Power Plant Cuts Storing Up Trouble? (Enron collapse and price plunges = 2002 blackouts?)

NEW YORK (Reuters) - The California energy crisis is starting to fade from memory, but U.S. power companies may be storing up fresh trouble for consumers in sites around the country.

The spectacular collapse of trading giant Enron Corp. (NYSE:ENE - news) and a plunge in power prices has led some companies to pull the plug on plans for power plants. That could create the conditions for a rerun of the California power crisis that started in 2000, but the location next time could be different.

Shortages remain a very real threat, although they are unlikely to haunt power consumers on the West Coast or other regions for several years, experts said.

Just recently, a number of generation companies -- including Mirant Corp. (NYSE:MIR - news) and PPL Corp. (NYSE:PPL - news) -- have decided to defer or cancel the construction of some power plants.

``Assuming that by the end of 2002 we've got the economy going full bore again and a really cold winter or hot summer in 2003, we could well see some shortages in certain parts,'' said Lynne Church, president of the Electric Power Supply Association, an industry group for competitive generators, power marketers and other suppliers.

Mirant said in December it would complete about 5,700 megawatts of power under way in North America, including the Caribbean, but will either defer or cancel about 8,300 megawatts. The company would not disclose where the deferred and canceled plants were to be located.

PPL said last Friday that it has canceled plans for six new power plants in Pennsylvania and Washington state, citing lower electricity prices and regulatory conditions.

Other power companies, including Calpine Corp. (NYSE:CPN - news), are reassessing their portfolios, according to analysts.

``You could end up with some shortages of power in certain regions,'' said Michael Worms, an analyst at Gerard Klauer Mattison. ``If everything goes according to plan, which is never the case, maybe, maybe not.''

The conditions that converged to cause California's crisis are still basically unaltered, he said. ``All you need is a large power plant or two tripping out for whatever reason at the wrong time of the year,'' he added.

Energy information provider Platts, a division of McGraw-Hill Cos., said a total of 84,976 megawatts of power in the continental U.S. were tabled or canceled in 2001, more than triple the total of 26,878 megawatts in 2000. One megawatt provides power for about 1,000 homes.

Though the figure for tabled and canceled megawatts seems large, many industry experts are not worried.

Doug Logan, principal at energy information and consulting firm Platts RDI Consulting, expects power surpluses, not deficits, in most regions of the country by the middle of the decade.

``There are more than 500,000 megawatts of projects in the pipeline, so it's not at all surprising to me that these projects are being canceled,'' he said. ``That's more than double what needed to be built over the next several years.''

Population growth and constraints in the transmission of power will help determine where shortages might occur.

Only one major power plant in New York has been terminated recently, with 18 applications pending, according to the New York State Public Service Commission, which regulates the state's electric and gas utilities.

``There are thousands and thousands of megawatts proposed in New York,'' said Maureen Helmer, head of the commission. ``We have never believed that every one of those plants was going to be built.''

Dave Rogers, a partner and chairman of the finance department at law firm Latham & Watkins, thinks the most extreme situation will be tighter reserve margins. Reserve margins are the amount of power maintained to ensure there is surplus available beyond normal demand.

``The delay in getting a plant built in a given year is unlikely to result in an outage. It'll just mean there will be tighter reserve margins, more days when the less efficient plants are going to be called upon to run,'' he said.

Before deregulation, which started in the mid-1990's, target reserve margins for utilities throughout the country were in the range of 15 percent to 24 percent, with most regions of the country enjoying 30 percent reserve margins because of overbuilding, said Logan.

But with the advent of deregulation, ``competitive pressures are going to push them toward the 15 percent end of the range, because that will provide the level of reliability that is sustainable by the market,'' he added.

There were hopes that deregulation would let the market do its job better by letting the market, and not regulators, govern the industry. But some observers think it will always be difficult to maintain a proper balance between power demand and supply, regardless of how market-oriented the industry becomes.

``It's always going to be an industry where capacity gets added in pretty big chunks. You've never going to be at equilibrium,'' said Peter Rigby, director of utilities, energy and project finance at rating agency Standard & Poor's. ``That is a notion that just needs to be dispelled.''

The economics of power production is only tangentially hit by the Enron debacle.

Enron was not a major owner of electricity generating plants. It traded/brokered the power produced.

At the margin, the demise of a major secondary market (post-production) player will trim liquidity, widen bid-offer spreads, and very slightly increase the cost of power to end users.

The economics of plant construction are more hostage to regulators and enviros than anything else, however.

The economics of plant construction are more hostage to regulators and enviros than anything else, however.

Well said. To the point that there are groups on the left coast who are against wind turbines because a few starlings are purported to be hit by the prop blades. Their mantra is: No oil, no natural gas, no nuclear, no wind (birds get hurt). I can only think that solar energy is the only solution. When their taxes triple, then they'll complain some more and there will be a larger exodus to Colorado. The remainders will criticize solar because they will argue that the voltaic cells absorbing the sun's energy will cause a brown-out from the sun, and will affect the Earth's tides so that the sufers will bnot have their God given rights on the western shores of America.

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