Fitch U.S. Regional Power Forecast: Different Market Structures, Same High Reserve Margins in Northeast & West.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 3, 2004

Fitch Ratings announces the publication of two special regional reports on the Outlook for the U.S. wholesale electricity markets in the West and the Northeast. The reports -- 'Fitch Western Regional Wholesale Market' and 'Fitch Northeast Regional Wholesale Power Market' -- explain trends in the regions' electric power supply and demand, reserve margins, and projected wholesale power market prices. These reports also discuss the credit implications of the power market forecast for merchant generation companies, investor-owned utilities, and public power entities in those regions.

Extreme volatility in the Western power market in 1999-2001 caused blackouts, bankruptcies, and economic disruption, but Fitch does not foresee a recurrence of those conditions in the balance of this decade. 'While the Western region needs to maintain higher reserve margins than other regions due to its dependence on variable hydroelectric production, the current reserve margin of approximately 40% in the West exceeds near-term demand,' said Philip Smyth, Director, Global Power, Fitch Ratings and co-author of the report on the Western region. 'The over-supply results from newly constructed power plants, combined with slower demand growth as a result of higher retail and industrial power rates, demand-side management initiatives, and the elimination of aluminum smelting loads.'

'Reserve margins are projected to remain relatively high for the next several years, declining from around 40% to the mid-20% level in 2010, under normal water conditions,' said Smyth. The report also considers the region's dependence on hydroelectric power and sensitivity to drought conditions. In the event of a serious drought between now and 2010, Fitch projects that lower hydroelectric energy output would increase demand for natural gas-fired generation. In this case, the natural gas-fired capacity would set the market clearing power price for more hours in the year, resulting in higher cash flow for merchant gas-fired capacity. 'Nonetheless, a windfall to generators would likely be mitigated by FERC price caps that suppress extreme prices, as well as the relatively large oversupply that affects market conditions during off-peak hours,' said Smyth.

While much of the market structure confusion that followed the crisis of 2001 have subsided, has subsided, policy makers in the West continue to debate the merits of competitive markets and federal versus state control of wholesale markets. The report on the Northeastern wholesale market comments on the advanced market structures in the region, including transmission and real-time energy markets that are controlled by independent organizations (RTOs or ISOs in New York, New England, and the mid-Atlantic region. According to Denise Furey, Senior Director, Fitch Ratings, 'The three regional organizations evolved separately, and the variations in standards, market rules, and system dispatch stand in the way of developing one integrated market in the Northeast.'

Overcapacity is also prevalent across the Northeast, with the exception of certain transmission-constrained regions such as downstate New York and Southwestern Connecticut. 'Demand growth in the Northeast is projected to lag other regions, at just 1.3% annually. But with little projected in the way of new generating resources, the current oversupply will gradually diminish over the course of a decade, and natural gas-fired generation will increasingly be the fuel on the margin throughout the region,' said Lina Santoro, Director, Public Power, Fitch Ratings and co-author of the Northeast report.

These two reports are companions to three regional reports on the wholesale electricity markets of the North American Midwest, Southeast, and Electric Reliability Council of Texas published within the past month, and now available on the Fitch Ratings web site at 'www.fitchratings.com'. The reports can be found currently via a special link on the home page of the Fitch Ratings web site at, or by going to the 'Special Reports' section of the 'Global Power' sector page, posted under 'Corporate Finance' at the same web site.