Lower demand, changing circumstances have companies pulling back from crisis plans.
The Los Angeles Times
Power companies have delayed or canceled more than half the new plants proposed during California’s energy crisis, citing lower demand, falling electricity prices, Wall Street’s reluctance to finance projects and stifling regulations.
Since 2000, energy producers have pulled the plug on power plants that would have generated nearly 3,000 megawatts of power–enough to light up 2.2 million homes, according to the state Energy Commission. Adding in projects that have been delayed, the total is closer to 20,000 megawatts, federal regulators say.
Following the severe shortages of 2000-2001, a burst of construction provided large amounts of needed power to the state. But the slowing economy, conservation and plentiful hydroelectric power have turned the shortage into a glut.
The glut, combined with questions over the energy sector’s credibility in the wake of the Enron Corp. scandal, has regulators, industry executives and consumer groups fearful that another crisis is a few years away.
“We’re at a crossroads right now,” said Suzanne Garfield, a spokeswoman for the California Energy Commission. “There’s been a lot built but a lot more is needed. We need to retire many old plants, and imports are decreasing as nearby states use more of their own power.”
As a result of the Enron scandal, much of the energy sector has come under a harsh spotlight, and companies now find themselves unable to access the financial markets for capital.
The industry’s struggles are evident at Redlands, Calif. There, at AES Corp.’s Mountainview facility, a few workers stand watch over a foundation where 500 laborers once toiled over what was to have been an $800-million power-generating plant.
AES poured more than $100 million into the project before the firm’s own retrenchment and the unwillingness of Wall Street to provide financing forced it to suspend work two months ago on the plant, designed to provide power for 800,000 homes.
Mark Woodruff, an AES regional manager, blamed restrictions imposed by Gov. Gray Davis‘ rescue plan, especially the state’s refusal to let AES and other power sellers strike supply deals directly with large business users.
The Mountainview plant in Redlands is “pretty much a ghost town now,” said David Kehnes, project manager for Arlington, Va.-based AES, which still operates a smaller plant nearby. “And we’re a skeleton crew.”
Similar scenes are apparent throughout the industry, eight months after the collapse of Enron started a landslide loss of faith in U.S. business practices.
UC Irvine professor and energy commentator Peter Navarro says the energy companies, having manipulated the energy market, badly overestimated demand, buried themselves in debt to build new plants and were surprised when the economy slowed.
“The mind set was that these higher prices would last forever,” Navarro said. “But when prices fall to a third of where they’d been, Wall Street figures out pretty quickly you don’t have cash to service your debts.
“This could turn what looked like a 5-year glut of power into probably a 2-to-3-year glut,” he added.
Announcing Monday that a big new Monterey County plant had come on line, Gov. Gray Davis boasted that California had added 4,165 megawatts of in-state power since last summer, enough to power more than 3 million homes. But the Federal Energy Regulatory Commission said this month that the net addition will be closer to 3,100 by year end because some existing plants will be decommissioned.
At a U.S. Senate energy committee meeting last week, FERC Chairman Pat Wood said projected construction of crucial generating and transmission infrastructure has “dropped off dramatically” as corporate downgrades by bond analysts “dramatically escalate the cost of credit in this industry.”
Power generators such as AES are “in the throes of a costly boom and bust cycle,” testified Larry Makovich, a senior consultant at Cambridge Energy Research Associates. He estimated that since the start of the year power plants capable of producing nearly 82,000 megawatts have been canceled or postponed across the nation.
While no one is predicting anything like the shortages and soaring prices seen in 2000 and 2001, California still must depend on having manufacturers voluntarily cut production to get by on the hottest days, as happened July 10.
To Mirant Corp. executives, that shows “there’s a current supply-demand imbalance” in California, spokesman David Payne said. For that reason, he said, the company fully intends to build a 530-watt Contra Costa plant originally set to open in 2003.
But Mirant, whose bonds are categorized as junk by Moody’s Investors Service and Standard & Poor’s, delayed the plant as part of a $2-billion cut in capital spending this year to shore up its balance sheet. A separate Mirant proposal to build another large plant at its Potrero facility in Northern California has been held up for years by permit disputes, Payne said.
Calpine Corp., a San Jose-based power plant builder with a once fast-growing trading arm, was hit early by the credit and liquidity crisis created by the downfall of Enron, the largest of the energy traders. Calpine’s money woes appear to have stabilized, but not before it slashed its plant-building budget and significantly slowed many projects.
In California, Calpine opened three major power plants and four smaller “peaker” units in the last year. But completion of three more big power plants capable of generating has been pushed back several months into 2004.
Company spokesman Bill Highlander said the delays in California are the result of the state’s tortuous permitting process as well as Calpine’s financial woes.
Davis spokesman Steve Maviglio said complaints about regulations and permits in the state are nothing new, adding that the fact that companies are scaling back nationwide shows the problems aren’t specific to California. Long-term power contracts with producers, though much criticized, will assure a supply of electricity no matter what happens, and Davis’ plan authorized the state itself to build plants if private power proves insufficient, Maviglio said.
He said the biggest problem for power generators is the current unwillingness of Wall Street to finance them–a problem that is undeniably fearsome.
At a briefing for investors Friday, Fitch analysts noted that debt defaults by corporations, which in the 1990s had been running less than $10 billion a year, zoomed to $28 billion in 2000. Defaults hit $78 billion in 2001 and $50 billion through the first half of 2002.
High on the ratings firm’s watch list these days is the energy industry, where credit downgrades have outpaced upgrades by 18-1 so far this year.
Fitch managing director Richard Hunter said the “heady cocktail” of lower prices, a credit crunch, Enron-style sham deals and potential litigation is exerting “extreme stress” on the industry.
One hopeful sign in California is that most of the proposed plants have only been delayed and not canceled outright, according to Bob Aldrich, a state official who keeps a running tab on the power-plant situation.
But at the same time, the uncertainty is aggravated by the fact that many power concerns are under investigation for the allegedly phony deals that critics say upset the energy markets and contributed to California’s crisis in 2000 and 2001.
“My industry’s so demonized. I feel like the new tobacco,” said Mark Byron, Dynegy Inc.’s California director of retail energy services until he was laid off in June. The energy industry “is an ocean of ex-employees,” Byron said.
In addition to state probes, investigations are under way by FERC, the Justice Department, the Securities and Exchange Commission and the Commodities Futures Trading Commission–all of which provides fodder for those who contend
the industry should never have been deregulated in the first place.
“We don’t need to rely on these companies [and] after what they did to us in 2001, we should not rely on them,” said Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “We must remember that these companies failed California long before they failed their shareholders.”
Times staff writers Nancy Rivera Brooks and Kelly Yamanouchi contributed to this report.