For Big Energy, a Different Kind of Crisis Looms

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By the time it got out of the Republican-led House last week, George W. Bushs energy plan looked like even more of a supply-side subsidy for Big Energy than Bush had intended. The vast majority of the bills $30 billion in tax breaks and spending went to oil, coal, gas and power companies for fuel exploration and power production, and Democrats will be crying "corporate welfare" from September until the 2002 elections — mainly because two-thirds of Americans tell pollsters that Bush is too beholden to his power-baron neighbors in Houston.

The real irony is that they don't need the help. Thanks to the rush among power producers to cash in on the California "crisis," by the time the plan gets through the Senate pipeline and out into the world of outlets, megawatts and pump prices, Big Energy will likely be facing an embarrassment of riches. Late last year, according to this weeks Barrons cover story, power was going for $1,000 per megawatt hour in California and more than $200 nationwide; now the going rate is less than $50.

It's all downhill from here

And according to the forward price curve, where long-term power traders place their bets, its all downhill from here. In mid-April, power bought in the mid-Atlantic region for delivery in 2002 cost $51 per megawatt hour — its since fallen to $38. Power for 2003 peaked then at $44 per megawatt hour — now its $36. And in California, power for conditioning the air out west in 2003 is down to $41 — from $73.

The main reason for the drop in prices is that the more-megawatts solution Bush unveiled in the spring is already coming to pass. Energy analysts figure on 45,000 additional megawatts of new power-generation capacity getting added to the market by year-end, and the industry plans an additional 290,000 megawatts of generating capacity through 2006 regardless of what Senate Democrats do to the Bush plan — an increase of roughly 38 percent. With a supply-and-demand picture like that, what Bush is offering — still more megawatts, via tax incentives and red-tape slashing — is like getting tube socks at Christmas.

The cloud in the silver lining

Of course, that still leaves one piece of the energy picture that energy suppliers can count on for some price support: The nations rickety transmission system. "The grid" serving the U.S. is actually three grids — one in Texas and two more splitting the country roughly along the Continental Divide — with few interconnections and a whole lot of weak spots and bottlenecks. Even at its best, the system keeps prices up by demanding a surplus in each grid before the nations needs can be considered met.

At its worst, its a disaster waiting to happen. "The question is not whether, but when, the next major failure of the grid will occur," David Cook, the North American Electric Reliability Councils general counsel, wrote to the Department of Energy recently. Fixing up the grids — and lacing them together so surplus power can reach any house, anywhere — would increase the efficiency of power production in America.

Bringing prices down with it. Testifying before the Senate in July, Jeffrey D. Ayers of energy producer Aquila Inc. told the Senate that a national transmission system — enabling a national wholesale power market — was the single best way to foster power-producer competition and efficient pricing, allowing supply and demand to get together with a minimum of surcharge.

Not in my back yard

So now Bush has even begun work on that. Energy Secretary Spencer Abraham announced Tuesday that he and the nations governors will jointly convene a task force to start hashing out the tricky property-rights issues that come with a grid upgrade. High-voltage power lines and their health risks come with a particularly virulent strain of NIMBYism, and Bush will undoubtedly be moving slow to avoid nettling anti-fed voters out west. (The House declined to even touch the issue.) But any success Bush has in the next few years will make power producers and ratepayers lives easier in at least equal measure.

Enron CEO Kenneth Lay gets top billing in all those Bush-and-Big-Energy stories, what with all the money he gave to the campaign and all the hours he spends in the White House chatting up his good friends Dick and George. Yet if Bushs energy plan was such a Big Energy boondoggle, why did Enron recently sell off the last of its power-producing assets in the face of disheartening price projections? (Its now exclusively a trading firm.) Why is American Electric Power, the largest U.S. power producer, making its few new plant-building operations risk-splitting joint ventures and building nothing on its own?

The energy bubble

Its not that Bushs plan doesnt smell a little cozy in parts — the coal industry, based in the states like West Virginia, that won Bush the election, gets a moral and financial clap on the back that critics say is a new lease on life for one of the environments mortal enemies. And then theres the kindness extended toward another supposed energy dinosaur, nuclear power.

But in the overall, the last year or two may well have been the industrys version of the Internet bubble — lucrative beyond imagining while it lasted, and soon to be but a memory. The "crisis" that lit the country up with an energy debate while lining Big Energys pockets with staggering profits — no argument there; Standard & Poors electric utility index was up 40 percent last year — is all but over. For the industry, a crisis of overcapacity — otherwise known as a bust — may well be nigh.

As a way to give ratepayers what they want — namely, lower rates — George W. Bushs energy plan isnt particularly friendly to the environment. It bears a few signs of preferential treatment for forms of production most of us wish would just go away. Heck — with the exception of the transmission fixes, it probably was never necessary in the first place. But if its corporate welfare for Big Energy, well, lets just say that in a few years the industry may need a different sort of subsidy — the price-support kind farmers get for not growing wheat.

And thatll be the day when Americans should really start complaining.