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Power-Plant Development: Raising the Stakes

Duke Energy’s Jim Turner and other utility executives weigh the odds on billion-dollar bets.

Fortnightly Magazine - May 2007

us to update them as often as every month on cost,” he says. In fact, Turner believes it may help in working with suppliers to let them know that the utility has to go back to the regulators every month to reexamine the cost. “It may have a salutary effect on helping keeping some of the prices down,” he says.

Richard Ward, senior director at Cambridge Energy Research Associates (CERA), says his firm is developing an index of commodity costs associated with power-plant development as a way to bring greater transparency to the process.

“What we are doing actually is leveraging our experience in a methodology we developed a year ago in the oil and gas sector,” Ward says.

About 18 months ago, CERA noticed that costs were starting to go up in the building of oil and gas projects. “What we found is when we asked executives about it, they couldn’t summarize it. They would jump straight down to the details about the price of steel or an engineering quote that they got,” Ward says. In response, CERA developed something like a consumer price index for oil and gas projects.

“So, it’s a portfolio of 28 projects from around the world, and every six months we go out and re-price, almost like an Ebay buy-it-now price for this entire basket of projects, and then we roll up the cost of all those things and index it back to the year-2000 cost.”

The IHS/CERA Upstream Capital Costs Index (UCCI), as it is called, which tracks nine key cost areas for offshore and land-based projects, climbed 13 percent during the six months ending Oct. 31, 2006, compared with an increase of more than 17 percent in the previous six months, according to press materials. The index could provide a high-level barometer to utility executives and regulators to look at what has happened in the cost situation in the last 24 months, he says.

Ward says he recently got the green light from internal management as well as some external power companies to start building the index with the same methodology, but for generation construction costs in North America. He predicts that the first results from the completed index will be available by late summer.

When asked about the benefits of using an index, one utility executive overseeing several construction projects said, on the condition of anonymity, that it could be helpful when dealing with the state-regulatory process. “It’s probably best to be as specific as you can with the costs related to your own project,” the executive said. It’s fine to show an index related to commodity prices, but you have to be prepared to show regulators what that specifically means with regard to the project they are looking at, he said. “As long as you can explain how such an index could impact a particular project and the cost of this particular project, I think that has a positive effect.”

And if utility executives do manage to contain the costs and build the right plants and manage the stress, the big bets