported, some small oil-fired generators, which are even more expensive to operate than the permanent, gas-fired peaking plants, have even been taken off line permanently after being installed over the past six months. And orders for new generators have been canceled. -By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.