Crisis Brewing Across State in Power Generation

DAVID ROBINSON - Buffalo News - 10-29-02

This is a dim time to be in the power plant business.

That's leaving a cloud of uncertainty hanging over the Buffalo Niagara region's big coal-fired generating stations -- the Huntley Station in the Town of Tonawanda, the Dunkirk Steam Station and the Somerset plant in Niagara County.

The companies that own those local power plants -- NRG Energy for the Dunkirk and Huntley stations and AES Corp. for the Somerset plant -- all are in deep financial trouble because of falling electricity prices and staggering debt loads.

Their owners, and power producers across the country, have been trying to raise desperately needed cash selling off assets -- often at fire sale prices. None of the local plants has been put on the block -- yet. But this isn't a local problem. It's also starting to raise concerns across the state that the collapse of the independent power market could leave New York without the additional generating capacity it expects to need within the next three years to meet the growing demand for electricity and to keep prices stable.

"The state of the industry is, for a whole host of factors, very poor," says Gavin J. Donohue, the executive director of the Independent Power Producers of New York, an Albany-based industry group. "It's a nationwide problem." Indeed it is. Electricity prices have fallen and the economy is weak, which has dampened the demand for power. Making matters worse is the turmoil that rippled through the nation's energy industry after the sudden bankruptcy of scandal-tainted Enron Corp. and the plunging stock market, which has prevented the weakening power producers from raising more money.

That's a powerful quadruple-whammy for power producers, who paid top dollar and borrowed billions to snap up power plants from utilities just a few years ago, only to see demand in New York plateau and prices weaken.

"It's sent the merchant plant business into a tailspin," says Ashok Gupta, senior energy economist for the National Resources Defense Council in New York City.

"People guessed wrong about what the market would be like and how much of their costs they could recover quickly," he says. "People thought that prices would be higher, but they ended up going lower." The region's major power plants are caught in the middle of that downward spiral. Xcel Energy, which owns NRG Energy, is scrambling to come up with a reorganization plan that it intends to present to its creditors by the end of this month in an attempt to keep NRG out of bankruptcy.

NRG, which defaulted on some of its debt earlier this month and lost its investment grade credit rating in July, has until Nov. 15 to post $1 billion in collateral on its loans. "The situation quickly became a crisis," said Wayne H. Brunetti, the chief executive officer of Xcel Energy, NRG's parent company, during a conference call last week.

AES, for its part, has sold off $800 million in assets so far this year and is on track to raise as much as $1 billion more by selling even more facilities, many outside the United States.

Its stock has lost 90 percent of its value this year and the company has asked its banks and bondholders to extend the repayment dates on $2.1 billion in debt to 2005. The creditors have until Nov. 8 to respond, and if they don't go along, analysts say AES could end up in bankruptcy.

Already, those fiscal problems are having an impact on the local plants. NRG, which had planned to invest $50 million in the Huntley Station to make it more efficient and install anti-pollution equipment, has put all of its spending plans on hold.

"We're not going to put another penny into NRG without a total settlement," Brunetti said.

Beyond that, analysts say it's possible the plants could be put up for sale if the firms fall into bankruptcy or if they continue scrambling to raise cash outside Chapter 11.

A report by Assemblyman Paul Tonko, D-Amsterdam, chairman of the Assembly energy committee, said the financial crisis swirling around the electric generating industry could put a crimp in the state's already tight supply of electricity if troubled power plant operators decide to close plants to reduce capacity and raise prices.

In all, six companies that own power plants in New York, accounting for 30 percent of the state's generating capacity, have credit ratings that are below investment grade, the report said.

With many power producers scrambling to find the money they need to simply stay in business and the industry's sorry state making it hard for anyone to get financing for an expensive project like building a new power plant, what was an all-out rush to add new generating capacity early last year has started to shrivel.

Just 18 months ago, power producers were proposing to build new plants that would add more than 29,000 megawatts of generating capacity in the state -- enough to nearly meet its current daily demand.

Nobody expected anything more than a fraction of those proposed plants to ever be built, mainly because the New York Independent System Operator, which manages the state's power grid, estimates that we only need a fraction of that -- 7,100 megawatts by 2005 -- to ensure adequate supplies and stable prices.

Still, reaching that target might be tough. While there currently is a long list of projects on the table that would produce about 25,000 megawatts, just 1,700 megawatts of capacity is currently under construction, according to Ken Klapp, a spokesman for the ISO. Projects with another 3,100 megawatts have been approved but have not begun.

But even the plants that are under construction are finding the going to be rough. Just last week, PSEG Power pushed back the opening of its new 750-megawatt power plant in Bethlehem by a year to 2005. The developer of a 1,080-megawatt power plant in Athens in Greene County last week won an extension on more than $400 million in debt associated with that plant and two others.

"We're still hopefully optimistic that generation comes on line to meet the reliability standard we've set," Klapp says. Across the country, more than 350 power generating projects, which could generate a total of 42,520 megawatts of electricity, have been delayed or canceled so far this year, according to the U.S. Energy Information Administration. That's 38 percent of all the new generating capacity that was scheduled to come on line this year, and virtually all of the canceled or delayed projects had been proposed by independent power producers. Part of the problem with getting financing is that power plants are built to operate for decades, but serve customers who often are free to switch suppliers on short notice, analysts say. It's hard to convince increasingly skeptical lenders to put up millions for a power plant project when the developer can't produce long-term contracts to show there are committed buyers for a good chunk of that electricity, Donohue says.

Part of the solution could be to encourage utilities, which still provide electricity to the vast majority of the state's residents, to enter into long-term contracts with power producers. That's the opposite of what utilities like Niagara Mohawk are doing, under guidance from state regulators trying to spur competition.

"The marketplace is so precarious," Donohue says. "It's getting to the point where it's very difficult to operate." e-mail: drobinson@buffnews.com