Who will build 1,500 power plants we need?

THE electric power business has come out of the closet. Enron, Reliant, Dynegy and other Houston-based energy firms have become household names in recent months, though not necessarily for the best of reasons. Terms such as transparency, round-trip trades, and "gaming the market" are now part of the journalistic lexicon. Electricity deregulation, which had been a sleeper public policy issue for years, is now the subject of heated debate in Washington and many state capitals.

Unfortunately, politicians of various stripes are using the Enron debacle and its aftermath as a stalking horse for unrelated agendas. Gov. Gray Davis of California is using the alleged misdeeds of energy traders to boost his re-election campaign, when the principal problem with California's power market was an ill-conceived deregulation program. Instead of working on a national energy plan, Congress is deposing Enron and Arthur Andersen executives and considering legislation to re-regulate the trading of all energy derivatives. And several states scheduled to implement retail competition in electric power this year have put these initiatives on hold while "problems" in the utility industry are sorted out.

It is also regrettable that virtually every power trader now is being portrayed as an Enron clone. But unlike Enron, which had few hard assets, Reliant, Dynegy and most other power traders own electric generating plants worth billions and report real earnings. In fact, Reliant is the second largest merchant power producer in the United States.

What's lost in all the noise about round-trip trading and creative accounting is the fact that the United States still faces a host of energy problems but has yet to come up with any viable solutions. For example, over the next two decades, the nation will need about 1,500 new electric plants to meet projected demand. Much of this new generation will be fueled by natural gas. But in the current environment, many of the nation's utilities and power companies are unable to raise money for new facilities, raising the risk of future power shortages. Calpine recently canceled 35 orders for natural gas turbines from General Electric and delayed the delivery of another 81. General Electric, which built 284 turbines last year for the U.S. market, will build only 150 this year.

To make matters worse, the stock prices and credit ratings of independent power producers -- the companies that have built most of the nation's new power plants -- have plunged since the collapse of Enron. Witness Dynegy, which laid off 6 percent of its work force last week. And disclosures about aggressive business and accounting practices in energy and other industries have made fund-raising even more problematic.

The upgrading of the nation's transmission grid is another challenge facing power companies and regulators. Otherwise, California-type electricity shortages may occur in other parts of the country in the near future. Absent a restoration of investor and lender confidence, the huge capital outlays required to complete the infrastructure required for a national power market will not be forthcoming and electric reliability will be impaired.

Nuclear power remains another unresolved energy policy issue. Though currently contributing about 20 percent of the nation's electricity supply, no new plants have been constructed or ordered since the late 1970s. As well, the battle over disposal of spent fuel at Yucca Mountain continues, with Nevada promising to fight the federal government all the way to the U.S. Supreme Court.

Finland and several other countries, recognizing that nuclear power is the most environmentally benign process for generating electricity while reducing dependence on costly imports, are proceeding to construct new plants. By contrast, America increases its dependence on imported energy month after month while nuclear power languishes and we lose our pre-eminence in this technology.

Perhaps the most serious consequence of the post-Enron climate is the lost momentum for deregulation and retail competition in electric power. Those politicians and consumer groups beating up on the power industry and clamoring for re-regulation fail to mention that inflation-adjusted electricity prices have decreased by 30 percent for residential customers and by 36 percent for industrial and commercial customers since deregulation began in the early 1990s. But with further deregulation on hold, consumers and businesses may pay higher prices than would otherwise be the case.

Ironically, Texas -- home to many of the "sinners" in the power industry -- is generally considered to have implemented the best deregulation plan in the nation and to be a model for other states. Texas has witnessed a smooth transition to a competitive retail market while at the same time adding to generating capacity and enhancing the overall reliability of the distribution system. Indeed, Texas has the potential to become a leading exporter of electricity to other states if, and when, the United States completes a national power grid and retail competition becomes a reality.

Deregulation can't work without power trading. As recently put by Pat Wood, current chairman of the Federal Energy Regulatory Commission and former chairman of the Texas Public Utility Commission, "Well-functioning power markets depend on three key elements: adequate infrastructure; clear and balanced rules that allow efficient trading among market participants; and effective market oversight." Congress should focus on the first element and leave the other two to FERC and the state PUCs.

If deregulation is to move forward, the power industry must rebuild trust among regulators and investors. Otherwise, capital will not flow where it is needed and consumers will remain skeptical about the benefits of competition in electricity.

Weinstein is director of the Center for Economic Development and a professor of applied economics at the University of North Texas in Denton.

"Finland and several other countries, recognizing that nuclear power is the most environmentally benign process for generating electricity"

What a ridiculous statement. If its so benign, then why is W foisting all that "safe" waste on the citizens of NV? Why don't the states that generate it want it in their back yard? I'm no greenie, but statements like this go far to give the nuclear industry a black eye.

Sounds like I should wait until the actual earnings announcement and then consider the matter in more detail.

Dog Gone, if I'm interested in investing in this sector thanks to my view that it's oversold, what company do you think is soundest? I picked Calpine mainly because it didn't seem to be in recent stories alleging problems, and they are continuing to successfully get power plants on line.

I appreciate your thoughts, and yes, I fully recognize that any investment decisions that I make are my own, and officially (and publically!) absolve you of any responsibility for same. (Besides, I'll be investing less than $1,000, on a strictly speculative basis).

"Indeed, Texas has the potential to become a leading exporter of electricity to other states if, and when, the United States completes a national power grid.."

That will never happen. There are a few direct lines between the Texas grid and the other grids, and they are very controlled, and easily disconnected. At this point in time, Texans probably would sooner secede from the Union rather than tie their power system to a national power grid. It seems to me one time, they did in fact try to connect the grids and a group of Texans cut the lines.

I like CPN, I think it will do well in the long haul. But it's falling like a rock right now, due to Enron problems and their announcement that earnings will likely be soft and an overall malaise in the market in general.

There is not a lot to buy in the market. I will buy CPN again in the future, but right now it looks horrible. It's down again today, approaching it's 52 week low. I'd wait and see if it breaks down to a new low and if it does, wait some more.

The cynical side of me says that due to the scrutiny in the energy field, there is little chance for the windfall profits from electricity market manipulation like last year. But this is just my personal advice. I am not a broker or professional advisor. Good Luck!

If I had to pick one stock in the sector, I'd pick Reliant Energy. Their stock has been hammered because their spinoff subsidiary, Reliant Resources, was engaged in some of the Enron trading practices.

Reliant was planning to divest itself of the rest of its ownership of this trading company this summer, but the SEC investigation has probably put that on hold. I wouldn't spend a penny on Reliant Resources stock, but the parent company is a hard asset company with an enormous customer base and the stock has been beat to death. It looks like a bargain to me, not as something that is going to post 50% gains for years to come, but as one that could easily be trading at twice its current price next year.

I don't own any of this stock, but I probably will once the stock market quits plummeting.

Previous disclaimers about my lack of expertise in picking stocks still apply!

The train wreck is coming, and this time it could be on a national scale.

Very well said and this article points out what our US Senators should be debating rather than being focused on just Enron and partisan politics.

By remaining isolated from the national grids, Texas escapes being subject to FERC regulations, so it's not likely that anyone will want to change that. However, since Texas has a surplus of power, neighboring states might be screaming for access to that power if there is a national shortage.

That will make for some interesting politics.

If its so benign, then why is W foisting all that "safe" waste on the citizens of NV?

Because nobody seems to have the intestinal fortitude to overturn Jimmy Carter's executive order ban on reprocessing 'spent' reactor fuel.

It appeals to some sense of independence but power in the quantities we use isn't there unless you put "unsightly" windmills darn near EVERYWHERE.

It would take a half-dozen of the popular Whisper 1000 or 1500 models to convert the wind in order for your home to be airconditioned while supper is being cooked, the tv and lights on, etc. Using a battery bank involves HUGE quantities of lead which the health authorities want out of your home......

My bets would be on more co-generation of heat and electric ,i.e. if your furnace was replaced with a generator you could still benefit from the heat released in combustion. Few people realize that more of the energy in gasoline is thrown away by the internal combustion engine than is used to move the vehicle. And engines that run at low rpm in a fixed, sheltered building can last an extremely long time. Current "home" generators use high rpm (low life) engine to maximize the horsepower in a small package.Can an engineer tell me what design lifetime could be expected (using proven technology)if you ran the engine not at 3600 rpm not at 1800 rpm , not even at 900 like Chinese diesel units but at maybe 300 rpm with a properly sized flywheel and utilized the "waste" heat for domestic uses.

No I'm thinking of the 50 to 90 meter windmills that are rated at 900kw - 3MW. We have a lot of the 50 meter 750 kw ones here in Iowa but they are building some bigger ones. Iowa is 3rd in the state in windmills and I'd love to know what percentage of Iowa's power they produce. But, there are very very few of them. The closest one to CR is 80 miles away and it's hard to find.

We can produce a very significant fraction of our power here in Iowa with very few windmills.

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