NV Halts Dereg; NY Sees Soaring Prices; PJM in Grid Revenue Battle

April 25, 2001

NV Halts Dereg; NY Sees Soaring Prices; PJM in Grid Revenue Battle

Nevada dealt deregulation a major setback last week and the New York Independent System Operator warned that, without new power supplies and improvements in the transmission grid, wholesale power prices in the summer of 2005 could run 46% higher on average than last summer. Competition in the Pennsylvania-New Jersey-Maryland market was seen threatened by a fee levied on power marketers.

A new Nevada law signed last Wednesday (April 18) by Gov. Kenny Guinn repealed that state's deregulation and put a moratorium on selling any power plants in the state. It also put on hold Sierra Pacific Resources' proposed acquisition of Portland General Electric.

Walter Higgins, CEO of Sierra Pacific Resources, called the action a "bold move" by the Legislature and the Governor since it assures that the state's two major electric companies can recover all of their future costs. He said this focuses "on the real problem that threatened every consumer and business in Nevada.

Concurrently, Sierra Pacific, holding company for Nevada Power and Sierra Pacific Power, suspended its first quarter dividend as a means of conserving cash, citing the region's continuing high wholesale power costs and uncertainty among policymakers. Senior vice president & CFO Mark Ruelle said the dividend policy will be reviewed at the May 21 board meeting, adding that, while suspension of the payout will save "less than $20 million . . . every dollar counts at times like this."

Moody's Investors Service said it would continue its review of the parent company and its two utilities but did not consider the dividend suspension "to be material enough to warrant a rating action at this time."

Along with potential cash flow issues related to the soaring wholesale power costs Sierra Pacific faces the delay of its proposed power plant sales, estimated at $1.7 billion for all 7, and the likelihood its will not be able to complete its proposed $2 billion takeover of Portland General Electric from Enron.

In an annual assessment of New York electric markets, David Patton, an independent advisor to New York-ISO reported that the 46% increase in the price of electricity would occur even with the addition of 1,500 Mw of new generating capacity since last summer.

"Over the past five years, barriers have prevented meaningful new investment in generation and transmission facilities," he said and added that the higher prices are "largely the result of an increased frequency of price spikes." He cited as an example the June 26, 2000 price spike, one of two last summer, that accounted for 20% of the average energy price for June in eastern New York. About 95% of the state's wholesale power is traded an the day-ahead market where utilities tell the ISO how much power they need and what they are willing to pay for it.

Lacking new power supplies and improvements in a congested transmission grid, "markets will grow increasingly vulnerable to substantial price increases," Patton stated in his report.

In its March report, New York-ISO predicted that, without new power generation, prices would rise by 10% to 15% across the state and 15% to 20% in the New York City region by 2005. That report did not single out prices in summer months. CEO William Museler, said that the ISO forecast was "conservative" by intent but Patton's higher prediction was "realistic."

The PJM battle is based on a fee levied on power sellers throughout the Northeast. Designed to encourage more power plant construction, it is levied against marketers who do not have their own power plants or long-term contracts to buy power from other suppliers. But Marc Manly, managing director of law & government affairs for New Power, a retail power seller, said that the fee is "a competitively non-neutral charge (that) really threatens the competitive market" since the smaller power operators do not own power plants and many do not have the long-term contracts.

PJM Interconnection has asked the Federal Energy Regulatory Commission to make it easier for those smaller operators to compete. Its reliability committee has proposed dispersing revenues from the fees to non-generating power sellers on the New England grid as a means of promoting competition.

Manly suggested that all grid users be charged the same rate for using transmission lines and using some of the revenue for loans for building new power plants. However, PPL opposed the PJM plan in a letter to FERC, saying: "PJM is now proposing to change this system. It asks the Commission to approve a complex scheme by which most of the capacity deficiency charge revenues is distributed back to (load-serving entities) that have provided no capacity beyond that necessary to support their own obligations."

But wholesale market problems are not confined to this country alone. A new report warns that a serious electricity shortage similar to California's power crisis looms for millions of Europeans. The report on 17 wholesale electricity markets by ICF Consulting advised that several Nordic countries face a severe power shortage next winter if hydro levels do not return to normal. It added that such shortages will create extremely high prices on the Nord Pool and, possibly, regional blackouts.

"The Nord Pool spot market will see significant price spikes if a cold spell combined with normal or below-average hydro conditions occur," noted managing consultant Neil Cornelius. He pointed out that incidental price spikes already occurred under favorable conditions as cold weather drove up demand and a submarine cable linking Scandinavia with continental Europe tripped.

"We expect to see price spikes in the hundreds or thousands of Euros/Mwh," he added. "We've seen this in the U.S. and there is no reason to believe that it can't happen here. My advice to consumers in the Nordic countries is to lock up your retail electricity rates now, before it's too late."