FYI.  Story on the effect of FERC prices on supply in PNW.
Best,
Jeff

Power-Market Bear Mauls Plans For New Generators In West
By Mark Golden
Of DOW JONES NEWSWIRES

07/26/2001
Dow Jones Energy Service
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW YORK -(Dow Jones)- The crumbling price of electricity in the western 
U.S., attributed by many to federal price controls, has forced power plant 
developers to cancel projects, calling into question whether there will be 
enough electricity to meet demand in the Northwest this winter. 
The cancellations of peaking plants and temporary, oil-fired generators - 
high-cost units that provide power needed only when demand is highest - have 
cut projected generating capacity in the Northwest by up to 1,000 megawatts, 
about 3% of the combined peak demand of Washington, Oregon, Idaho and western 
Montana.
"The price caps have added uncertainty," said Scott Simms, spokesman for 
Enron Corp. (ENE) unit Portland General Electric Co. "If we look forward to 
this winter and you see a diminished supply scenario, you can see why we have 
concerns about regional reliability. That could put us in a position of 
having rotating outages in the region." 
About two weeks after the Federal Energy Regulatory Commission imposed limits 
on western power prices on June 19, Portland General halted installation of a 
new 45-megawatt gas-fired peaking turbine at its existing Boardman power 
plant. 
The utility was developing the extra generation both to meet its customers' 
needs and to sell some output to other Northwest utilities left short of 
hydroelectric supplies due to this year's drought. A turbine that size could 
power about 45,000 homes. 
"You can directly attribute that to FERC price controls," Simms said. 
After the FERC order, at least two utilities in Washington State ended 
negotiations with NRG Energy (NRG) for supplies from new plants that NRG was 
ready to build in time for winter. Both utilities - Tacoma Power and 
Snohomish County Public Utility District - experienced significant supply 
shortages in the past 12 months, paid very high prices in the spot market and 
had to raise customer electric rates by as much as 50%. 
But both utilities told NRG, and later Dow Jones Newswires, that they had no 
reason to sign long-term contracts to guarantee new supplies, because the 
FERC had practically eliminated the financial risk of relying on the spot 
market. NRG, as a result, scuttled plans to build peaking plants in 
Washington that could have added 300 megawatts. 
FERC's price controls, as well as supply-demand fundamentals, have 
dramatically changed the economics of selling power into the West's open 
market in the past few months. 
The current western U.S. electricity price cap of $98 a megawatt-hour covers 
the costs of generating power from easy-to-install but inefficient peaking 
turbines, but not the capital costs of buying and installing new peakers. In 
addition, the current price cap may soon be recalculated to a much lower 
level. The cap is based largely on natural gas prices, which have been cut in 
half since the cap was first formulated in June. 

Not Everyone Blames FERC 

The average monthly price for on-peak hours in the Northwest from August 
through March is $60 a megawatt-hour - a fraction of what it was three months 
ago. Many in the western electricity industry think that's because FERC's 
price controls have kept prices artificially low. A smaller group thinks the 
market is appropriately signaling that not all the planned gas-fired plants 
are needed, because some power plants are already under construction and 
consumers are conserving electricity. 
Jim Kemp, a senior executive for the Canadian utility TransAlta's (TA.TO) 
merchant power group, TransAlta (TA.TO), for example, doesn't attribute the 
cancellation of projects to price controls. 
"I see it as due to demand-side control and new units," Kemp said. "The 
market is sending out a signal that we have enough. Maybe this winter we will 
find that we don't have enough, but that's not the signal the market is 
sending now." 
The spot market for power has been far below the federal price cap for two 
months. Mild weather, a slowing economy and conservation efforts throughout 
the West have made power from expensive peaking plants unnecessary except for 
a few hours so far this summer. 
"Prices started to come down before the FERC mitigation plan started," said 
Tacoma Power supply analyst David Lucio, who was negotiating with NRG. "The 
need to try to execute a contract wasn't as great with the prices falling." 
Lucio said there should be enough capacity to get the Northwest through the 
winter, barring abnormalities like a long, extended freeze. 
Construction of dozens of peaking plants in the West is going forward in 
cases where developers sold supply contracts in advance. TransAlta is 
continuing construction of a 154-megawatt peaking plant in Washington, 
because much of the plant's capacity was sold months ago. 
"The number of announced projects is far and away more than what is needed 
within the time frame we're talking about," said Dick Watson, a director with 
the Northwest Power Planning Council. 
Still, several western utilities have asked the FERC to raise the price cap. 
Puget Sound Energy (PSD) told the FERC the cap "undercuts the Commission's 
efforts to ensure adequate supplies of electricity." 
As previously reported, some small oil-fired generators, which are even more 
expensive to operate than the permanent, gas-fired peaking plants, have even 
been taken off line permanently after being installed over the past six 
months. And orders for new generators have been canceled. 
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.