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Dynegy: Free Market Key to More Generation

Dynegy: Free Market Key to More Generation

Rising temperatures again will mean growing tightness in power markets across the country this summer. While industry players have more experience dealing with shortages and constraints, a truly efficient market with ample power supply depends upon regulators, according to industry executives.

Dynegy President Stephen W. Bergstrom has strong opinions about California, its need for more generation, and why there is reluctance by industry to step up and provide it. He expects the state to be about 10,000 MW short this summer. "We ran more in the first quarter of this year with our [California] generation than we've run all last year in the wintertime. So we're starting to see some signs of demand growth out there and no new plants being built as well.

"We've been telling the regulators in California for three years that if you continue to hold price caps in California, people will not build new plants out there, and you're going to be short. Well, guess what. Now we're getting calls from the governor and calls from the legislative guys in California saying, 'Come out and talk to us. We're really concerned about this short market in California that we're starting to see.'"

For the rest of the country, excluding the New England states, where so many generation projects are planned or under way that the market will be --- at least theoretically --- long on generation, the power market by 2003 will be 60,000 MW short of peaking capacity, Bergstrom said. That prediction assumes all the announced plants outside of New England get built, no coal/nuclear plant shut-downs for four years, 3% annual demand growth and 15% reserve margin.

"Even if we're off by 50% and it's 30,000 MW instead of 60,000 MW, it's a significant number," Bergstrom told attendees at the Ziff Energy Group's North American Gas Strategies Conference in Houston last week. "At 5% demand growth that's 35,000 MW of new plant that needs to be built every year just to keep up with demand, let alone make up for some of the shortfall for no plants being built in the last three years."

Dynegy plans to install 1,000 MW of generation this year and another 1,600 to 1,800 MW next year. "So it takes 35 Dynegys, if you will, doing what we do, just to keep up with demand growth at a 5% demand growth rate. So this is not something that can be easily solved in a year or two. These are plants that take two to three years to build and develop, even if you get permits, so it's a significant issue."

For this year the North American Electric Reliability Council's (NERC) summer assessment still is in the works, and the season's weather remains to be seen. But the market "In each of the last two years, the load versus capacity situation in ECAR was tight but manageable, and that's what we're expecting again in 2000," said Brantley H. Eldridge, executive manager East Central Area Reliability Coordination Agreement. "Basically, at time of peak we're expecting the situation to be tight again in ECAR." Over the last couple of years, the peak reserve margin in ECAR has gotten down to around 10 or 11% when previously it was around 15%.

The Mid-America Interconnected Network (MAIN) expects to have another 2,900 MW of generation available this summer due to new plants and facility upgrades, said spokeswoman Jackie Olson. "Overall, we expect improved reliability over the next couple of years." All of the region's nuclear plants are expected to be on line this summer. "We've been able to meet the peak demand over the last several summers. [Some customers] have had to employ some demand-side management efforts, but we've been able to meet peak, and we expect to be able to this summer." The summer 2000 outlook for MAIN differs from the reality of 1998 when a number of large nuclear plants were off line. However, the region's summer assessment still is a week or two away.

NERC said its summer assessment won't be available until the latter part of May, and a spokesman would not comment on the summer outlook for power shortages.

Bergstrom also is concerned with the function of ISOs and their setting of prices. Yes, ISOs are necessary, he said, but they should function only as traffic cops.

"We're in the worst of all worlds today where we've got one foot in regulation and one foot in deregulation trying to push this market in a period when we've got some supply-demand issues. We think [FERC] Order 2000 was a good try but probably won't work, because of the state-by-state issues that are there. We've got to get the states committed to making this thing happen. IOUs must divest and remove generation from the rate base, and the ISOs must focus on system operations and reliability."

Joe Fisher, Houston

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