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Generation Roundtable: Power Flux

Generators struggle to plan for the future as they cope with an unstable present.
Fortnightly Magazine - December 2003

Generators struggle to plan for the future as they cope with an unstable present.

When the acting administrator at the Environmental Protection Agency (EPA), Marianne Horinko, signed the EPA's "routine replacement" rule on Aug. 27, 2003, she proclaimed that the new approach to Clean Air Act regulation would "provide … power plants with the regulatory certainty they need."

Then, almost immediately, any illusion of regulatory certainty went up in smoke. A platoon of lawyers from 13 states and two dozen cities marched into federal court and filed suit against the EPA, challenging the legality of its new rule.

"The situation is just as uncertain as it ever was," says Chuck Wehland, a partner with the Jones Day law firm in Chicago. "I think it's doubtful that the routine maintenance and repair rules will survive the legal challenges."

Such uncertainty typifies the state of limbo in which power generators find themselves today, with evolving environmental regulation adding to the uncertainty over a wide range of factors. Consider:

  • The U.S. economy is in flux. Third-quarter 2003 GDP growth topped 7.2 percent, yet the consumer confidence index declined in each month from May through September. The economy is on shaky ground in a jobless recovery, accompanied by the reality of war and the threat of terrorism. All these factors converge as we enter an election year.
  • Investors maintain a decidedly cautious stance on all things related to power-with good reason. Write-downs, defaults, and foreclosures have become all-too-familiar occurrences. The latest: Reliant Resources announced a $1 billion charge-off on its wholesale segment, after suffering $11.5 billion in equity impairments in the previous 12 months.
  • Power market restructuring momentum has slowed, but the Federal Energy Regulatory Commission (FERC) continues to press its case for standard market design at the regional level. Amid ongoing wrangling, regional transmission organizations (RTOs) stumble forward in fits and starts. The Midwest ISO, for example, withdrew its energy markets tariff in mid-October so it could focus on reliability concerns. Merchant power companies, meanwhile, die on the vine.
  • Companies seeking to liquidate non-core assets find themselves in a field cluttered with sellers, but scarce few buyers. Thus the bid-ask spread on power projects-particularly merchant plants-remains a yawning chasm.

Such unsteady ground makes a poor platform for planning the country's power-supply future. Nevertheless, as the Fortnightly learned in a recent series of interviews, companies are moving forward by carefully addressing the issues within their control. In preparation for new environmental regulations, for example, power companies are assessing their assets and investing in technology development. Write-downs and charge-offs, moreover, are part of a painful but ultimately healthy balance-sheet strengthening exercise. And liquidations are yielding opportunities for companies with the appetite for acquisitions. To analyze the major trends in generation strategy planning, the Fortnightly consulted utility leaders for their perspectives on the subjects of market forecasting, asset sales, environmental legislation, and energy technology and distributed generation issues.

Forecasting in Roller-Coaster Markets

The alpha and omega of power resource planning is the ability to forecast load changes. Accordingly, raging volatilities in economic and regulatory trends, plus terrorism and

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