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Power Trade Slump May Hit Consumers

Energy: Lack of deals, possible shortages could mean higher prices as merchants struggle and plant-building slows.


When Western electricity traders gathered in Ojai in June for their industry group's annual meeting, the masters-of-the-universe attitude was gone.

Traders, who in the age of Enron Corp. seemed to rule the energy world, complained they were spending more time defending against market-manipulation lawsuits and investigations than they were buying and selling electrons. "It was pretty glum," acknowledged Gary Ackerman, executive director of the Western Power Trading Forum, the Menlo Park, Calif.-based trade group.

Since then, the energy trading sector has staggered through a summer of financial disaster that has badly shaken the business.

The year has brought accusations of questionable accounting and trading practices, stubbornly low electricity prices, deep losses, abrupt executive departures and widespread layoffs as companies scaled back or abandoned electricity trading. Energy merchants are mounting the equivalent of a giant yard sale of energy assets and have postponed or canceled the construction of scores of power plants.

The pain has been severe for the companies, their employees and shareholders. But there are even wider implications from the meltdown, including potential electricity shortages and a lack of good energy deals for big industrial users and others, which could eventually mean higher costs for consumers.

The trading of energy products might seem to be an esoteric enterprise far removed from the daily business of flicking light switches. However, energy trading firms also build power plants. With the companies in such sorry financial shape, they are pulling the plug on plant-building programs and eliminating projects capable of generating 86,000 megawatts of electricity nationwide. During the last two years, projects that could generate an additional 90,000 megawatts have been put on hold, according to Platts, an energy research company. (One megawatt can power about 750 homes.)

More of the canceled or postponed power plants were in California than any other state, Platts said, with total potential production capacity at about 19,000 mega-watts. Calpine Corp. of San Jose was most aggressive in the nationwide pullback, followed by Duke Energy Corp. of Charlotte, N.C.

"Clearly the boom is over and we're in a bust," said Brian Jordan, director of North American electricity markets at Platts. "When the bust becomes so severe and a lot of plants are being killed or postponed, that suggests that the next boom-bust cycle will be even more severe."

California's Supply

Although the nation as a whole will have more electricity than it needs until 2006, California may begin experiencing power shortages after 2003, said Christopher Ellinghaus, energy analyst with Williams Capital Group, a New York investment bank, who recently completed a market-by-market study of electricity supply.

The California Energy Commission on Wednesday licensed a 600-megawatt power plant in Hayward, which Calpine is scheduled to begin building early next year for operation in 2005. But a Calpine spokesman said Thursday that the company won't build the $400-million plant unless it can sign long-term power contracts for the juice electricity the facility would produce.

The California Energy Commission, however, is not ready to send up warning flares, despite the cancellation or postponement of several power plants. Some of the proposals were not all that serious anyway, said Claudia Chandler, assistant executive director of the commission. "It's not the market that people thought it was when everyone thought they could make a bazillion dollars in power plant development. Now we're seeing the real developers."

"Power plants are being built," Chandler said, adding 2,766 megawatts in the year ended July 31 with 3,643 megawatts to be added in the next fiscal year. "We are OK through the end of 2004, though we are watchful of 2005."

At the same time, power trading has shriveled. Platts estimates that trading in some key daily and forward electricity markets has fallen as much as 70% from a year ago. This may not make much of a difference to California power users, forbidden by law from seeking the best deal for electricity on the open market, at least for now. But some market-watchers say the declining number of energy merchants also has affected the sale of natural gas, which was deregulated in the '80s.

As a result, some large customers have a harder time getting energy contracts signed with energy middlemen, or at least on the terms they would like, consultants say. And with a slowdown in the trading of energy derivatives, which are contracts based on the future price of a commodity, big energy users are having trouble hedging against large price movements.

Higher Energy Costs

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