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IssueAlert for  February 20, 2001=20

Florida Study Recommends Wholesale Deregulation

by Will McNamara
Director, Electric Industry Analysis

Florida's political and business leaders moved cautiously toward deregulati=
ng=20
the state's electric industry in a move last week, while vowing to avoid=20
problems such as those in California. Florida's Energy 2020 Study Commissio=
n=20
unanimously recommended that the Florida Legislature consider deregulating=
=20
wholesale electricity. The move could spark construction of a number of pow=
er=20
plants in the state.=20

Analysis: Florida Gov. Jeb Bush created the Energy 2020 Study Commission wi=
th=20
the intent of submitting an initial deregulation proposal for consideration=
=20
in this spring's legislative session. Florida's energy market represents a=
=20
$13 billion industry, so obviously there has been great interest on the par=
t=20
of new energy suppliers that want to begin serving the state. =20

Florida continues to move slowly toward deregulation across all levels.=20
Competition on the retail side may take several more years, especially as t=
he=20
California crisis is causing many states to adopt a more cautious approach =
to=20
removing state regulations. The commission's recommendation to initiate=20
deregulation on the wholesale side is considered a small step toward reachi=
ng=20
the ultimate goal of total deregulation in the state. =20

Specifically, the commission has endorsed a plan that would allow=20
out-of-state companies to build new merchant power plants in Florida and se=
ll=20
wholesale electricity to the state's utilities. Florida law forbids=20
out-of-state electric utility companies from providing year-round service t=
o=20
utilities and customers, but merchant plants can provide backup service to=
=20
existing utilities when energy reserves are stretched thin, to avoid power=
=20
outages and rolling brownouts. Also under the commission's plan, in-state=
=20
utilities would also be allowed to sell their regulated plants at depreciat=
ed=20
values to affiliated companies that would compete head-to-head on the=20
wholesale market. In addition, the state's utilities could engage in=20
long-term power contracts with suppliers instead of relying on the open=20
market (a major difference from California's original plan), and state=20
regulators would still review all wholesale contract prices. The commission=
's=20
plan must still be approved by the Florida Legislature, and the commission=
=20
readily admits that approval may not be easily obtained due to the ongoing=
=20
crisis in California.=20

At the present time, no official start date for electric competition in=20
Florida has been announced. The state's "go slow" approach is characteristi=
c=20
of other Southeastern U.S. states, many of which continue to enjoy=20
comparatively low electric rates. Florida's renewed interest in deregulatio=
n=20
is being driven by the belief among several commission members and other=20
officials that competition eventually will result in lower rates for=20
consumers. Or, at the very least, competition should prevent rates from=20
continuing to increase as they reportedly would under a regulated structure=
.=20
The commission's plan also is intended to prevent power supply problems in=
=20
Florida similar to those in California, by allowing for new generation to b=
e=20
built in the state by external companies. Florida law requires power=20
companies to hold 20 percent of their power supplies in reserve to that the=
y=20
can handle periods of extreme usage. However, both the commission's chair a=
nd=20
Gov. Bush have suggested that Florida will face a shortage of electricity i=
n=20
the next decade unless out-of-state companies build new plants. =20

Consumer groups and municipal electric providers have resisted the=20
commission's recommendation. In general, such groups fear that deregulating=
=20
Florida's wholesale market would lead to higher electricity bills since big=
=20
utilities in the state would be allowed to earn higher profits that may or=
=20
may not result in benefits for consumers. In fact, the Florida Municipal=20
Electric Association recently argued that annual electricity prices in=20
Florida would rise by between $700 million and $1.6 billion if the=20
commission's plan to initiate wholesale deregulation is approved. In=20
addition, Florida's utilities have been rather effective in persuading stat=
e=20
officials to move slowly toward deregulation, perhaps out of concern about=
=20
losing their monopoly status. Walter Revell, the chairman of the Energy 202=
0=20
Study Commission, denied that the group is considering any plan that would =
be=20
partial to the state's largest investor-owned utilities, which include=20
Florida Power & Light, Tampa Electric, Florida Power Corp. and Gulf Power. =
=20

The commission's recommendation supports what is already a fast-growing=20
wholesale business in the state of Florida, with outside power companies su=
ch=20
as Duke, Enron, Calpine Corp. and others aggressively trying to penetrate t=
he=20
state and gain a foothold for when deregulation emerges in full force. Such=
=20
power suppliers may be accurately surmising that Florida is headed toward a=
=20
supply / demand imbalance, as has occurred in California. An imbalance of=
=20
this sort would offer competitive opportunities for power suppliers in the=
=20
state. According to a report in the St. Petersburg Times, merchant power=20
companies have announced plans to build some 20 plants across Florida just=
=20
over the last year or so. However, the article stated that the Florida's bi=
g=20
utility companies still have enough clout to block any plant proposal.=20

For instance, Florida Power, Florida Power & Light and Tampa Electric joine=
d=20
forces last year to block Duke Energy from constructing a plant near Dayton=
a=20
Beach. Yet, Duke pushes forward and recently said that it would revive plan=
s=20
to build a merchant plant in New Smyrna Beach, Fla. Duke's plans to build t=
he=20
plant had previously been blocked by a Florida Supreme Court ruling that su=
ch=20
plants were prohibited under state law.=20

Enron unveiled plans for two "peaker" plants in Pompano and Deerfield Beach=
,=20
Fla., several weeks ago. Construction on both sites is pending city and sta=
te=20
environmental department approval, but Enron hopes to have both 500 MW=20
facilities running by summer 2002.  Enron expects the Department of=20
Environmental Protection to license each peaker plant for 125 days each yea=
r,=20
with roughly 83 days powered by natural gas and the rest by oil. Enron is=
=20
also in the preliminary stages of planning a 90-mile liquefied natural gas=
=20
(LNG) pipeline between the Bahamas and Port Everglades, Fla. The company ha=
s=20
an option on a 90-acre site in the harbor of Grand Bahamas Island, where it=
=20
hopes to build a conversion and treatment terminal for LNG.=20

Calpine received approval to build a 529-MW natural gas-fired plant to supp=
ly=20
electricity to Seminole Electric Cooperative. The plant will be part of the=
=20
proposed Osprey Energy Center in Aurburndale, Fla., next to an existing=20
Calpine 150-MW cogeneration plant. According to Calpine, beginning in June=
=20
2003, Seminole Electric Cooperative will distribute electricity from Osprey=
=20
for 17 years to 10 member electric cooperatives. =20

Reliant Energy is also finding its own way to penetrate the new openings in=
to=20
the Florida market. Just last week, Reliant Energy Services, an unregulated=
=20
wholesale power subsidiary of Reliant Energy, announced that it has entered=
=20
into agreements with affiliates of El Paso Energy Corp. to purchase future=
=20
supplies of power from several new facilities to be built in Florida. Under=
=20
the tolling agreements, Reliant Energy Services has secured the right to=20
utilize and dispatch electric generating capacity totaling approximately=20
1,100 MW. The electricity will be generated by two new natural-gas fired=20
simple-cycle peaking plants, to be owned by El Paso Energy, that will be=20
located in Pasco and Hardee counties. The new plants are scheduled to be=20
completed by the spring and summer of 2002. =20

These are just a few examples of the many companies that plan to take=20
competitive advantage of the anticipated opening of Florida's market. While=
=20
Florida clearly has no plan to open deregulation on the consumer level any=
=20
time soon, competition in the state does appear to be gaining momentum, at=
=20
least on the wholesale level. Of course, the commission's plan has not yet=
=20
been fully approved by the Florida Legislature, and critics claim that the=
=20
state's big utilities still wield a great deal of influence over the extent=
=20
to which competing power suppliers will be allowed to participate in the=20
state's market. There are many debatable nuances within the Florida=20
commission's plan. Yet, one positive thing is that Florida does appear to b=
e=20
making valuable steps to increase its own power supply, addressing a proble=
m=20
that many have accused California of ignoring. Having learned the lesson fr=
om=20
California, Florida seemingly acknowledges that there is simply no guarante=
e=20
that power will be readily available at tolerable price levels on the open=
=20
market. Thus, this plan to increase the availability of power supply within=
=20
the state through increased merchant plants seems to be a prudent approach.=
=20

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www.ConsultRCI.com


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