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Uncertainty Zaps Power Construction

by Dale Kasler
The Sacramento Bee, September 2, 2004

Many projects are in limbo as California awaits market clarity.

Three years after the energy crisis faded from view, California's electricity picture remains uncomfortably muddled.

After withstanding record-high consumption levels this summer, the state will surely need additional power plants over the next two years to serve a rising population and a growing economy.

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 Nez, 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."

Dale Kasler
Uncertainty Zaps Power Construction
The Sacramento Bee, September 2, 2004

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