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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \Mark_Haedic_Jan2002\Haedicke, Mark E.\Inbox X-Origin: Haedicke-M X-FileName: mhaedic (Non-Privileged).pst <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/rci/infogrids.asp< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 <http://secure.scientech.com/images/spacer.gif<; <http://www.thestructu= regroup.com< <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/specialpages/Strategic_Planning.asp< <http://secure.scientech.com/ima= ges/spacer.gif< <http://secure.scientech.com/rci/details.asp?ProductID=3D90= 9< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 29, 2001 California Develops Plan=20 to Renegotiate Long-Term=20 Power Contracts as State=20 Faces Energy Surplus=20 By Will McNamara Director, Electric Industry Analysis [News item from the Los Angeles Times] After months of defending the $43 bi= llion worth of long-term electricity contracts he helped negotiate on behal= f of the state, S. David Freeman suggested for the first time this week tha= t the contracts be renegotiated, perhaps through the California Power and C= onservation Financing Authority, a new public power agency he now chairs. "= There seems to be pretty general agreement that these contracts need to be = renegotiated," said Freeman, noting that critics of the contracts include G= ov. Gray Davis, the president of the California Public Utilities Commission= and the leader of the State Senate. Freeman said he is still proud of his = work negotiating the contracts with companies Davis labeled at the time as = gougers and pirates, but California's energy picture has vastly changed sin= ce January.=20 Analysis: Oh, yeah, the California energy crisis ? remember that? For some,= it may seem like ancient history that California suffered through an ill-f= ated experiment with electric deregulation that led to some devastating con= sequences, especially considering the Enron saga that now occupies headline= s in the energy industry. Nevertheless, it should not be forgotten that, ev= en though rolling blackouts in the state are no longer an imminent threat, = some fundamental problems that defined the California energy crisis continu= e to plague the state. As one of the main resolution steps that were taken = to repair the dysfunctional market, the state of California stepped into a = very involved role as power purchaser on behalf of the state's three IOUs (= Pacific Gas & Electric Co., Southern California Edison and San Diego Gas & = Electric Co.), which due to credit problems were unable to secure power on = their own. In an ironic twist indicating that California's problems are far= from over, the stabilization of the state's markets are now in essence cau= sing a new set of challenges and casting light on what appear to be questio= nable choices made by the state at the height of the crisis.=20 At issue presently are some 54 long-term contracts that the state of Califo= rnia, through its Department of Water Resources, signed with power generato= rs such as Calpine (NYSE: CPN), Duke (NYSE: DUK), Mirant (NYSE: MIR), and W= illiams (NYSE: WMB) to name a few back in early 2001, a time at which whole= sale power prices were still running at very high levels. One of the primar= y benefits of the contracts was that they reduced the state's reliance on t= he volatile spot market, where prices had soared as high as $500/MWh. As a = whole the contracts are worth about $43 billion and have a lifespan of 10 y= ears or more. Some might argue that Gov. Davis, who led the effort for the = state to assume the role of power purchaser, felt pressure to sign the cont= racts at that time, due to the uncertainty surrounding the financial solven= cy of Pacific Gas & Electric and SCE in particular. However, critics argue = that the contracts locked the state into wholesale power costs when prices = were the highest.=20 Much of the details of the contracts signed by the state are proprietary, b= ut there are some interesting details that can be gleaned. First, a good nu= mber of the contracts lock the state in to buying power at various times, i= ncluding those of low demand (such as the morning). This leaves the state w= ith a surplus of power that it does not need, which it in turn has been for= ced to sell at a loss. We also know that, as a general observation, the sta= te bought power under the long-term contracts at an average price of $75/MW= h. That same power reportedly will sell for only $16/MWh in 2002.=20 As noted, Freeman, who previously managed the municipal utility known as th= e Los Angeles Department of Water and Power, recently assumed the managemen= t post of the new California Power and Conservation Financing Authority at = the request of Gov. Davis. The agency was charged with quelling the extreme= situation that California faced over the last year, including soaring powe= r prices and blackouts. Looking beyond the immediate problems that have sub= sided, Freeman's new plan calls for a way to renegotiate the existing contr= acts and increase generation supply in the state at the same time.=20 Let me try to put Freeman's plan into a nutshell. As a state agency, the Po= wer Authority could sell up to $4 billion in revenue bonds, which would be = guaranteed by energy sales, to lease, build or buy power plants. Consequent= ly, the state, which can borrow money at below-market rates, is in a positi= on to build new plants more cheaply than private companies could. As a carr= ot to entice the renegotiation of the long-term contracts, the state could = offer generating companies a financial incentive to build new power plants = in the state. In other words, the state would carry the investment for the = costs of the new plants, alleviating pressure on the private companies to p= rovide a 20-percent return to their shareholders. Note that most of the gen= erating companies involved in long-term contracts with California are commi= tted to building new power plants anyway. Some reports I've seen indicate t= hat 70 percent of the 54 contracts that the state has signed include clause= s that require the generating companies to build new power plants in the st= ate. However, under normal circumstances, the expense of building the new p= lants would be financed by the generating companies and could cost hundreds= of millions of dollars. Thus, in return for the financial incentive, the s= ame generating companies would agree to renegotiate the terms of their long= -term contracts with the state of California, presumably based on current m= arket conditions. Note that the renegotiation could include cutting the pri= ces in the contracts, or providing the state with more flexibility on the t= iming and quantity of electricity that must be purchased.=20 The word from California is that most state officials think this plan has s= ome legs. Nevertheless, word of the plan comes on the heels of claims that = California is presently suffering from an energy glut (unused electricity) = that may end up costing ratepayers as much as $3.9 billion over the next de= cade. The reason for the surplus power is that Californians have increased = conservation efforts, which brought demand down, a condition that was maint= ained by comparatively moderate weather trends. The end result is that the = state apparently bought far more power than it needed to meet the needs of = the customers served by the three IOUs, and the state unfortunately cannot = sell the excess power elsewhere and gain a profit. For instance, according = to a report by the Department of Water Resources, in one three-month, low-u= sage period expected in the spring of 2002, 57 percent of the power for whi= ch the state has contracted will have to be sold at a loss of close to 80 c= ents on the dollar, ultimately costing utility customers as much as $193 mi= llion. The same report indicates that the power surplus in the state will r= each its peak in 2004 and then gradually decline through 2010.=20 Consequently, despite the financial advantages of Freeman's plan, the logis= tics of getting new power plants approved in the state in light of the appa= rent energy glut may be an impediment to the renegotiation strategy. In add= ition, some of the companies involved in the contracts with the state alrea= dy own a large amount of generation capacity in California and may not be e= asily convinced to build new plants right away. For instance, Calpine Corp.= , which is one of the companies that has signed a long-term deal with the s= tate of California, responded to the plan as saying that it "wouldn't be an= ything that Calpine would use." The company reportedly has finished three n= ew power plants since June 2001 and would not be enticed by the financing i= ncentive that the state is orchestrating. Further, the state's desire to re= negotiate terms of the contracts is not a new concept. Ever since wholesale= prices began to drop earlier this year, the renegotiation debate has been = a fixture of state legislative and regulatory proceedings. However, since t= he onset of the talks, a good number of the generating companies have maint= ained that re-negotiation would not be possible as they had already locked = themselves into deals with natural-gas suppliers.=20 Thus, one concern is that the apparent energy glut in California will disco= urage further development of new generation and renewable energy sources, a= t least in the near term, which could set the state up for another dangerou= s boom-and-bust cycle down the road. In addition, those companies that alre= ady have long-term contracts with the state (such as Calpine) may not be en= ticed by the financing incentive, and those companies that don't have long-= term contracts with the state will have no incentive at all to build new pl= ants in California. All of this could create a situation in which Californi= a has too much power over the next few years and then will find itself in a= nother shortage situation 10 or more years down the line.=20 Freeman is apparently also pushing the state to once again make an attempt = to take over some of Pacific Gas & Electric Co.'s physical assets. Instead = of its transmission lines, however, the state now is examining its opportun= ity to buy the hydroelectric generation network (including dams and powerho= uses) owned by the state's largest electric utility. Note that under its re= structuring plan that has been submitted for regulatory approval, Pacific G= as & Electric Co. would split from its parent, PG&E Corp., and transfer gen= erating and electric and gas transmission assets to form three new companie= s, which would fall under the jurisdiction of the Federal Energy Regulatory= Commission (FERC). State regulators do not like this plan, and thus are se= eking a way to retain control over the generating and transmission assets o= f Pacific Gas & Electric Co. Putting the hydroelectric assets under the Sta= te Power Authority would keep the assets under state control.=20 Moreover, even though California is rethinking certain choices it made almo= st a year ago that directly entrenched the state government in the energy m= arket, state officials still seem to want to gain control over fundamental = parts of the state's energy infrastructure. Remember that Gov. Davis spent = much of the last year attempting unsuccessfully to negotiate deals with SCE= and SDG&E for the purchase of the utilities' transmission networks. Pacifi= c Gas & Electric Co. never was interested in selling its transmission asset= s, which it believed the state's offer grossly undervalued. One of the main= reasons that these attempts by the governor were unsuccessful was concern = by state legislators who argued that the state was ill equipped to assume o= peration of the complex transmission networks. Nevertheless, in addition to= renegotiating the long-term contracts, the state is still pursuing at leas= t the hydroelectric generation assets of Pacific Gas & Electric.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to IssueAlert <mailto:IssueAlert@scientech.com<, with "Delete = IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 29, 2001 California Develops Plan=20 to Renegotiate Long-Term=20 Power Contracts as State=20 Faces Energy Surplus=20 By Will McNamara Director, Electric Industry Analysis [News item from the Los Angeles Times] After months of defending the $43 bi= llion worth of long-term electricity contracts he helped negotiate on behal= f of the state, S. David Freeman suggested for the first time this week tha= t the contracts be renegotiated, perhaps through the California Power and C= onservation Financing Authority, a new public power agency he now chairs. "= There seems to be pretty general agreement that these contracts need to be = renegotiated," said Freeman, noting that critics of the contracts include G= ov. Gray Davis, the president of the California Public Utilities Commission= and the leader of the State Senate. Freeman said he is still proud of his = work negotiating the contracts with companies Davis labeled at the time as = gougers and pirates, but California's energy picture has vastly changed sin= ce January.=20 Analysis: Oh, yeah, the California energy crisis ... remember that? For som= e, it may seem like ancient history that California suffered through an ill= -fated experiment with electric deregulation that led to some devastating c= onsequences, especially considering the Enron saga that now occupies headli= nes in the energy industry. Nevertheless, it should not be forgotten that, = even though rolling blackouts in the state are no longer an imminent threat= , some fundamental problems that defined the California energy crisis conti= nue to plague the state. As one of the main resolution steps that were take= n to repair the dysfunctional market, the state of California stepped into = a very involved role as power purchaser on behalf of the state's three IOUs= (Pacific Gas & Electric Co., Southern California Edison and San Diego Gas = & Electric Co.), which due to credit problems were unable to secure power o= n their own. In an ironic twist indicating that California's problems are f= ar from over, the stabilization of the state's markets are now in essence c= ausing a new set of challenges and casting light on what appear to be quest= ionable choices made by the state at the height of the crisis.=20 At issue presently are some 54 long-term contracts that the state of Califo= rnia, through its Department of Water Resources, signed with power generato= rs such as Calpine (NYSE: CPN), Duke (NYSE: DUK), Mirant (NYSE: MIR), and W= illiams (NYSE: WMB) back in early 2001, at a time at which wholesale power = prices were still running at very high levels. One of the primary benefits = of the contracts was that it reduced the state's reliance on the volatile s= pot market, where prices had soared as high as $500/MWh. As a whole the con= tracts are worth about $43 billion and have a lifespan of 10 years or more.= Some might argue that Gov. Davis, who led the effort for the state to assu= me the role of power purchaser, felt pressure to sign the contracts at that= time, due to the uncertainty surrounding the financial solvency of Pacific= Gas & Electric and SCE in particular. However, critics argue that the cont= racts locked the state into wholesale power costs when prices were the high= est.=20 Much of the details of the contracts signed by the state are proprietary, b= ut there are some interesting details that can be gleaned. First, a good nu= mber of the contracts lock the state in to buying power at various times, i= ncluding those of low demand (such as the morning). This leaves the state w= ith a surplus of power that it does not need, which it in turn has been for= ced to sell at a loss. We also know that, as a general observation, the sta= te bought power under the long-term contracts at an average price of $75/MW= h. That same power reportedly will sell for only $16/MWh in 2002.=20 As noted, Freeman, who previously managed the municipal utility known as th= e Los Angeles Department of Water and Power, recently assumed the managemen= t post of the new California Power and Conservation Financing Authority at = the request of Gov. Davis. The agency was charged with quelling the extreme= situation that California faced over the last year, including soaring powe= r prices and blackouts. Looking beyond the immediate problems that have sub= sided, Freeman's new plan calls for a way to renegotiate the existing contr= acts and increase generation supply in the state at the same time.=20 Let me try to put Freeman's plan into a nutshell. As a state agency, the Po= wer Authority could sell up to $4 billion in revenue bonds, which would be = guaranteed by energy sales, to lease, build or buy power plants. Consequent= ly, the state, which can borrow money at below-market rates, is in a positi= on to build new plants more cheaply than private companies could. As a carr= ot to entice the renegotiation of the long-term contracts, the state could = offer generating companies a financial incentive to build new power plants = in the state. In other words, the state would carry the investment for the = costs of the new plants, alleviating pressure on the private companies to p= rovide a 20-percent return to their shareholders. Note that most of the gen= erating companies involved in long-term contracts with California are commi= tted to building new power plants anyway. Some reports I've seen indicate t= hat 70 percent of the 54 contracts that the state has signed include clause= s that require the generating companies to build new power plants in the st= ate. However, under normal circumstances, the expense of building the new p= lants would be financed by the generating companies and could cost hundreds= of millions of dollars. Thus, in return for the financial incentive, the s= ame generating companies would agree to renegotiate the terms of their long= -term contracts with the state of California, presumably based on current m= arket conditions. Note that the renegotiation could include cutting the pri= ces in the contracts, or providing the state with more flexibility on the t= iming and quantity of electricity that must be purchased.=20 The word from California is that most state officials think this plan has s= ome legs. Nevertheless, word of the plan comes on the heels of claims that = California is presently suffering from an energy glut (unused electricity) = that may end up costing ratepayers as much as $3.9 billion over the next de= cade. The reason for the surplus power is that Californians have increased = conservation efforts, which brought demand down, a condition that was maint= ained by comparatively moderate weather trends. The end result is that the = state apparently bought far more power than it needed to meet the needs of = the customers served by the three IOUs, and the state unfortunately cannot = sell the excess power elsewhere and gain a profit. For instance, according = to a report by the Department of Water Resources, in one three-month, low-u= sage period expected in the spring of 2002, 57 percent of the power for whi= ch the state has contracted will have to be sold at a loss of close to 80 c= ents on the dollar, ultimately costing utility customers as much as $193 mi= llion. The same report indicates that the power surplus in the state will r= each its peak in 2004 and then gradually decline through 2010.=20 Consequently, despite the financial advantages of Freeman's plan, the logis= tics of getting new power plants approved in the state in light of the appa= rent energy glut may be an impediment to the renegotiation strategy. In add= ition, some of the companies involved in the contracts with the state alrea= dy own a large amount of generation capacity in the state and may not be ea= sily convinced to build new plants right away. For instance, Calpine Corp.,= which is one of the companies that has signed a long-term deal with the st= ate of California, responded to the plan as saying that it "wouldn't be any= thing that Calpine would use." The company reportedly has finished three ne= w power plants since June 2001 and would not be enticed by the financing in= centive that the state is orchestrating. Further, the state's desire to ren= egotiate terms of the contracts is not a new concept. Ever since wholesale = prices began to drop earlier this year, the renegotiation debate has been a= fixture of state legislative and regulatory proceedings. However, since th= e onset of the talks, a good number of the generating companies have mainta= ined that re-negotiation would not be possible as they had already locked t= hemselves into deals with natural-gas suppliers.=20 Thus, one concern is that the apparent energy glut in California will disco= urage further development of new generation and renewable energy sources, a= t least in the near term, which could set the state up for another dangerou= s boom-and-bust cycle down the road. In addition, those companies that alre= ady have long-term contracts with the state (such as Calpine) may not be en= ticed by the financing incentive, and those companies that don't have long-= term contracts with the state will have no incentive at all to build new pl= ants in the state. All of this could create a situation in which California= has too much power over the next few years and then will find itself in an= other shortage situation 10 or more years down the line.=20 Freeman is apparently also pushing the state to once again make an attempt = to take over some of Pacific Gas & Electric Co.'s physical assets. Instead = of its transmission lines, however, the state now is examining its opportun= ity to buy the hydroelectric generation network (including dams and powerho= uses) owned by the state's largest electric utility. Note that under its re= structuring plan that has been submitted for regulatory approval, Pacific G= as & Electric Co. would split from its parent, PG&E Corp., and transfer gen= erating and electric and gas transmission assets to form three new companie= s, which would fall under the jurisdiction of the Federal Energy Regulatory= Commission (FERC). State regulators do not like this plan, and thus are se= eking a way to retain control over the generating and transmission assets o= f Pacific Gas & Electric Co. Putting the hydroelectric assets under the Sta= te Power Authority would keep the assets under state control.=20 Moreover, even though California is rethinking certain choices it made almo= st a year ago that directly entrenched the state government in the energy m= arket, state officials still seem to want to gain control over fundamental = parts of the state's energy infrastructure. Remember that Gov. Davis spent = much of the last year attempting unsuccessfully to negotiate deals with SCE= and SDG&E for the purchase of the utilities' transmission networks. Pacifi= c Gas & Electric Co. never was interested in selling its transmission asset= s, which it believed the state's offer grossly undervalued. One of the main= reasons that these attempts by the governor were unsuccessful was concern = by state legislators who argued the state was ill equipped to assume operat= ion of the complex transmission networks. Nevertheless, in addition to rene= gotiating the long-term contracts, the state is still pursuing at least the= hydroelectric generation assets of Pacific Gas & Electric.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to IssueAlert <mailto:IssueAlert@scientech.com<, with "Delete = IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D11/29/2001<;
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