What a difference a year makes.

As 2000 ended, wholesale power markets were subject to skyrocketing natural gas prices and a high-profile energy crisis in California. Power producers were licking their chops at what looked like high-price, high-volatility market conditions.

In 12 months, things have changed dramatically. Natural gas prices have dropped, huge amounts of generating capacity have entered the market, and much more is on the horizon. And, seemingly out of nowhere, the largest market participant collapses and virtually disappears from the market. To top it off, it appears that economic conditions and other forces are putting downward pressure on demand in the near term. Now, wholesale power market participantsare wondering: how low prices will go, and how long will they stay down?

In , RDI Consulting's annual national wholesale power price forecast for North America, we provide our answers to those questions. Perhaps more importantly, we examine the fundamental forces that are currently driving markets and discuss how things are likely to shake out.

In our view, 2002 will prove to be a pivotal year. While 2001 can be characterized by uncertainty, by the end of 2002, we should know a lot more about what power markets are likely to look like over the next five to 10 years.

The power plant construction boom is continuing. However, with projections of over-supply, cancellation notices are starting to mount. In the Outlook for Power 2001, RDI forecasts significant surpluses, even assuming less than half of all announced projects will be completed. In our view, most of those cancellations are related to projects that have not made significant progress in development and represent little lost investment. So, one prospect for faster price recovery rests with the willingness of developers to cancel projects in which they already have a significant investment at stake. There is some indication that this is starting to take place. But, by the end of 2002 we'll have a better feel for whether those types of cancellations represent isolated occurrences or the start of a trend.

Another hope for recovery from over-supply rests with the issue of retirements. Power plant developers moved forward with projects believing they could chase much of the older, less-efficient fleet of plants from the market. That hasn't happened yet. Moreover, there appears to be a movement among regulators to keep much of the existing fleet available in order to avoid California-like shortages in the future. So market economics may not be decisive.

On the demand side, recessionary forces will place downward pressure on electricity demand. But, in a shorter recession, that impact will likely be felt most in regions where industries are hit hardest. Perhaps a more important trend to watch in 2002 is whether-in light of the California crisis and recent market volatility-consumers will permanently change the way they consume electricity. Certainly, the crisis brought conservation issues to the forefront. But, more importantly, large customers have become aware of the fact that they are "in the energy business." There are significant savings associated with curtailing service during peak hours, or selling power back to the grid. Moreover, some customers are starting to take reliability into their own hands by building their own power infrastructure. In 2002, we are likely to learn a lot more about whether this is a short-term effect of the "crisis," or a long-term trend.

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