A DUK Article but IMO a Good Overview Article
Market Glut Forces Duke Energy to Sell Power Plants
By Stan Choe, The Charlotte Observer, N.C. -- Jan. 10 Jan.
When Duke Energy Corp. announced three years ago it was building a new power plant in Arkansas, the company bragged about its rapidly growing portfolio of wholesale power plants that sell electricity to local utilities.
The plants were propelling Charlotte-based Duke up the Fortune 500 list. And the Southeast was one of Duke's, and the industry's, favorite places to build.
But since 2001, the Southeast has become so saturated with wholesale plants that the Duke Arkansas plant is running less than expected and other Duke plants in the region aren't running at all.
On Wednesday, Duke said it would try to sell the Hot Spring plant, as well as its seven other Southeastern plants, as part of a sweeping financial plan to reinvigorate the company. It will likely get back only a small fraction of the construction costs.
The company said it wants to focus on units that provide more reliable profits, such as its regulated Duke Power utility in the Carolinas and its wholesale plants in the Northeast and West.
The meteoric rise and fall of Southeastern wholesale plants somewhat mirrors the Internet stock bubble. Many of the industry's players use the same term -- irrational exuberance -- coined by Federal Reserve chairman Alan Greenspan to describe investors' craze over dot-com stocks. And most everyone in the energy industry was involved.
"It was the absolute worst business decision that you could imagine," said James Atkins, a regulator with the S.C. Public Service Commission.
Energy companies had forecast that the country would need more power plants to satisfy its growing economy and thirst for electricity.
But many of their expectations for the Southeast, which seemed the most attractive region in the country, proved wrong.
Companies thought the low price of natural gas early in the decade would make it the fuel of choice for power plants. To keep fuel costs down, companies wanted to build plants close to the source of natural gas, much of which comes from the Gulf of Mexico. That drew many to such states as Arkansas and Mississippi.
But natural gas prices ended up spiking, making the natural-gas-fired plants expensive to operate.
Companies thought the U.S. economy would continue to grow, which would boost demand for electricity at offices and manufacturing plants. The economy ended up stumbling, especially Southeastern manufacturing.
Companies thought the federal government would easily push through new rules that would beef up transmission lines, making it easier to move power from a Mississippi plant to neighboring states, for example. But the Federal Energy Regulatory Commission ran into a roadblock of Southeastern regulators. The state regulators don't want their residents to have to pay for transmission improvements that would only take power out of their states.
The Southeast looked especially attractive to companies because the states were more welcoming of power plants. The states wanted the property tax revenues the plants would generate. The Southeast, accustomed to manufacturing plants, has less of a not-in-my-backyard reaction, companies say.
Atkins, the S.C. regulator, said he and his counterparts in the Deep South didn't balance the new plants with the transmission lines they would need.
"And state commissioners let them get away with it because of political pressure on them to get the tax benefits," he said in an interview Friday.
The North American Electric Reliability Council estimates the Southeast has 45 percent more available power than it needs. New York City, in contrast, may not have enough generation capacity to serve its needs unless a planned plant is finished this year.
"The industry didn't sit back and think about all the other people building in the same area and their impact on the market," said Mark Mulhern, a senior vice president for Progress Energy Inc.
Progress, which owns the utility for Eastern North Carolina, had plans to own about a dozen wholesale plants. It ended up building or buying only half before the wholesale market fell out in 2002.
The collapse of energy-trading giant Enron took a major trader out of the marketplace to swap power and natural-gas contracts. It also precipitated a credit crunch: Credit-rating agencies began slashing their ratings of energy companies' debt, making it harder for them to borrow and get cash.
"Enron virtually put a pall on everything," said Duke President and Chief Operating Officer Fred Fowler.
Now Duke is willing to take maybe 20 cents on the dollar for the Southeastern wholesale plants, analysts say.
Duke says it typically spent between $500 and $700 per kilowatt in construction of its wholesale power plants. Hot Spring is a 620-megawatt plant, making its cost between $310 million and $434 million.
Duke's proposed sales are part of Anderson's new financial plan, announced Wednesday, that turned the company's focus to maintain its annual dividend, now at $1.10 per share. The company, one of the Charlotte region's major employers with just under 10,000 employees, is depending on its reliable, regulated utility and natural-gas pipelines for income.
The most likely buyers for Duke's eight Southeast plants would be private investment firms, Anderson said. Those firms don't have the same Wall Street pressures to post quarterly profits; they can afford to wait five years until the economy and demand for power improve.
Last year, investment firm Goldman Sachs bought 26 plants from Charlotte-based Cogentrix Energy Inc. Cogentrix had initially hired Goldman Sachs to find a buyer for the plants, but the first prospect pulled out.
All is not lost in the wholesale market, though.
Duke is still betting its wholesale plants in the Northeast and California will soon recover and is looking to them for growth. Not as many energy companies flooded those areas, making supply more even with demand, Fowler said.
And those states are more deregulated than the Southeast. States such as New York and California forcefully broke up utility monopolies, making them buy power from other generators and wholesale plants.
"The California market, with economic recovery, will be the first market that comes back in a tight situation," Fowler said. "It just hasn't had that much infrastructure built out there." |
