California a ‘wake up’ call to US political risk

By Kate Thomas OGJ Online HOUSTON, Feb. 15—Many lessons can be drawn from the debacle in the California electricity markets, and one of them is political risk is not limited to developing nations, say some of its sadder but wiser participants. “California has been a wake up call from the mindset that the US is a risk free market,” Mirant Corp. Pres. Marce Fuller said Thursday at the Cambridge Energy Research Associates Conference. “There are just as many risks operating in the US as in operating around the world.” Mirant, formerly Southern Energy Inc., owns about 3,000 Mw near San Francisco, in addition to interests in the UK, Europe, and other regions of the world. As the situation worsens, she said, “What we have seen in California is creeping confiscation.” With a proposal on the table for the state to buy the transmission assets of financially crippled Southern California Edison Co. and Pacific Gas & Electric Co., it has been “amazing to watch the governor [Gray Davis] morph into Karl Marx,” said Cinergy Corp. CEO James Rogers. “It’s remarkable. Only in America could this happen.” He called the idea a “dangerous precedent” at a time the country needs a single market. Rogers said it would be better to sell the system to a private operator rather than put transmission in the hands of bureaucrats to run. While such an acquisition is still far from a sure thing, Fuller said Mirant’s concern is that the company is not discriminated against in terms of access to the transmission system. If such a move would remove the transmission system from oversight by the Federal Energy Regulatory Commission, that “would be extremely concerning to us,” she said. Duke Energy Corp. would have similar concerns, although “it may be possible the state will allow upgrades to the system” faster than currently planned, said Duke’s Kirk Michael. California’s problems, he said, is slowing deregulation down not just in other states, but “quite frankly around the world.” While state officials attempt to sort through the mess, Fuller said Mirant is trying to “get them to understand we are not an out-of-state generator.” Meanwhile, she said, the company has “10 people camping out in Sacramento help to shape the legislation” to resolve the crisis. Some of the proposals under discussion, especially reregulation, could do as much harm as good, Duke’s Michael said. “They may not be able to attract capital, equipment, or expertise to build their way out.” Calpine Corp., the first supplier to announce signing a long-term power contract with the California Department of Water Resources (DWR), is presently negotiating with the DWR on other contracts, said CEO Peter Cartwright. The California legislature approved legislation permitting the state agency to enter into long-term power contracts that will be backed by revenue bonds. Cartwright said the company has locked in gas prices and will also use gas from its own reserves to back the contracts. He called Gov. Davis’s announced goal of making an additional 5,000 Mw available by summer “very ambitious” that probably will not be met. Many of the speakers at the conference raised a red flag with respect to the growing reliance of the US on gas-fired generation at a time of rising prices and called for a more balanced approach. While none expect new nuclear plants to be built in the US, many speakers called for new coal plant construction. Fuller noted one-half the company’s generating assets are dual-fueled. And while the 15,000 Mw under construction are gas-fired, she expects coal to make a come back in the Midwest and Mid-Atlantic states. Present gas prices make “those old coal clunkers look good,” Rogers said of Cinergy’s coal-fired generation. He called it “dangerous” public policy to rely solely on gas to fuel the nation’s new generation.

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-- Martin Thompson (mthom1927@aol.com), February 15, 2001