New England power producers to feel restructuring pressures

Texas electric utilities should escape the pressure to reorganize and merge that is bearing down on New England power producers. But in an era of cutthroat competition, this could be a two-edged sword for Texas producers, says a national energy consultant.


Kate Thomas
OGJ Online

Texas electric utilities should escape the pressure to reorganize and merge that is bearing down on New England power producers. But in an era of cutthroat competition this could be a two-edged sword for Texas producers, says a national energy consultant.

Plants in the Electric Reliability Council of Texas (ERCOT) have not been subjected to competitive pressures experienced by power producers elsewhere in the US, Kemm C. Farney, vice-president, WEFA Inc., told the Gulf Coast Power Association Thursday. In a commodity market, it is not sufficient to be a low-cost producer. "You must also lower your costs faster than your competitor in order to win market share," he says.

As long as there are any vestiges of regulation, regulated producers have an incentive to be slow about improving plant performance. American Electric Power Co., Columbus, Ohio, is an example of a company that has focused on becoming a competitive process operator, he says, achieving a 2-3%/year reduction is cost. Texas utilities have been less consistent, Farney says. "This is an indication that most utilities are still running plants the way they always have," he explained.

But because Texas plant operating costs are still consistently lower than the power prices that are likely to prevail, on average, when compared to plants in the Northeast, individual power producers in ERCOT are much less likely to get into financial difficulties. "Where we expect to see continuing financial reorganizations in the Northeast, we do not foresee similar problems in Texas," Farney says. "ERCOT plants have plenty of room to get costs down."

Longer term, he predicted, the wholesale price of electric power will be largely determined by the cost of production at a new incremental generating unit. But by and large, new construction will only move older plants out of the merit order when their dispatch costs are higher than the new plant's total economic costs.

"Thus, in the long run, the cost of the next green-field plant places and upper bound of sorts�except during panicked bidding�on the price of power," Farney said. In future, Texas prices will become less predictable, more volatile, and subject to the ability to move power among major Texas cities already facing transmission constraints.

More in General Interest