June 25, 2001

Proposed plants may not solve power troubles

More competition, lower prices not guaranteed BY STEVE JOHNSON Mercury News

Although California's summer energy outlook seems to be brightening, state leaders still are counting on new power plants to boost competition and lower electricity prices in years to come.

They may end up disappointed.

Even with 42 new power plants in the works before the California Energy Commission as of early last week, the state can't be sure of how much power they will produce or what prices they will charge, experts say. That could prove troublesome, since 70 percent of the power the state plans to buy through long-term contracts is supposed to come from these new plants.

Nor is there any guarantee of the price these plants might charge for the rest of their power on the spot market, despite last Monday's order by federal regulators to generally limit spot prices across the West.

Like much of what has happened since the state passed deregulation, the future appears cloudy. Here's why:

Critics say the price caps ordered last Monday by the Federal Energy Regulatory Commission contain loopholes that could allow California's electricity costs to soar on days when it is desperate for power. And when the Mercury News asked 12 of the companies involved in the recently approved or pending power plants if they could promise that their spot-market prices would be cheaper than what California has been paying recently, none could.

Of the 25 mostly private entities involved in these new power plant projects, only six are generators new to the state, and most of their plants are relatively small. That may slow the development of a more competitive electricity market, which state officials say is needed to lower prices.

More than a third of the electricity to be produced by these new operations would be controlled by companies accused in recent lawsuits or governmental actions of questionable pricing and, in some cases, outright gouging. State officials claim that some of these companies, among other things, have shut down their plants when electricity demand was high to artificially crimp supplies and inflate prices.

Some experts doubt that all of the proposed plants will get built. Several power companies acknowledged that the intense criticism of them by California officials and uncertainties over the economic viability of owning plants here could cause them to delay or even abandon their projects. Others suspect these companies eventually may cancel some of the plants they have proposed, to keep power in short supply and prices high.

The same cartel

``I'm concerned,'' said California Public Utilities Commissioner Carl Wood, when asked about the makeup of the companies proposing the new plants. ``It's the same cartel. We will have more generation, but we will have the same players owning and controlling it.''

Such comments irk power suppliers, who have repeatedly denied breaking any laws or regulations governing the sale of wholesale electricity. Many of these entrepreneurs find it particularly galling that the very state officials accusing them of price gouging are begging them to build plants in California.

Few politicians have been as vehement in their denunciation of electricity suppliers as Gov. Gray Davis. Yet he is among those relying heavily on the new power plants these companies are developing to help pull California out of its energy crisis.

``Eventually, when supply and demand come back into something approaching balance, there will be genuine price competition,'' Davis said in December. He repeated the point earlier this month, proclaiming that ``by the fall of 2003, we will have more power than we need. That will solve the long-term problem.''

Davis isn't alone. Although power costs have fallen in recent weeks and federal officials may impose tougher price controls on electricity, the assumption that more plants is the key to solving California's troubles is taken as gospel by many state and federal officials.

It seems logical enough. More power presumably would not only ease the threat of blackouts, but relieve California of the need to pay exorbitant prices on days when electricity is in short supply.

But calculating how much more power the state will wind up with, based on how many plants are on the drawing board, is risky, say some state regulators and consumer advocates.

``I have no confidence at the moment that a majority of those new plants will ever materialize,'' because power companies are likely to maintain an electricity shortage to keep prices high, said Michael Shames, of the Utility Consumers Action Network. ``Why would they want to change what they've got? They've got a sweet deal.''

Another reason plants might not get built is politics. Several companies with projects in the works claimed that threats by state officials to seize their plants or impose a windfall-profits tax on their sales had made it harder to obtain financing.

Political climate

``Every time these politicians start spouting off to improve their own political careers, they don't realize the damage they're doing,'' said Gary Ackerman of the Western Power Trading Forum.

Just this month, Mirant of Atlanta received state permission to build a 530-megawatt plant in Contra Costa County -- enough to supply power to about 400,000 homes -- and it has applied to build a similar-sized generator in San Francisco. But spokesman Chuck Griffin said both projects are on hold, until Mirant feels more comfortable about the state's political and economic climate.

``We have to be able to determine that it's going to be a viable investment,'' he said.

Even if all 42 plants are built, many of the companies proposing them were skittish about promising cheaper prices. They said it depends on such things as the future cost of natural gas, which many of their plants use for fuel.

One company California is counting on is Calpine of San Jose, which already commands a modest fleet of small plants in the state and is developing nearly one-fourth of the 42 new plants.

Although Calpine has earned huge profits in recent months, it has a relatively good reputation among consumer advocates and state investigators who have reviewed its confidential power-sales data. Moreover, Calpine's name is conspicuously absent from recent lawsuits and federal legal filings that have either accused other companies of gouging or questioned the reasonableness of their prices.

Much of the power to be generated from Calpine's new plants will be sold in long-term contracts to the state, said company spokesman Bill Highlander. But like other suppliers, he was vague about what it would charge for the rest.

``It kind of depends on a whole number of factors,'' Highlander said, including how much people conserve and how much power California can continue importing from other states. Since no one can predict such things today, he added, ``that's what makes it so difficult.''

Won't speculate

If anyone should be concerned about the price of power it's the folks at PG&E Corp., who have blamed high electricity costs for forcing their utility -- Pacific Gas & Electric -- into bankruptcy. But even they wouldn't speculate about how much they would charge for the power from their 1,048-megawatt plant in Kern County, which is to be built by their unregulated affiliate, PG&E National Energy Group. PG&E's energy trading arm is among the suppliers accused of questionable pricing practices, although PG&E officials have denied any wrongdoing.

By the time the Kern County plant is done in two years, ``if we have a situation where we are seeing a lot more generation come on line in the state, economic law should dictate that prices will come down,'' said PG&E Corp. spokesman Greg Pruett. But that's not for certain, he said, adding, ``we've all gone to school about how topsy-turvy the market could become.''

Like every other generator, PG&E doesn't plan to spend a lot of money building a plant just to wind up giving away its electricity. ``Obviously,'' Pruett said, ``everyone who invests in these is doing so to earn a profit.''

Contact Steve Johnson at sjohnson@sjmercury.com or (408) 920-5043.

http://www.siliconvalley.com/docs/news/depth/power062501.htm

-- Martin Thompson (mthom1927@aol.com), June 26, 2001