----- Forwarded by Steven J Kean/NA/Enron on 02/28/2001 01:49 PM -----

	"SCIENTECH IssueAlert" <IssueAlert@scientech.com>
	02/28/2001 06:07 AM
		 
		 To: 
		 cc: 
		 Subject: Constellation to Build Major Plant in California, First in Over a 
Decade






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[IMAGE]

IssueAlert for  February 28, 2001 

Constellation to Build Major Plant in California, 
First in Over a Decade

by Will McNamara 
Director, Electric Industry Analysis

Constellation Energy Group (NYSE: CEG) announced that Kiewit Industrial 
Company of Omaha, Neb., will begin construction in early April of the 750-MW 
High Desert power plant near Victorville, Calif. The project, which has been 
in development since the mid-1990s by High Desert Power Project, LLC*a 
subsidiary of Constellation Energy Group of Baltimore, Md.*will be the first 
new major power plant to serve the Southern California area in more than a 
decade. 

Analysis: The fact that California suffers from a significant supply / demand 
imbalance, and that no new major power plant has been built in the state in 
over a decade, has been well documented in the energy industry press. 
Consequently, the fact that Constellation Energy Group is now close to 
breaking ground on its new plant (having completed the laborious plant siting 
requirements in California) is a major*and somewhat surprising*coup for the 
company, considering that its generation expertise has primarily been in the 
Northeast nuclear industry. Constellation Energy Group has said that it will 
market power from the plant within California, which should prove to be a win 
/ win scenario for both the company and the state. 

The High Desert power plant will be built on a 25-acre site at the Southern 
California Logistics Airport, formerly known as the George Air Force Base. 
Commercial operation of the plant is scheduled for June 2003. The plant's 
electric generating technology is based on clean-burning, natural gas-fired 
combustion turbines operating in a combined-cycle mode. Part of the current 
supply problem in California is the fact that hydroelectric resources, the 
state's primary energy source, have been in short supply due to 
lower-than-average rainfall over the last year. Moving away from a dependency 
on hydroelectric supply may be a smart move for the state. In addition, the 
High Desert plant is consistent with a national trend that supports natural 
gas as the fuel of choice for new power plant development projects. As a 
point of interest, according to data from the Energy Information 
Administration, California's fuel mix is primarily based in a mixture of 
natural gas (45.59 percent), hydro (21.95 percent), nuclear (18.07 percent), 
coal (1.36 percent), oil (1.04 percent), and other, presumably renewable, 
sources (11.98 percent). 

It is rather surprising that Constellation would be the first company to 
build a major power plant in California in over a decade, considering the 
company's consistent geographic and fuel-mix focus. Constellation Energy 
Group is a holding company that includes a group of competitive energy 
businesses focused mostly on wholesale power marketing, merchant generation 
and portfolio management in North America. Constellation Energy Group is the 
parent company of the Baltimore Gas and Electric Company (BGE), a regulated 
gas and electric delivery company serving Central Maryland. Up until this 
point, Constellation's generation assets have been primarily based in a 
mixture of coal and nuclear, and for the most part located in the 
Northeastern United States. According to information directly from the 
company itself, Constellation's own fuel mix is predominantly coal (54 
percent), followed by nuclear (40 percent). Oil, gas and hydro only represent 
a small percentage (6 percent) of Constellation's fuel mix. 

Although coal is the primary fuel in Constellation's portfolio, over the last 
year the company has become more focused on nuclear. For instance, last 
December Constellation Nuclear, a wholly owned subsidiary of Constellation 
Energy Group, announced its intent to purchase 100 percent of Unit 1 and 82 
percent of Unit 2 of the Nine Mile Point nuclear power plant. Once the deal 
is closed in mid-2001, Constellation will own a total of 1,550 MW of Nine 
Mile Point's 1,757 MW of total generating capacity. The nuclear plant 
purchases that Constellation is making expand upon its Calvert Cliffs asset, 
an 850-MW two-unit nuclear plant in Southern Maryland. When I wrote about 
this acquisition last December, I noted that, while Constellation will most 
likely retain its coal-fired generation assets, the company appeared to be 
moving closer toward a nuclear-based portfolio. 

In addition, in early 2000 Constellation began a restructuring of its 
corporate identity, dividing its operations into two separate segments: one 
focused on its merchant energy business (including Constellation Nuclear) and 
the other focused on regional retail energy services. The merchant energy 
business was ranked fifth in the nation for sales of electric power in the 
third quarter of 2000, and the company is committed to expanding this growth. 
The goal for the merchant energy business, according to Constellation Energy 
Group CEO Christian Poindexter, is to establish a portfolio of over 30,000 MW 
of electric generation facilities by 2005. Toward that end, Constellation 
acknowledged earlier that it would be taking advantage of "bargain prices for 
nuclear plants," which resulted in large part from other utilities focusing 
on transmission operations and thus choosing, or being mandated, to divest 
their generation plants.  Constellation in the past has justified its move in 
this direction by saying that its experience has found that nuclear fuel is 
cheaper than coal and gas generators and that "the economics [of nuclear] are 
quite robust, once they are calculated out."  

However, considering that there is only a limited number of nuclear plants in 
the United States that will become available for purchase, Constellation 
Energy Group may have recognized the need to become even more diversified. 
The California market, despite its stringent plant siting requirements, 
arguably offered an appropriate market for Constellation to become more 
diversified. Given the state's environmental lobbying presence, it is 
doubtful that a nuclear plant could have been approved in California. 
Although natural gas is not a primary fuel source for Constellation as a 
company, it is the preferred source for new power plants. Therefore, the High 
Desert plant, given that it will be fired by natural gas, presumably stood a 
greater chance of navigating through California's plant siting requirements 
(than a coal or nuclear plant could have). In fact, in the announcement of 
the plant, Constellation noted that, having received all federal, state and 
local approvals, the High Desert plant "will be a good neighbor in the 
community with no significant environmental impacts." 

The announcement of Constellation's new plant could not come at a better time 
for California, of course. Although the plant won't be operational until June 
2003, the state can use the good publicity now. A new report from the 
Cambridge Energy Research Associates (CERA) says that it is already too late 
for the state to head off a serious summer shortage that could lead to at 
least 20 hours of rolling blackouts. "It's too late for this summer," 
declared Lawrence J. Makovich, of CERA, referring to the state's desperate 
efforts to ramp up power supplies for the short term. "The source of 
California's far-reaching power crisis is a shortage. At least 5,000 
megawatts of new generating facilities are required to restore balance to the 
state's grid." Instead, according to the report, demand will exceed supply by 
3,000 MW, which will cause the state to be under an energy alert of some sort 
for at least 200 hours. 

CERA's report came out on the heels of Calif. Gov. Gray Davis' pledge to have 
5,000 MW of new generating capacity available in California by July, more 
than double the amount expected just a few months ago. Davis said the new 
plants would provide enough electricity to ward off blackouts this summer, 
which CERA obviously disputes. Davis announced a series of orders intended to 
bring online 5,000 MW by July 2001, with an additional 5,000 MW by July 
2002.  

In any event, as California continues to struggle from a severe supply / 
demand imbalance, the announcement of Constellation's new plant appears to be 
good news for all the parties involved. Gov. Davis has pledged to support an 
expedited approval process for additional plants, so it will be interesting 
to see which company is given approval to proceed with the next power plant 
in the state. It will also be interesting to see, based on Constellation's 
plant and others that may be built, whether or not the economics of building 
such plants in California will prove beneficial. Other power suppliers may 
opt to merely enter into long-term sales agreements with the state, rather 
than invest the resources that building a power plant would require. 

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