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A range war is brewing

Issue 7 and Volume 99.

OPINION

A range war is brewing

Roger Naill, vice president of AES, the large independent power producer, reports that his firm has lost on projects lately on bids of three cents a kilowatt-hour, adding, “Prices are ridiculous. This market is unbelievably competitive.”

In addition, as of March 29, every utility in the United States has access to that market. That`s when the Federal Energy Regulatory Commission (FERC) served notice that owners of electrical transmission capacity would have to provide equal opportunity to use that capacity for all wholesale buyers and producers.

Bulk power is ridiculously cheap and now all utilities have equal access to it anywhere in the United States. I think it adds up to a range war in wholesale power. True, there`s always been a wholesale market for bulk power–utilities selling to other utilities–but it`s operated on an extremely limited basis. The comfortable relationships that have existed for a hundred years among utility neighbors and friends are going to end. Entrepreneurs, deal-makers and capitalists are coming to the wholesale power market.

Dozens of third-party power marketing organizations already have hunting licenses, and more are being licensed by FERC every month. They have not had much impact yet, but they`re offering utilities new deals. They`re offering access to cheap new power. They`re working out ways for utilities to “unwind” their existing contracts with independents and sell that power to distant utilities. They`re linking summer peakers and winter peakers. They`re extending the reach of new capacity bidding programs.

Brokerages are being established to link spot-market buyers and sellers of wholesale power. Some established exchanges are even talking about setting up trading in electricity futures contracts. Most utilities don`t feel comfortable with these new entities and have not done much business with them. It is not clear yet how third-party marketers or spot markets or brokerages will work, or even if they will. Some utilities are embracing the concept. Utilicorp United, the Kansas City-based energy supply company, has reached out to 45 states in its gas business and says it would like to follow the same path in electricity supply. The company says its “EnergyOne” brand is the first line of products and services for electric and gas utility customers covering the entire United States.

Other utilities are looking beyond their distribution service territories and more will do that in the future. I think the action will be heaviest in the wholesale market first. The new FERC position on transmission access plus the low price of new bulk power that`s currently available adds up to a lot more action and competition in the wholesale power market. It will take a few years for the change to take shape, but it is coming. Maybe it`s an exaggeration to say a range war is brewing, but significant change in wholesale power marketing is on its way, whatever you call it.

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Editorial Director