POWER POINTS: Is This The End Of Merchant Power?
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- There were battles. Empires rose and fell. Hundreds of billions of dollars changed hands. When America first started to deregulate electricity markets about five years ago, nobody - but nobody - expected anything like this.
Is the rest just denouement? Will the remaining pro-deregulation companies, politicians and regulators be finished off? Or will they survive and rally to fight again?
To look at the newspapers, you'd think it's curtains for them. The Wall Street Journal reported Friday that Pat Wood III, chairman of the Federal Energy Regulatory Commission, is encircled by headhunters, and not the kind who find you a job. For years, FERC has been the driver of energy markets deregulation.
The business pages of your newspaper are likely to reflect that merchant power companies, villainized as fat bullies just a year ago, are now pathetic weaklings, with some of their stock prices weighing in at a tenth of what they once were. One of them, AES Corp. (AES), said this week that it has $110 million cash on hand. For a global player in this very capital intensive business, $110 million is almost nothing.
Funny thing though. What's killing the independent power producers isn't Enron Corp. (ENRNQ), but incredibly low wholesale power prices. But if power prices are so low, why isn't deregulation hailed as a smashing success?
Answer: All kinds of local utility costs stand between the consumer and the market's low prices.
Amid unexpectedly slack demand, the U.S. is awash with two-cents-a-kilowatt-hour power generated by non-utility producers such as AES, Calpine Corp. (CPN) and Mirant Corp. (MIR). That price covers fuel and other variable costs, and leaves a little marginal profit. But merchants need to charge another penny per kWh to cover the fixed costs of their plants, costs that include interest on big debt, to say nothing of interest on debt for the many, many plants under construction. Unless a merchant company were smart enough to have sold almost all of its generating capacity before this deadly spot market developed, it could now be burning through a hundred million dollars a month.
To get through what merchants call a temporary bust, the companies need to borrow more, sell more stock, or sell assets. Wall Street spigots, gushing just a year ago, are dry. Witness Calpine's difficulty securing a $1 billion new line of credit; the company still hasn't managed the feat, which it expected to have completed last month.
But electricity rates haven't crashed along with wholesale electricity prices or merchant producers' stock prices. Though deregulation reached the residential consumer in very few states, most people do get a breakdown of their energy bills. Some sort of "energy commodity" price is shown separately from the transmission and distribution rate. What's yours? Five cents? Ten cents? More?
So, whose fault is it that the fruit of deregulation doesn't appear in your mailbox monthly? Enron's? Pat Wood's? Calpine's and Mirant's?
Where's It All Going?
Maybe it's better to ask: Where is all the money going? After all, this is billions of dollars a year.
The old, regulated utilities get to keep the difference and use it for two things, basically. The first is paying off old debt incurred mostly from building nuclear power plants. That practice will eventually result in slightly lower electricity rates, because interest on the debt has been in rates and will soon go away.
It's less consoling to ponder the second main use made of the difference between what you pay your utility and what your utility pays the merchant producers. The utilities use the money to cover the fixed costs of their dirty, old, inefficient fossil fuel-burning power plants, which are no longer needed. These plants may be idled, but they still burn dollars.
A utility is obligated to buy power from merchant companies only if the market price beats the utility's variable generating cost, which covers natural gas and a bit for operation and maintenance. The far more efficient merchant plants have been beating that target, (again, with little left for the merchants to service their debts).
But there are fixed costs associated with idled plants. They require workers to operate and maintain them, for example.
The utility passes the fixed costs to its customers, regardless of whether its old gas-fired plants actually run, unless and until the local utility commission tells it to shut down the plants permanently. The commissions aren't taking that step. They're frightened by power shortages and high prices seen in the western U.S. in late 2000 and early 2001.
They needn't be. The current softness in spot power prices is reflected in the forward market. America not only has two-cent power today, it has three-cent power as far as the eye can see. Or, at least until 2010.
So, the more important question is: Does the forward market beat the utilities' all-in - fixed plus variable - costs? Yes it does, by a lot. But state utility commissions really aren't about to push for something that seems pro-deregulation right now.
America hit on a real shortage of generation in the go-go years. It first showed up in the Midwest and Northeast in the summers of 1998 and 1999, and in a drought-stricken West in 2000 and 2001. The partly deregulated electricity market, stunted though it is, got new power plants built where they were needed, more quickly and for less money than any regulated utility ever has.
So, why aren't the merchant power companies making this fairly straightforward, pro-deregulation argument? Not only are they busy struggling for their economic survival, their only public message right now, as one merchant power executive put it, is: "We're not Enron."
The merchant companies, some say, have only themselves to blame. They should have shown more restraint in the western energy crisis and not overreacted by committing to build so many power plants so quickly.
But there's an outside chance that the merchants will forget about Enron and bring this message to the American people: "The U.S. has never had cheaper electricity than it has now. But consumers aren't getting our prices."
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
Updated February 22, 2002 3:09 p.m. EST |
