Enron Mail

From:eileen.ogrady@dowjones.com
To:eileen.ogrady@dowjones.com
Subject:FYI: The Ercot Story from 5/7 WSJ
Cc:
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Date:Mon, 7 May 2001 09:37:00 -0700 (PDT)

Charged Up:
Texas May Face a Glut
Of Electricity, but That
Won't Aid Rest of U.S.
---
Pride and Policy Make State
A Magnet for Power Plants
And an Island Unto Itself
---
A Wire Enshrined in Lucite
----
By Alexei Barrionuevo and Russell Gold
Staff Reporters of The Wall Street Journal

The Wall Street Journal via Dow Jones

While California struggles to keep its lights on and New York City braces
for
possible electricity shortages this summer, Texas utilities could soon face
the
opposite problem: a power glut.

Texas' wide-open spaces and relatively weak zoning and environmental rules
have helped make the Lone Star state a magnet for power-generation companies
as
it prepares to deregulate its electricity market next year. The result:
Texas'
electricity-production capacity this summer is expected to exceed its peak
power
demand by 11,000 megawatts -- nearly enough to light up New York City. By
the
summer of 2002, the excess may be closer to 15,000 megawatts, enough to
power 15
million homes. And with 27 new generating plants under construction, more
than
any other state, some power producers fear that overbuilding ultimately
could
send Texas' wholesale electricity prices into a tailspin.

All this sounds like good news for the electricity-starved East and West
Coasts -- but it isn't. That's because the U.S. is divided into three major
power grids -- with the West on one, the East on another and most of Texas
on a
third, with very few links to the rest of the country. In the world of
electricity, that makes Texas "an island with a couple of little footpaths
over
to it," says Larry Makovich, senior director for electric power research at
Cambridge Energy Research Associates, a Cambridge, Mass., consulting firm.

Some Texas utility executives argue that their state's island status is
principally an accident of geography. But no one disputes the fact that good
old
Texas pride -- and a deep-seated skepticism toward federal regulation --
also
played a role in shaping the state's grid. So, too, did a renegade utility's
desperate 1976 bid to save itself from a corporate breakup and the resulting
four-year legal battle, which the industry later dubbed the "Texas Range
War."

Texas' isolation isn't expected to end anytime soon. If Texas became fully
interconnected, its big utilities say, the state could become more
susceptible
to blackouts, if other regions drew off too much power. "From a reliability
standpoint, it would be a degradation to the Texas grid," says Steve
Schaeffer,
a senior vice president at Reliant Energy Inc., the former Houston Lighting
&
Power Co.

Moreover, the utilities estimate that building the transmission lines
needed
for a full connection to the nation's other grids would take at least three
years and cost Texas ratepayers about $600 million. They don't want to
invest
that much money to sell power to California or New York to ease what they
view
as temporary imbalances.

Some in the state also believe low rates and excess power could give it an
advantage in persuading businesses to locate there. "America will be shy
enough
electricity that this will be one of our greatest inducements for growing
Texas," says Matthew Simmons, president of Houston investment bank Simmons &
Co.

Texas is an extreme example of the haphazard way electricity grids
developed
in the U.S. Until the 1960s, most power plants were built near the customers
they served. Then, utilities began building larger, more-efficient coal and
nuclear plants, connecting them with their neighbors to ensure that if one
of
these big plants went down, there would be a backup ready to keep the power
flowing.

But the old-line Texas utilities, which have long benefited from the
state's
plentiful supplies of fuels such as natural gas and lignite coal, were
reluctant
to join in this wave of interconnections. Back then, in the mid- to late
1970s,
electricity outside Texas was generally more costly. And surrounding states
weren't planning big enough plants to back up the huge new ones Texas was
building to power its fast-growing cities and energy-thirsty petrochemical
industry. "There was no big money to be made by shipping power one way or
the
other over the lines," says Reliant's Mr. Schaeffer.

By confining their grid to Texas, state utilities also avoided oversight
by
the Federal Energy Regulatory Commission. Thus, FERC couldn't force Texas to
send power out of state in case of an emergency.

The state's dominant utilities -- Texas Utilities Inc., the Dallas-based
predecessor of what is now TXU Corp., and Houston Lighting -- went to great
lengths to ensure there were no interstate connections. The switches at a
hydroelectric plant on the Texas-Oklahoma border were wired to prevent power
from flowing between the states. Elsewhere along the border, a system of
relays
was installed to prevent unauthorized interstate transmissions.

Only one big utility didn't like the setup: Central & South West Corp., a
Dallas holding company that owned power plants in both Texas and Oklahoma.
In
1976, it faced a crisis. If it couldn't show that its plants in both states
were
interconnected, it ran the risk of being broken up under a federal law. The
law,
which barred holding companies from owning unconnected utilities in separate
states, was decades old. But, until then, it hadn't been strictly enforced.

On May 4, 1976 -- eight days before the Securities and Exchange Commission
was
set to consider the matter -- Central & South West took an extraordinary
step.
At 5:30 a.m., it sent one of its line crews to secretly rewire a substation
in
Vernon, Texas, near the Oklahoma border, allowing power to flow freely
between
the two states. For a few hours, the grids were connected by a minuscule
thread.
Later that morning, officials at Central & South West phoned other Texas
utilities to tell them the company was engaged in interstate commerce.

Texas' other major utilities reacted angrily. "The sons of bitches are
trying
to steal my lignite!" Texas Utilities Chairman Louis Austin bellowed,
according
to former Texas Public Utility Commissioner George Cowden, who recalls Mr.
Austin making the remark during a private meeting between the two men.

Around noon, Houston Lighting cut its system off from the rest of the
state's
utilities. Texas Utilities followed suit hours later. By day's end, the
state's
utilities had broken the grid into a half-dozen pieces.

That same day, one of Texas Utilities' chief lawyers, a 6-foot-6 former
college-football star named J.A. "Tiny" Gooch, dispatched one of his
company's
crews to disconnect the link Central & South West had made between Vernon
and
Altus, Okla. "They made it so it was physically impossible to [connect] it
again," says Mr. Gooch's son, Gordon, then a lawyer representing Houston
Lighting. The elder Mr. Gooch, who died in 1986, is considered the patron
saint
of Texas' electrical independence.

At an emergency meeting of the utility commission three days later, Mr.
Austin
of Texas Utilities expressed disgust at the prospect of having to burn Texas
lignite and natural gas to satisfy "Yankees," according to a transcript.
And, he
added: "I don't like federal regulations." (Mr. Austin died in 1997.)

A wire reputed to have formed part of Central & South West's brief
Texas-Oklahoma interconnection later was cut into pieces, encased in Lucite
and
given out as paperweights by Dallas law firm Worsham, Forsythe & Woolridge,
which represented Texas Utilities.

Alan Erwin, a state utility commissioner in 1976 who still has the
souvenir on
his desk, used the wiring episode as fodder for a 1979 novel, "The Power
Exchange," in which a winter storm cripples Northeast power production and
the
nation turns to Texas for electricity. Texas refuses to ship the
electricity,
fearful that other regions would drain it of "what little cheap fuel was
left."
Ultimately, Texas becomes a scapegoat and ends up seceding from the union.

In reality, the outcome was less dramatic. The grid conflict wound its way
through many courtrooms. Central & South West -- recently acquired by
American
Electric Power Co. of Columbus, Ohio -- lost almost every round. After about
four years, the utilities hashed out a compromise, at the urging of the
federal
government.

Rather than link the Texas grid to the East, so that electricity could
flow
freely across state borders through alternating-current cables, they agreed
to
build two direct-current lines. Operators could control the flow over these
bridges, which at peak capacity could carry a mere 820 megawatts. The
parties to
the deal, which included the federal government, agreed these links wouldn't
bring the Texas grid under federal jurisdiction. Today, Texas power
continues to
be regulated in Austin, not Washington.

"It's just a Texas thing," says Pat Wood III, chairman of the state
utility
commission and a recent Bush administration nominee to FERC. "We want
control of
our own destiny."

That independent attitude has extended in recent years to Texas'
business-friendly approach to deregulating its power industry. Unlike
California, with its stringent emissions and zoning rules, Texas has made it
quick and easy for power companies to locate their plants almost anywhere
they
can find a place to hook up to the grid. Last year, Texas completed a major
upgrade to alleviate bottlenecks on the grid, and it has six similar
projects
under way. Unlike most other states, it decided to charge grid users a flat
rate
to move power anywhere in the state, so they could put plants in low-cost
rural
areas, far from their customers.

Those policies, as well as projections that the state's electricity demand
would grow by a robust 3.5% a year, set off a flurry of power-plant
construction, beginning in 1998. Since then, $11 billion worth of power
plants
have been completed or started in Texas, and more are on the drawing board.

By contrast to California's approach to deregulation, which largely failed
to
bring new plants online, Texas' strategy "encouraged an overbuild," says Mr.
Makovich, of Cambridge Energy Research Associates.

Consider tiny Seguin in south central Texas, where Constellation Energy
Group
Inc. of Baltimore is building an 800-megawatt gas-powered plant in a former
cornfield. Fifteen miles to the west, Texas Independent Energy LP of Dallas
recently finished a 1,000-megawatt plant. About the same distance to the
north,
American National Power, a Houston-based unit of Britain's International
Power
PLC, is building a 1,100-megawatt plant.

If generators don't get cold feet, Texas is on track to have a capacity
surplus of 9% this summer and 11% by summer 2002, says Cambridge Energy
Research
Associates. That's in addition to the 15% surplus that most experts consider
an
adequate cushion. Some areas of the country, including parts of the
Southeast,
Upper Midwest, New York City and the West, are struggling with razor-thin
capacity margins. After factoring in a similar 15% cushion, the West has an
8%
capacity deficit and the Upper Midwest has a 4% deficit.

As a result, while electricity futures prices for summer are running at as
much as $400 per megawatt hour in the Northwest and around $100 in the
Northeast, Texas futures prices are averaging only $72 to $74 per megawatt
hour.

Calpine Corp. of San Jose, Calif., is making the boldest wager that
overcapacity and a lack of export possibilities won't sink Texas' wholesale
electricity prices. The company has six plants under construction in the
state,
two of which are expected to come on line next month. And it plans to add an
additional five plants over the next two years. Altogether, Calpine plans to
spend about $2.8 billion in the state, its largest investment outside
California.

"People from day one probably thought Calpine was crazy," says Darrell
Hayslip, a company vice president. "But so far, we are absolutely convinced
that
this is the right bet." He says Calpine's newer gas-fired plants are 40%
more
efficient than older plants in the state, a third of which are at least 30
years
old. Calpine expects that edge to force rivals to retire older plants, thus
keeping electricity prices from sagging.

Others aren't so sure. After initially planning new plants in Texas, Duke
Energy Corp. began to worry that the state was getting overbuilt. Last May,
Duke, of Charlotte, N.C., sold its 80% stake in a plant under construction
in
south Texas to Calpine. "We sized up the market early, and then realized too
many followers were doing the same thing," says Jim Donnell, president and
CEO
of Duke Energy North America.

If the electricity situation outside Texas grows too grim and too much
supply
sinks prices in the state, there could be "renewed pressure" for Texas to
study
interconnection options, says John Stauffacher, vice president for
regulatory
affairs at Houston-based Dynegy Inc., which has 1,000 megawatts of capacity
in
Texas.

Calpine, for one, wouldn't mind sharing Texas power with the East and
West. "I
would love to be able to wheel power from Texas to California," says Mr.
Hayslip. But, so far, the Texas utilities haven't budged in their opposition
to
exports.

A few generators are trying to find the best of both worlds. Tenaska Inc.
of
Omaha, Neb., is building plants at the border between the Texas and eastern
grids. Though utilities aren't allowed to be connected to both grids at
once,
the plants are designed to allow the company to switch between grids as
demand
and prices warrant.

In rural Grimes County, about 90 miles outside Houston, Tenaska plant
manager
Frank Carelli boasts that his 830-megawatt plant could disconnect from one
grid,
connect to the other and be back at full power within an hour. A similar
Tenaska
plant is slated to begin operations this month in Rusk County, near the
Louisiana border.

WSJviaNewsEDGE
:PAGE: A1
:TICKER: CEG CPN DUK IPR REI TXU IPR.GB
:SUBJECT: EUTL STGO CA EC MD NC TX ENGL WSJ
Copyright © 2001 Dow Jones and Company, Inc.
Received by NewsEDGE/LAN: 5/7/01 1:22 AM