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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (14494)	5/26/2004 1:54:58 PM
From: Gemlaoshi	Read Replies (4) \| Respond to of 110194

Darffot, If you dig a little deeper into your research on NGAS generation, you will find: (1) Stupid "policy making" had nothing to do with it. The capacity you refer to was speculative construction by merchant power/IPP companies who have no supply contracts and were depending on selling into the spot market. (Enron, Dynegy, Mirant, Calpine, Reliant, Williams, etc.). (2) It was a multi-billion dollar bet that electric deregulation would soon occur at the retail customer level and the California situation could be repeated 47 times! (3) Most of that marginal capacity: Never completed construction, is not online because there are no supply contracts, is priced out of the spot market because of high gas prices, acts only as peaking capacity, or has been returned to the banks as collateral for the unpaid loans. (4) Much of the financing was short-term (3-5 years) and will be coming up for refinancing/default in the next two years. The market is very soft for gas generation right now, so the banks are taking title rather than dumping the capacity at fire-sale prices. (5) Some of the combined-cycle plants in states with low intrastate gas prices (e.g. Texas) can profitably run as baseload capacity. However, most of the combined-cycle and all of the simple-cycle plants act as peaking plants. That means most generate less than 20 percent of nameplate capacity rating. (6) Electricity is basically a regional resource. There are certain capacity and transmission hotspots (primarily California and upper East Coast) that will continue to have problems. However, for the rest of the country, pricing will continue to be soft for at least 3-4 years. (7) The merchant power dilemma is similar to the earlier telecom meltdown. Cheap credit led to overbuilt capacity, leading to massive default. The players will change, but infrastructure will not go away. The timing is uncertain, but it will probably take 3-5 years for this malinvestment to be digested by the industry. (8) The merchant power business is not the same as the electric utility industry. They seem similar on the surface, but have very different economic drivers. Regards, Dave