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Power Industry may Face Boom-Bust Cycle by Reuters New York Times, May 9, 2001

SAN FRANCISCO (Reuters) - The U.S. power industry, which has embarked on a $140 billion building spree to avoid more California-style blackouts, could see that boom turn bust, with too many megawatts chasing too little demand, industry analysts warn.

Plans already on the drawing board would add a staggering 305,000 megawatts of power by 2007 -- electricity for nearly three times the number of homes in the entire country, according to industry estimates.

But not all the plants will likely be completed, with some canceled or pushed into lengthier development schedules.

``A lot of power developers are targeting the same places like California, Texas, Arizona, Nevada, New England and the Midwest for new plants, but they must balance their ambitions with reality,'' said Susan Abbott, a managing director at Moody's Investors Service.

``We find announced plans to build generation that dramatically exceed conventionally measured requirements,'' the Electric Power Research Institute (EPRI), a utility industry research group in Palo Alto, California, said in a study.

``If even half these plants were to be built, we would observe the markets swinging from famine to feast, with the pain recently experienced by buyers migrating to sellers,'' EPRI warned.

CALIFORNIA FEARS SPARK THE BOOM

California's energy crisis -- which has led to six days of blackouts in the state so far this year -- and other states' efforts to deregulate their own electricity sectors have triggered the rush to build new generating plants.

California, the nation's most populous state, led the pack with a 1996 law to spur competition among generators and reduce electric rates, then 50 percent above the national average.

The new law worked well at first, prompting big independent producers like Duke Energy (DUK.N) and others to buy and upgrade plants from PG&E Corp.'s (PCG.N) Pacific Gas & Electric unit and Edison International's (EIX.N) Southern California Edison.

But the law was badly written, requiring in-state utilities to buy whatever extra power they needed in the volatile wholesale market while capping how much they could charge customers.

Wholesale prices started to soar last spring amid strong demand and tight supplies, eventually pushing Pacific Gas and Electric into a Chapter 11 bankruptcy filing while SoCal Edison struck a tentative $2.76 billion bailout deal with Gov. Gray Davis.

Meanwhile, California's deregulation bid and similar moves by other states slowed power plant construction to a crawl as industry executives pondered the new marketplace and looked for new investment opportunities.big new power plants in 10 years -- was unable to bridge a widening supply-demand gap that state energy officials predict will produce up to 35 days of blackouts this summer.

EYE ON BIG EXPANSION

Calpine Corp. (CPN.N), of San Jose, California, is one of the big independent power producers adding badly needed generators in the Golden State and scouring other states to serve growing demand.

The company, which now has 6,000 megawatts on line, ``wants 70,000 megawatts in operation in the United States by the end of 2005,'' said Calpine spokesman Bill Highlander -- more than 8 percent of current total U.S. demand of about 800,000 megawatts.

``We expect national demand to be 1 million megawatts by the end of 2005 with population growth and more robust economic gains. What you find in the U.S. is what you find in California -- lots of inefficient plants 30 to 40 years old. So we're building to meet new demand and replace the older plants,'' Highlander said.

Other big players challenging Calpine in the national power stakes include Mirant (MIR.N), privately held Panda Energy, PG&E's National Energy Group, Reliant Energy (REI.N), NRG Energy (NRG.N), PSEG (PEG.N), FPL Group (FPL.N), and Cogentrix.

The generating capacity among the top 10 developers totals 136,580 megawatts, or about 45 percent of all new capacity expected to be operational by 2007, according to EPRI.

The hot markets for new fuel-efficient ``combined cycle'' plants powered by natural gas are Texas, the mid-Atlantic states of Pennsylvania-New Jersey-Maryland, California, New England, and Florida.

``THREE OUT OF NINE''

``The market rule of thumb is that for every nine projects announced, only three will get built,'' said Abbott of Moody's. ''I have a lot of respect for the developers, but everyone has to put a little bit of cautious realism in their plans.''

EPRI warned ``developers could well overshoot the conventional requirements of several market regions, likely creating a dip in prices, profitability and utilization rates for many of the new plants.

``Of course, this is only one possible path for industry evolution. It is also plausible that strong environmental restrictions on coal burning will create a need for a great deal of the announced plants, without overcapacity,'' said EPRI.

Calpine nevertheless remains bullish.

``It's a big market out there,'' said Highlander.