Utilities expanding their own power plant portfolios to meet demand

Utilities wary of the notoriously volatile electricity markets are pulling back from the unregulated wholesale trade by expanding their own power plant portfolios to meet demand, companies and analysts said.

The trend, which is also driven by state regulators' fears of California-style power shortages seen in 2000-2001, is a further blow to the hard-hit merchant power sector whose future heavily depends on a recovery in wholesale power markets.

"It appears to be a confirming signal about the poor prospects for the merchant sector in the future," said Craig Pirrong, head of energy market studies at the University of Houston.

In recent months, Oregon's Portland General Electric has sought state approval to build a new power plant despite receiving more than 100 bids to supply it with electricity, and Cincinnati-based Cinergy Corp. moved to transfer two power plants from its merchant unit to its regulated PSI Energy arm in Indiana.

"We needed to get up to a more reasonable level so for (peak usage) requirements we're not dependent on the mercy of the market," said Steve Brash, Cinergy spokesman.

Even in Texas, often hailed as the one of the country's best power markets, city-owned Austin Energy is set to open a new 300-megawatt plant this year rather than rely too heavily on the state's competitive market.

Those moves come despite the glut of power generating capacity available that was built in the past five years by merchant energy companies eager to grab market share in the deregulated markets dominated by now-defunct industry leader Enron Corp. .

Struggling to survive under a mountain of debt taken on during the boom that added more than 200,000 megawatts of generating capacity, those merchants have put many of those plants up for sale at a fraction of their construction costs.

MERCHANT PLANT DEMISE

The sector's demise has permanently destroyed the merchant power model for generation, according to Jacob Worenklein, chief executive at acquisition firm U.S. Power Generating Co. in New York, and neither equity investors nor lenders will finance new plants without long-term supply contracts to customers.

"This conclusion stems not just from the magnitude of the current disaster, but also from the fact that conceptually merchant power was a mistake because of the extreme level of price volatility at times of the slightest surpluses or deficits," Worenklein told an energy conference here last month.

Despite the large number of plants for sale, buyers have shied away from taking on the risk in the merchant power markets as well as the debt linked to those plants, analysts said.

"You might see some of these plants migrate to new owners, especially if they can put them back in the rate base," said Peter Rigby, credit analyst with Standard & Poors.

Regulatory hurdles to moving plants from the unregulated to the regulated markets have limited those transactions so far.

The Federal Energy Regulatory Commission agreed to Cinergy's power plant transfer and last month said it would allow Edison International's Southern California Edison to buy a power plant to supply its regulated business.

But the FERC indicated it would not approve such moves in the future, and has so far rejected Oklahoma's Gas and Electric Co's requests to buy a merchant plant on the grounds it would hurt the competitive market.

"I think the FERC has made it extraordinarily clear how they would be (deciding cases) going forward," said Christine Tezak, analyst with Schwab Capital Markets.