Calpine's Power Play Shorts Out
California Electricity Generator
Spent Heavily on Plant Capacity,
But So Far, Demand Isn't There
By REBECCA SMITH
Staff Reporter of THE WALL STREET JOURNAL
August 4, 2005; Page C1
Power generator Calpine Corp.'s strategy in recent years sounds like a play on the famous line from "Field of Dreams": If you build the power plants, they will buy.
Except, for the most part, "they" -- utilities -- aren't.
Calpine, of San Jose, Calif., has spent more than $27 billion assembling a giant portfolio of 93 power plants to churn out electricity to help utilities trying to meet rising demand. So when air conditioners went on full blast during last month's heat wave in Southern California, one of Calpine's new plants near Bakersfield stepped up to help meet the need for electricity.
But the Bakersfield plant, and another near San Jose also put into service this summer, were built by Calpine "on spec" at a combined cost of $1 billion, meaning no utilities had pledged to buy their power. The plants mostly are being snubbed by California's big utilities; Pacific Gas & Electric Co. and Southern California Edison Co. have crafted new long-term power solicitations that essentially exclude Calpine's new plants from competing for the business.
POWER PLAYS
See a graphic of Calpine's power plants.
Calpine and its founder, Pete Cartwright, set out several years ago to become the biggest electricity generator in the U.S. Even as other companies scaled back on construction spending after power markets sagged in 2001, Calpine forged ahead, adding plants and debt.
The company's massive investment, resulting in nearly 28,000 megawatts of capacity -- enough to power all of New York state for a scorching summer day -- has appeared to backfire badly: Calpine is having difficultly selling even half the electricity it can generate. The so-called merchant power firm's financial and stock-market performance illustrates the problem: It is racking up quarterly losses. Short sellers have placed many bearish bets on the stock, which has sagged as low as $1.32 in the past year and closed yesterday at $3.32, down 56 cents, or 14%, as of 4 p.m. in New York Stock Exchange composite trading. The company's market value has plummeted from about $30 billion in 2001 to about $2 billion today.
Now Calpine finds itself competing with utilities it hoped to be selling power to, and those same utilities are driving hard bargains when they do buy from Calpine.
Many utilities that sold off their own power plants a few years ago are now eager to add back plants. That means that they are often freezing out independent generators like Calpine -- except in emergencies when a federal rule dating from the 2000-2001 power crisis forces independent generators in California's market to send electricity to that state's power-grid operator. But that same rule requires the independents to send juice to the grid even if the price they are paid is so low they lose money on the business.
Some utilities are even starving suppliers to force them to sell them power plants at fire-sale prices. Indeed, several big power plants have changed hands recently, selling for less than half what they cost to build.
And Calpine's woes extend beyond California's border: In Oregon, both PacifiCorp and Portland General Electric Co. recently sought additional supplies, and Calpine figured it was a strong candidate to supply them, since it had a new plant in eastern Oregon, extra turbines, and plans to build a liquefied natural-gas terminal in the state. But those utilities also ultimately decided to build their own plants.
Despite these bruising setbacks, Mr. Cartwright keeps adding to Calpine's portfolio, convinced his vision will eventually carry the day. Having watched one big slump in the power industry years ago -- he had a first career helping General Electric Co. build nuclear plants around the world -- Mr. Cartwright, 75 years old, is convinced that his company will survive "because the nation needs what we make: electricity from clean, environmentally responsible gas-fired plants."
Mr. Cartwright may yet have his day. Record-breaking electricity demand in many parts of the country so far this summer has pushed up spot-market prices, which is what utilities pay to buy power on the open market from merchant generators like Calpine. They have approached a capped price of $250 per megawatt-hour in California, and at times hit $400 on the East Coast and $800 in Texas. That is many times the normal price seen across much of the country. And projected prices for 2006 are running above average.
If these higher prices are sustained, utilities might return to the bargaining table to sign deals with Calpine to protect their customers against rising prices, and make Calpine look smart.
Launched in the mid-1980s, Calpine began life as the owner of a tiny geothermal power plant in Northern California. Independent power generators had slim prospects then, because big utilities generated most of the electricity and sold most of it to the public.
Then, in the mid-1990s, many states, including California, opened up their energy markets. Suddenly, Pacific Gas & Electric and Southern California Edison had to sell most of their power plants or risk being accused of holding too much control over the newly free marketplace. So they sold, and upped their purchases of bulk power from Calpine and other merchants.
But after 2001, the tide turned again, as utilities throughout the U.S. added more generation, both to boost predictable returns and protect against price volatility.
That latest shift made things hard for Calpine. For example, the company aimed to build a plant for PacifiCorp near Salt Lake City on an abandoned steel-mill site. But even after the bid was won, there were sticking points, says Jim Macias, Calpine's executive vice president for development. "It became crystal clear they didn't really want to do a deal," says Mr. Macias. Finally, PacifiCorp terminated discussions, at a cost to Calpine of $8 million. Calpine later learned PacifiCorp had arranged for another firm to build a plant for it on the same site. A PacifiCorp spokesman says the notion Calpine's project was hijacked is "a false claim by a disgruntled bidder."
Calpine also was frustrated by an attempt to build a plant for Portland General. After receiving about 100 bids, that utility, owned by Enron Corp., decided to build its own 400-megawatt plant.
online.wsj.com |
