 To the Point: Letters to the Editor - By Bob Bellemare Daily IssueAlert 5/24/2005 Free  Dear Readers: Tomorrow, UtiliPoint® will introduce a new format for the IssueAlert®. We are consolidating all of our Alerts into one publication that will be distributed three times a week. We'll be bringing you the analysis and insight of a variety of industry specialists providing a fresh perspective on the energy industry's most important issues. For the past three years, Ken Silverstein has covered just about every angle of this industry. With a keen analyst's viewpoint, he wrote articles that gained the respect of professionals from all sectors in this field and, at the same time, appealed to a broader audience. We want to thank Ken for giving our readers such high quality commentary and analysis. We know you have come to depend on us for timely and accurate coverage of energy industry issues. In our new format we will continue to provide you with interesting, informative and market leading analysis. Sincerely, Bob Bellemare President and CEO A Tailwind is Blowing 5.23.05 I enjoyed reading this article. You clearly illustrate the importance of the Federal Production Tax Credit to the wind energy industry—2500MW of wind turbines expected to be installed during the full year 2005 with the PTC in effect compared with 400MW in 2004. Most of 2004's turbines were installed in the last three months after the PTC was reinstated. Perhaps 50MW were installed during the first nine months when the PTC had not been re-extended. I often hear it said that the wind industry is “mature.” I wonder how an industry that depends on subsidies for its very survival can be mature. The PTC is now worth $19/MWH. If the 2500MW installed this year produce at an average net capacity factor of 30 percent, and all these turbines qualify for the PTC (probably only +/-95 percent do since turbines owned by municipal and other non-taxpaying utilities do not qualify), the PTC results in forgone taxes in excess of $100 million per year for 10 years to the owners of turbines installed this year alone! No wonder turbine manufacturers want to see it extended. Perhaps your readers would like to know where these manufacturers hail from. Vestas American is the U.S. arm of the Danish company Vestas. Of the top 10 wind turbine manufacturers, only one, GE Wind Energy is a U.S. company and most of their units have a large German content. One company is Japanese, one is Indian, and the rest are European. I guess if we buy our oil from the Middle East it is only fitting to buy wind turbines from Europe. One would think that someone, the U.S. government perhaps, should have some interest in seeing the cost of wind-generated electricity come down. However, the Department of Energy “invests” only about $20 million per year to develop new technology that might reduce the cost of wind turbine technology and most of that is aimed at modest improvements to existing turbine designs. Unfortunately, by subsidizing existing wind technology and clearly making the installation of existing wind turbines economically viable, the PTC takes away any incentive for project developers, utility companies, or others to try new, prospectively lower cost, but unproven wind technology. Why take the technology risk? This situation has been created by a number of factors, including subsidies throughout the energy chain, which wind advocates regularly decry, as well as by the PTC, which is supposed to “level the playing field.” In the United States, these subsidies mostly arise from the federal government. If new, lower cost wind technology is to be developed, do not look to the private market in the United States to do it. Private investors will not take the risk. While I cannot provide any insight into the “who should pay for developing new technology” question, the path to low cost wind energy is clear. It begins with the recognition you provide that 80 percent of the cost of an installed wind project is embedded in the turbine. Further, approximately 80 percent of the cost of wind energy per kWh is embedded in the installed project cost. This means two-thirds of the kWh cost of wind energy is the wind turbine. It doesn't take much imagination to identify a starting place for cost reduction. What is the answer? The title of your article says it all—A Tailwind is Blowing. As the Irish knew long ago, it is better to have the wind at your back than to have it hitting you in the face. This, however, is a lesson that existing wind turbine manufacturers will probably never learn—NIH—a mind is a terrible thing to waste. Lawrence W. Miles The Wind Turbine Co. With regards to the viability of wind power generation as discussed in this article, I thought your story was an excellent assessment of where wind power generation is today. While there is still a lot of oil and gas left in the world today, there is seemingly increasing evidence showing the age of cheap hydrocarbons may be drawing to a close. Which indeed all adds up to "a strong wind is blowing": from diverse sources toward a renewed interest in alternative energy sources Your bottom line is quite right: technological developments over the past two decades (mostly in Europe) make wind one of the best power options currently available. You also wrote, "Meantime, the intermittency of wind means that most utilities have to keep other fossil-fired generators on call.” Indeed, the technological application of wind power generation has been inefficient primarily because of wind's “on/off again” nature, which has meant that output has fluctuated over time. In simple fact, this was the biggest single drawback to wind power generation. Indeed, shortly after the East Coast blackout of the summer of 2003, Alan Greenspan characterized the entire electrical generation business as "an industry without inventory." However, that was true. A very recent development—embodied in a new type of battery—called the Vanadium Redox Battery Energy Storage System (VRB/ESS) is just being commercialized, which efficiently stores mass amounts of electricity. VRB/ESS doesn't care how power is generated, so we're also talking about applications for traditional power generation, such as providing demand management for blackouts and brownouts (peak shaving), backup generation for telecoms, as well as alternative energy applications like wind and solar. Looking from a consumption viewpoint, when there is wind, demand may be quite low. And when demand is high, there may be little or no wind at all. Matching supply—the availability of wind with peak electrical demand times—with end user demand is the key. But this could only be done if it were possible to effectively store mass quantities of wind-generated electricity for later distribution when demand is high. By combining an VRB/ESS electrochemical energy storage facility with wind generation it is now possible for this alternative power to be operated over a full range of acceptable speeds as power is first fed to the storage system, which will then smooth and control the output voltage, power factor and current. The batteries can be recharged indefinitely and have almost instantaneous “flow-through.” Importantly, the batteries employ a “green” technology, and use conducting plastic electrodes that do not contain heavy metals, unlike other conventional systems that rely on toxic substances such as lead, zinc or cadmium. But please don't take my word for all this. You may wish to download a recent Fraser Mackenzie research report, which concluded in part: “An efficient storage technology for large amounts of electrical energy provides the basis for a complete change in the thinking surrounding power generation and use. VRB-ESS takes the solution into the scale of small power generators and individual users, while RGN-ESS has the potential to turn the power industry upside down. The result would be a world in which hydroelectricity and other Kyoto-friendly technologies (wind, nuclear, etc.) can be allowed to dominate the power generation landscape.” Wind power may have been overblown, but could a cool breeze be on the way? Kevin Cullen Bangkok
W.K. Davis AEP-CSW Ruling: A Slippery Slope 5.12.05 PUHCA's onerous and expensive regulatory requirements do scare off potential investors in the utility sector. By acting as a deterrent to investment, PUHCA has a difficult-to-quantify but very real impact on the cost of capital that is available for utility infrastructure projects, something PUHCA advocates conveniently omit from their consumer protection rhetoric. The argument that PUHCA reform would allow utility managements to gamble away ratepayer funds is absurd. For one thing, private utilities are owned by their shareholders rather than their customers (though frequently customers are also significant shareholders). Simply buying monopoly service does not and should not confer any right on customers (sometimes also known as ratepayers) to dictate how a privately owned business deploys surplus capital. Second, if customers do end up paying for the sins of utility managements, it's because state regulators lack the courage to make shareholders bear the consequences of bad management (think California's energy crisis). Even so, it's not clear how utility shareholders benefit when a utility gets larger. Most of the projected savings are traded away to consumers in return for merger approval. Unlike competitive industries, swallowing a retail competitor doesn't improve pricing power because most mergers don't involve overlapping service territories and in any event prices are strictly regulated. Lack of service overlap also limits opportunities to leverage economies of scale. In fact, mergers often end up destroying shareholder value rather than enhancing it. Finally, it's important to note that Berkshire Hathaway's appetite for investment in the utility sector is a very special, very unique case. Berkshire's principal motivation for investing in the utility business is its steady, predictable, and largely protected cash flows at very attractive risk-adjusted returns on capital, which can either be reinvested in similarly protected utility assets or in other businesses run by managements that have specific competence and proven track records in those industries. It's a much different business model and a much different investment approach from that used by more typical utilities, which have had terrible results when seeking growth in unregulated and unrelated ventures. Jack Ellis As a lawyer in the AEP/CSW case, the purpose of the hearing was to determine whether AEP and CSW were operating as an "integrated" system, and the ALJ's very correct finding on the evidence is that they are not. Oh, financially they are just as integrated as Sam Insull's utility empire was; you may have read that his utilities and holding companies all went down financially together. Ken Lay may be unpopular, but Sam Insull had to flee the country for his life. He was later acquitted of any law-breaking because, pre-PUHCA, there were no laws to protect utility investors and consumers. There were 53 holding company bankruptcies, and 23 bank loan defaults. Hundreds of thousands of utility investors lost their life savings. States, of course, still have no control over inter-state utility holding companies, and with PUHCA gone, no entity will have any utility financial regulation over such giants. In addition, with PUHCA gone, the oil companies, which seem to have a lot of cash on hand right now for some reason, can buy up AEP, or Entergy, or Exelon/PSEG. An electricity/natural gas/oil cartel is just what this country needs, don't you agree? And FERC has deregulated electric wholesale generation because there is increasing competition. I used to be the assistant general counsel for electric rates and corporate regulation at FERC, and then I worked for 17 years on regulatory matters for an international law firm whose clients build power plants around the world. Because I know what's coming with PUHCA repeal, I left the firm and have been volunteering at Public Citizen since 2003, fighting to save PUHCA. In addition to the SEC PUHCA cases, I've recently filed a brief challenging FERC's market rate scheme as illegal under the Federal Power Act and unsanctioned by any court that has actually analyzed its legality. You're too influential, Ken, and smart for me not to have responded. Lynn Hargis Just a modest correction to your standard good article today dealing with the recent SEC administrative law judge's decision about AEP's merger with CSW: The recently U.S. House-passed comprehensive energy legislation, H.R. 6—Energy Policy Act of 2005—does contain repeal of the Public Utility Holding Company Act (PUHCA). See Section 1263 of this bill, in its Title XII - Electricity, at its "Subtitle F—Repeal of PUHCA," as passed by the House April 21, 2005. Terry Adlhock Wisconsin Energy Corporation Calpine Calls Bankruptcy Rumors “Unfounded” 5.11.05 Your Calpine article was excellent and I read it with great interest. As with all your articles, you make the difficult concepts understandable and most interesting. I would question one of the initial ideas and that is that there was a surging demand in the 1990s. There is an implication that industry forecasts of needed generation led IPPs and their investors down a garden path. As a forecaster, planner and operator during that era, I didn't see the surging demand or universal expectation of capacity shortages. I do remember two common expectations of the time that played into the current situation: First, prices were going to go up. Someone would have to pay more for electricity and IPPs would become profitable at $35/MWH. This was the time of $20/MWH average system lambda and $2.00/MMBTU gas. Second, the new clean efficient gas plants owned by IPPs would cause the dirty inefficient coal plants run by monopolies to shut down forever. Wholesale electric market prices have increased substantially above the $35/MWH level but rather than IPP profits they provide profit for the gas providers. Coal plants, with a reasonably priced domestic fuel and having been fully depreciated, remain viable and lower cost alternatives to the IPP plants. It may well have been that IPPs believed in—and sold their investors on—their ability to raise electricity prices with their fuel prices staying low and the inability of incumbent generation to compete. The same can be said of dot coms and dark fiber. Thank you for your excellent publication and I look forward to each issue. Jeff Williams In your article about Calpine, you refer to the "surging electricity growth rates" in the 1990s. While there may have been some kind of "voodoo economics" perception of "surging electricity growth rates" on a national basis none existed. Last week I wrote you about how the coal industry blew it by playing ball with the electricity generation industry in putting off and off re-enactment of the Clean Air Act. Looking at growth in electricity generation from 1973 to 2004, the compound growth rate in electricity generation was about 2.4 percent p.a. The growth rate between 1992 to 2002 was about 2.3 percent p.a. suggesting that growth in the 1990s was not especially out of line with historic rates. So, where did this myth about "surging" growth rates come from? The confusion was the difference between making up for lack of investment during the 1980s and some kind of "new metric" that electricity growth rates were "surging." Restructuring, as you rightly mention, had a lot to do with this as well. What started out as a fairly conservative project finance structure, bolstered by long term contracts for electricity sales and fuels, transitioned into a highly risky merchant structure. In the mid-1990s the banks were falling all over themselves to finance power deals. The bonuses and success fee structures blinded most to the fact that the train was headed straight to a bridgeless canyon crossing. Calpine, in a sense, is a victim of its own sensibility. On one hand, they bought into the myth of the infallibility of merchant power too much. On the other hand, they were conservative about finance. If I recall correctly, Calpine used their own balance sheet to support power project development more than most in the industry. Therefore, Calpine is struggling under the burden a lot of debt it cannot service now that the merchant power bubble has burst. I am not clairvoyant enough to guess whether or not Calpine will seek protection of the bankruptcy laws, nor am I an insider, so I haven't a clue as to their financial strategy. My guess is that they are under a lot of strain, but in the end the banks will not want to own a bunch of marginally sustainable generating assets, so the lenders, bondholders, etc. will be grudgingly flexible. Zach Allen Pan EurAsian Enterprises Ruckus Surrounds Coal Rail-Transport System 5.10.05 Your article regarding the impact of rail transportation constraints and costs on coal-fired generation was timely for several reasons: IssueAlert should consider covering the debate that will arise from newly drafted legislation affecting all Class I rail shippers, including utility coal shippers. Recently, draft legislation under two very similar bills was introduced by bipartisan groups of 14 House sponsors (HR.2047) and 10 Senate sponsors (S.919) that calls for modernization of U.S. rail statutes due to the drastic consolidation of Class I rail carriers over the last 25 years. Looking at it from a practical standpoint, due to consolidation and Class I-imposed paper barriers upon spun-off short-line railroads plus pro-rail federal regulatory policy, major commodity shippers (e.g. coal) at best may have two service providers in the western U.S. and two in the eastern U.S. if they have any access to rail competition at all. A significant portion of U.S. shippers have no alternative mode of transportation and have only one Class I rail carrier available to transport their product (e.g. coal for their generating stations) from origin to destination. If there were a similar analogy in the electric industry, imagine what kind of national political furor would exist if only two utilities served the western U.S. and two utilities served the eastern U.S., and then they claimed revenue inadequacy, required continuing federal protection of their existing anti-trust exemptions, and maintenance of the status quo of favorable regulatory oversight. That situation is approximately what you have in the "deregulated" rail industry. The draft legislation seeks to recognize the obvious evolution of the industry and secure solutions that would provide improved service, more competitive costs for customers, and infrastructure financial support for Class I's and even shippers where increased competition would result from the infrastructure improvements. All the preceding modernizations should increase rail traffic, improve long-term rail revenues, lower shi costs, boost the economy, increase rail industry jobs, and end a long era of special protection for Class I rail carriers that is no longer consistent with the rail industry's structure. Given the nation's overwhelming resources of economically recoverable coal and need for 50 percent of the electric generation from coal-fired boilers for years to come, Class I's should find it harder to fight the future. IssueAlert would be wise to cover the debate. Barry Johnson Coal Supply, Principal Engineer Xcel Energy Opening Letter: To the Point 5.9.05 I note you recently repeated the oft made claim that increasing U.S. motor vehicle fuel efficiency will decrease our dependence on Middle East oil. In normal markets, reduced demand leads to lower prices and the high cost producers are forced out. Since Middle East producers (especially Saudi Arabia) are the world's low cost producers, this would tend to increase, not decrease, their market share. But the international oil market is controlled by a cartel, OPEC. If we reduce oil demand, normally Middle East producers (especially Saudi Arabia) will reduce output to help OPEC support prices, which leads some to believe that reducing oil demand will be a successful strategy, long-term, for reducing dependence in Middle East oil production. However, should Middle East producers choose instead to increase market share, then the normal rules of economics become operative. For example, in December 1997 Saudi Arabia grew tired of being virtually the only oil exporting country that was reducing output to maintain oil prices, while other OPEC producers cheated on their quotas and non-OPEC producers like Mexico and Norway increased production. So Saudi Arabia increased production and world oil prices dropped by 30+ percent in seven months. It took a little over a year, but oil producers saw they needed to cooperate with Saudi Arabia. OPEC members, especially Venezuela, promised to stop cheating on their quotas. Mexico and Norway agreed to restrain the growth in their exports. OPEC reduced output and oil prices rose. Informed sources reported that Saudi Arabia had two goals when they announced they were increasing their oil production in December 1997:
Producers, whether national oil companies like Petroleos de Venezuela or investor-owned oil companies like ExxonMobil, reduced their investment in oil exploration and production. Then, when demand increased, they were not in a position to return to former production levels, much less increase production. But Saudi Arabia, which maintained its oil production infrastructure, was able to fill the void. That is how Saudi Arabia has become first among equals in OPEC in determining oil production levels and world oil prices. Thus, a strategy to decrease U.S. dependency on Middle East oil based solely on decreasing oil demand will only work to the extent that Middle East producers, especially Saudi Arabia, will allow our strategy to succeed. Ben Ziesmer It certainly would be nice if Americans could look down the road a little further and our legislative and executive government branches could act more progressively when it comes to energy efficiency in this country. I've lived in Central Florida all my life (47 years) and it seems the roads are filled with gas-guzzling vehicles such as the V8 SUVs, hybrid trucks, and luxury cars, reminiscent of the 1960s and 70s. A trip to Europe recently gave me an eye-opening comparison to how different we think in terms of conservation. There is an amazing variety of very roomy small cars in Europe, many built by American car companies. The amount of foreign oil consumption could be greatly reduced if more Americans were willing to use smaller urban-type vehicles going to and from work. They could then use their larger high performance vehicles after hours and on weekends. It's hard to believe the sustained high gas prices haven't pushed more people to move in this direction already. We are indeed the "consuming society" and I believe we will need some push by government to head in the conservation direction. Matt Blankner Power Resources Orlando Utilities Commission With regard to over-dependence on foreign oil, it becomes a national security issue at some point, and that point has probably been passed a while back. That is why a number of conservative Republicans—like Frank Carlucci, and several more from the Reagan administration—joined with with CIA director James Woolsey and a number of environmentalists in a letter to Congress urging that measures be taken to reverse our continually growing dependence on foreign oil. Each group—those concerned with national security, and those concerned with the environment—had different reasons for signing. But each group believes that there are externalities not priced into the cost of crude or gasoline that fail to give adequate price signals, and let's not forget that externalities are an economist's concept. It isn't easy to price these externalities, but just because they are hard to price, doesn't mean that we shouldn't find a way to take them into account—and now, as noted, senior Republicans are joining this chorus. Tom Grahame You usually do a good job of getting things right in your articles. In your article today, you got a lot wrong. With respect to automobile fuel economy, you wrote, "Government regulations seemed to work in the late 1970s when it came to dealing with the oil crunch back then. But, free market economists say that Americans will switch their buying preferences in response to high energy prices. In essence, with more efficient options commercially available, let buyers choose how they want to spend their money and that will send the right signal to the manufacturers. In fact, one can argue this is already occurring because hybrid sales are increasing." Most of that is wrong. First, the CAFE standards for automobiles, whatever their initial effect, were never binding on U.S. auto manufacturers. They were phased in gradually, and when they finally would have been binding (under the Reagan administration), government agencies raced each other to come up first with a way of preventing that from happening. NO AMERICAN AUTO MANUFACTURER EVERY PAID A PENALTY FOR NOT HAVING A SUFFICINTLY EFFICIENT FLEET OF NEW CARS. In addition, pick-up trucks and SUVs were allowed to become loopholes so that the efficiency of our private transportation fleet is not improving. Note: My point is not that CAFE standards cannot work, but rather that they must be taken seriously and enforced in order to work. Second, the position attributed to free market economists and treated with respect by you assumes that the price of gasoline in the U.S. reflects its true cost to the country. It doesn't. It is not even close. Pollution aside, the costs in dollars and lives of maintaining a military that can and does fight wars in countries that have large oil reserves is a direct consequence of our heavy dependence on the oil in those reserves. That's a couple of hundred billion dollars per year and a lot of lives and limbs that are not factored into the cost of oil. Our national interest requires us to reduce our dependence on foreign oil. Business as usual is neither efficient nor patriotic. Patriots not only fight to defend their country, they also accept small concessions in their life styles to protect their country, and it is time we faced that need. Michael Rothkopf Miscellaneous I read your articles regularly. The information you provide truly enriches my background. Thank you. Joan B Davenport, CPA Financial Planning Administrator Sierra Southwest Cooperative Services, Inc I enjoy reading your informative page every day. Keep it up. Ron Amberger Professor RIT Rochester, N.Y. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2005. UtiliPoint International, Inc. All rights reserved. |
