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Plant Construction Continues With or Without Deregulation.

UNDETERRED BY Arkansas' unraveling love affair with deregulation of electric rates, companies planning to speculatively produce power for the wholesale market are forging ahead with numerous projects in the state.

The state has approved the construction of 11 new merchant power plants in the past couple of years, three of which are already operating. Another four applications are being reviewed by the Arkansas Department of Environmental Quality, and Genova Power Co. of Dallas revealed plans in early November for yet another electricity-producing hummer near Tontitown.

That multiple corporations are lining up to invest billions to enter the unregulated electricity marketplace while the state shows every sign of running earnestly from deregulation is not surprising, said Sandra Hochstetter, chairman of the Arkansas Public Service Commission, the body currently wrestling with the complex issue.

"There's no correlation at all" between deregulation of the retail market and the power generators' business plans, she said last week. "Those merchant plants are being built to serve the wholesale market."

PSC senior electrical engineer Clark Cotten agreed.

"I have not seen that anybody has backed out," Cotten said last week.

Many states moved in the late 1990s' to lift government constraints on the traditional public utility model of power supply, hoping that open, competition would lead to efficiencies, delivering the best product for the lowest price that the market would bear.

The Arkansas General Assembly decreed in 1999 that deregulation should take place by January 2002. The 2000-01 meltdown in electric rates and supplies in California, the state that led the nation into the deregulation age, brought the process to a nervous halt. But the surge in merchant power plants has not slowed appreciably, even as the state backed off deregulation.

"Despite the glaring failure of California's process to deregulate its electric generation business, investment bankers and analysts say that deregulation is a reality in the United States and is working elsewhere," an Oct. 25 Reuters article said.

The idea behind merchant plants is simple: Unregulated power generation companies, either spun off from existing utilities or independently formed, bet that they can produce electricity more efficiently than utilities and offer the product to the wholesalers more cheaply than the power providers can produce it for themselves.

"They are going at risk in terms of their investment," Hochstetter said. "Since they're not, utilities, they're not guaranteed a return on their costs, and they're locating in areas where there's a regional need."

In the nation's most populous state, several factors converged, that spelled disaster for power deregulation. Prices more than quadrupled in 2000, leading to a consumer revolt. When the state stepped in to cap rates, supplies all but disappeared, leading to rolling blackouts and enforced conservation this year. The state's three main utilities neared bankruptcy.

In Arkansas, the Legislature passed Act 234 of 2001, pushing back deregulation almost indefinitely. The PSC's staff recommended further delays recently, urging the commission to work with lawmakers to further amend or, preferably, to scrap the deregulation plan altogether after concluding that there would be no savings to Arkansas ratepayers in the foreseeable future.

The commission, while favoring slower, careful implementation, argued in a study several months earlier that Arkansas is not headed for a California-style disaster.

Titled "What Happened in California, or Why Arkansas Is Not California," the study, authored by D. David Staton, chief of staff to Hochstetter, noted six failures in the Western scheme:

* Unanticipated growth in demand;

* Unanticipated reductions in supply;

* Structural defects in the plan;

* Stringent environmental regulations, leading to siting difficulties for potential new plants;

* Poor execution and political miscalculation; and

* Possible profiteering, or "exercise of market power," by wholesale generators.

"No new large power plants have been built in California in 10 years," the report said. "The availability of imported electricity, typically about 20 percent of the California supply, has been going down due to growth, particularly in Arizona, Nevada and Washington. Probably the greatest structural defect built into the California plan is the requirement placed on utilities to purchase all of their energy needs from the daily spot market, the California Power Exchange."

Along with the knowledge gained from the California blowout, the report claims that Arkansas would benefit from different circumstances, in almost every instance, than the Californians faced.

"While some form of exchange will most likely develop, the private sector will provide for those services," the report stated. "The commission will have no rules mandating sales into or purchases from the [power exchange]."

Arkansas is experiencing stable demand and supply, the report said, and the state has a less stringent, faster licensing process and fewer environmental hurdles, providing supply flexibility.

The PSC is working on a comprehensive recommendation on deregulation, to be delivered to the General Assembly. A hearing will be held on the matter Dec. 20 by the Joint Insurance and Commerce Committee.

"We're in the process of preparing our conclusions," Hochstetter said. "We may also be giving them legislative recommendations."

In any case, the PSC will continue to monitor any plan implemented for the next 10 years, she said.

"Only if a majority of the ratepayers benefit, would restructuring [electric rates] be in the net public interest," Hochstetter said. "That's the test that we have applied."

RELATED ARTICLE: El Dorado Giant Leads Power Plant Surge

A PROLIFERATION OF merchant power generators, featuring a $1.1 billion plant in El Dorado that's on track to be the nation's largest, continues in spite of holdups in the state's deregulation plan.

The move to deregulate the traditional public utility-controlled power market has spurred construction of numerous power plants across the state. The operations are backed by unregulated companies, some spun off from utilities, that plan to produce power to sell on the open market to retail providers.

Eleven plants have been approved by the Arkansas Department of Environmental Quality. Two in Pine Bluff and one in Fulton are already operating. By far the largest, Union Power Station broke ground Aug. 21 in El Dorado. A joint venture of Panda Energy International of Dallas and Teco Power Services of Tampa, Fla., the El Dorado power plant is set to produce about 2,100 megawatts through natural gas-fired generators in Phase I, making it the largest in the country. Phase II, also gas-fired, will add about 500 megawatts. At the peak of construction, the companies claim, 1,000 workers will be employed with a payroll of about $8.5 million. The plant will need about 65 employees once operational.

The project is "on budget and on schedule," Kyle Woodruff, Panda's vice president of engineering and construction, said last week. About 800 people are working at the site already.

"Things are moving along quite well," Woodruff said. So far, the company has completed a 42-mile 30-inch pipeline that will deliver natural gas from northern Louisiana to the plant. An intake structure to bring Ouachita River water to the plant and other, water users also is finished, Woodruff's said.

Though the Union Power Station is not scheduled for full operation until May 2003, the plant will be on line before then, Woodruff said.

"We'll have one of the power blocks operational probably mid to late summer of 2002," he said. "The first power will come out of it this summer."

Four more permits are under review by ADEQ. The plants, to be located in Ozark, Osceola and Newport [two facilities], would produce more than 2,500 megawatts.

And just this month, another Dallas firm, Genova Power Co. LP, said it would build a 550 megawatt merchant plant near Tontitown. Genova, partnering with Hunt Power LP of Dallas, said the plant would open in 2004, employing about 25 people at an annual payroll of $1.6 million.

JACK WHITSETT
New Power Plants In Arkansas

Location Output (megawatts)
Final Permits Issued

Union Station El Dorado 2,100
Wrightsville Power Wrightsville 510
GenPower Dell 640
CT1 Fulton 153
Pine Bluff Energy Pine Bluff 220
Hot springs Energy Hot Springs 1,240
Pine Bluff Energy 2nd Unit Pine Bluff 220
GenPower Keo 640
Hot Springs Power Hot Springs 700
AES Cypress Dell 540
Tenaska Keo 1,800

Under Review By ADEQ
Arkansas Electric/Thomas B.
Fitzhugh Station Ozark 170
Plum Point Energy Osceola 1,000-1,600
Duke Energy Jackson Newport 620
Newport Power Facility Newport 560

Pre-Application
Genova Arkansas I Tontitown 550

Location Fuel Planned Startup
Final Permits Issued

Union Station Natural gas May 2003
Wrightsville Power Natural gas N/A
GenPower Natural gas May 2002
CT1 Natural gas In operation
Pine Bluff Energy Natural gas/oil In operation
Hot springs Energy Natural gas May 2002
Pine Bluff Energy 2nd Unit Natural gas/oil In operation
GenPower Natural gas March 2003
Hot Springs Power Natural gas July 2004
AES Cypress Natural gas June 2003
Tenaska Natural gas/oil May 2003

Under Review By ADEQ
Arkansas Electric/Thomas B.
Fitzhugh Station N/A N/A
Plum Point Energy Coal January 2005
Duke Energy Jackson Natural gas May 2003
Newport Power Facility Natural gas May 2003

Pre-Application
Genova Arkansas I Natural gas Summer 2004

Source: Arkansas Department of Environmental Quality.
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Title Annotation:Arkansas; electric power plants
Comment:Plant Construction Continues With or Without Deregulation.(Arkansas; electric power plants)
Author:Whitsett, Jack
Publication:Arkansas Business
Geographic Code:1U7AR
Date:Nov 26, 2001
Words:1507
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