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Fortnightly Magazine - January 15 1997

Wholesale power transactions continue to grow. During 1995, utilities spent more than $58 billion on bulk power and, for the first time, investor-owned utilities spent more for electricity ($30 billion) than for fuel ($29 billion) to generate it. The reasons for the expansion can be traced to more aggressive marketing strategies by electric utilities, an increasingly competitive group of independent power providers, and the presence of power marketers as a formidable and growing group of power traders.

Expansion in wholesale markets is hardly new. Transactions have been increasing steadily for the past 20 years. However, today, a larger portion of power transactions are shorter in term than in previous years. Liquidity in wholesale power markets as evidenced by the explosion in trades by power marketers (nearly 70,000 gigawatt hours in the third quarter of 1996) and an increase in the number of non-requirements transactions among investor-owned utilities (up 6.6% in 1995) are clear signs of the changing dynamics of today's power markets.

Most of the increase in bulk power transactions in recent years has come from investor-owned utilities. Since 1990, power purchases by IOU's have grown by 56% (em 768,000 GWh in 1995. Today, power purchases by IOU's account for nearly 29% of all electric operation and maintenance (O&M) expenses (em up 31 percent since 1990.

In addition to the rising number of IOU bulk transactions, the growth in non-utility generator (NUGs) power sales continues to increase but is beginning to slow. Purchases of NUG power topped 222,000 GWh in 1995 (em up only 6.3%. During the past 5 years, NUG electric sales have increased by more than 92%. The majority of NUG power (98.5%) is purchased by investor-owned utilities accounting for just over 46% of their cost of wholesale electricity.

The combination of contract buy-outs, high reserve margins, and a new emphasis on providing competitively priced electricity is slowing market growth. However, another more subtle phenomenon is on the rise (em the evolution of merchant plants, a new breed of generating capacity. Merchants will change markets as we know them today.

There are a number of new merchant power projects already planned. In Massachusetts, nearly 1,000 Megawatts (MWs) are planned. These new facilities are being constructed without guaranteed long-term contracts. In addition, four projects (800 MWs) have been announced for development near the Powder River Basin coal fields in eastern Wyoming. In addition to new project plans, a number of existing plants are being taken out of rate base with the intention to compete in open markets. Altogether there are well over 3,000 MWs in existing plant conversions and new plant announcements.

With adequate reserve margins in most regions of the country, this new trend for market driven generating capacity is a primary reason that aged, inefficient, high-cost, dirty power plants will find the playing field increasingly unfriendly in future

competitive markets. The results of RDI's most recent study "Power Markets in the U.S." indicate the retirement of uneconomic operating capacity could reach as high as 10% to 15% during the next ten years.

We cited rising activity by marketers just