Late for dinner? Blame Enron. Go ahead. It may seem unfair to blame another for something you did wrong, but the post-Enron political climate makes it easy to do. California politicians already are hip to this strategy. But, blaming all of California's woes on Enron is less than politically honest and may have far-reaching effects on power markets.
Recent data confirms that in the wake of the Enron collapse and subsequent revelations of industry accounting and trading scandals, the power sector largely has curtailed expansion plans. According to Platts NEWGen database, over 150,000 MW now have been permanently cancelled or postponed by North American power developers. The RDI Power Outlook forecast for the 2nd Quarter 2002 concludes that despite the cancellation trend, shortages are not likely for the foreseeable future. Rather, the trend represents one step toward a rationalization of power markets. In fact, 133 GW of new capacity are still under construction and moving forward. Also, many of the tabled projects represent postponements and are still viable projects waiting for a better time to enter the market.
But, California's political climate is forcing players there to take actions that aren't necessarily rational. California recently has seen a spate of cancellations despite the strong price signals sent to developers during power shortages in 2000 and 2001. Almost 15,000 MW set to be built in California have been cancelled in the last six months. Some of those projects already were under construction.
Developers' expansion plans clearly were over-exuberant and forecasts of over supply have contributed to project cancellations. But the acceleration of cancellation announcements in California also is related to political and regulatory risks in that market, which have more in common with developing countries than other U.S. regional markets. Developers have come to perceive California's playing field as less than level, and are choosing to go play elsewhere, or wait this one out.
New coal price levels are down, but above the prices realized in the 1990s. Perhaps it can be demonstrated that the supply of coal is much more in line with its demand, and that coal mines are producing at levels much closer to aggregate mine capacity.
While it might not be politically timely to do so, it should be pointed out that despite California's problems, other states continue to deregulate. In fact, markets recently opened in Texas and Ontario. While none of these jurisdictions are the paragons of retail competition envisioned by proponents of deregulation, it's hard to classify them as utter failures.
Moreover, deregulation has spurred innovations in the market. More efficient, cleaner power plants have been introduced. Real-time pricing has made customers more aware of the value of electricity, spurring conservation measures. Generators are more focused on profits and are finding innovative ways to improve plant availability and output, which increases the level and reliability of supply. By making a commodity of electricity, market participants have developed legitimate, complex risk management instruments that facilitate trading and infrastructure investment. All of this makes markets deeper.
Knee-jerk political reactions that impact all players could have severe consequences. Many of the innovations gained in energy markets could be at risk. As one trader told me, "You can still make a profit in this market if you're smart. But, if you try to do anything clever, you're immediately under suspicion." This environment could have a chilling effect on market innovation.
Any malfeasance by power market participants should be investigated and punished. But, politicians should avoid the temptation to latch on to the easy sound bite, or to throw the deregulation baby out with the Enron bathwater. "It's Enron's fault" may be an effective political slogan in the short-term. But, it's unlikely to have the staying power of, say, "The buck stops here."
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