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November 14, 2001 



Calpine Corp. Becomes One of the Few Companies to Penetrate Florida's Wholesale Market



By Will McNamara
Director, Electric Industry Analysis


[News item from Reuters] San Jose, Calif.-based Calpine Corp. (NYSE: CPN) announced that it has begun construction of its planned 530-MW Osprey power plant in Auburndale, Fla. The plant, known as the Osprey Energy Center, is expected to begin commercial operation in late 2003, according to company statements. Calpine said in June that it had received Florida's regulatory approval for the plant, and that it was expected to cost $250 million to build. Calpine also said that it is "continuing to move forward" with the proposed 1,080-MW Blue Heron Energy Center, slated for Indian River County, Fla. 

Analysis: With the onset of construction on this plant, Calpine now reportedly ranks as one of the few out-of-state generating companies that has been able to penetrate Florida's wholesale power market. Other companies such as Enron have made similar attempts to begin construction on new plants (or gain control over existing plants), only to be blocked by community and regulatory resistance. Calpine, which now ranks as the largest builder of power plants in North America, has gained entry into Florida by agreeing to sell the output from the plant to one of Florida's existing utilities. Nevertheless, it is a concession that supports Calpine's larger strategy for expansion, both within Florida and across the United States. Along with the Osprey and Blue Heron facilities, Calpine also plans to eventually build a 1,080-MW, $500-million plant near Vero Beach, Fla., which certainly positions the company as the leading out-of-state generator in Florida's rather cloistered wholesale market. 

It is important to note that the Osprey Energy Center, which will be a combined-cycle, natural gas-fired facility, will be the first power plant of its kind to be built by an independent power producer (IPP) in Florida under the state's stringent Power Plant Siting Act. There are some fundamental aspects of Florida's $13-billion electric market that should be established for context. First, Florida represents the third-largest electric market in the United States in terms of consumption (193 million megawatt-hours, according to the Energy Information Administration), so deregulation of the state remains of great importance to many stakeholders. However, Florida has taken a "go slow" approach toward electric competition and, at this point, there is no plan to initiate retail competition in Florida. Leaders of the state (including Gov. Jeb Bush) have supported competition in the state's wholesale market in an effort to move cautiously toward total deregulation. Florida's Energy 2020 Study Commission, which is preparing the blueprint for competition in the state, endorsed a plan to allow out-of-state companies to enter Florida's wholesale market by building new plants and selling power to the state's incumbent utilities. 

However, the Florida Supreme Court has banned out-of-state companies from building merchant plants in the state, which would be free to sell power anywhere and are not subject to rate regulation by the state's regulatory commission. A good example of this is Enron, which has attempted several times to build new generation facilities in the state. A proposed plant in Pompano Beach, Fla., was rejected amid strong community resistance. Enron was given governmental approval to proceed with a peaking unit in Deerfield Beach, Fla., for which the company is still attempting to obtain air quality permits. According to Enron, the Deerfield Beach plant was approved because it was classified as a peaking unit, and will be allowed to generate only during times of peak demand. It is not known at this time if Enron will continue with its plans to build this plant now that it is being acquired by Dynegy Inc. Southern Company has also moved into Florida (its first expansion outside of its service area) after receiving preliminary approval to build a 633-MW natural-gas generation facility in Orlando. Southern Company has agreed to sell the total output from this plant in a 10-year contract with the Orlando Utilities Commission, Kissimmee Utility Authority and Florida Municipal Power Agency. 

Nevertheless, the important point is that Florida has been a notoriously difficult state for outside generating companies to enter and obtain permission to build new generating facilities. Florida law does allow out-of-state companies to build peaker plants, as long as they only operate in times of especially high demand when normal supplies are strained. Some new plants are small enough as to not need approval from the Florida Public Service Commission, although they still must obtain approval related to zoning laws and air pollution permits. One proposal under the 2020 plan has suggested eliminating the involvement of the governor and the State Cabinet in approving proposed plants, and limiting the ability of local governments to block projects. 

There are two factors that enabled Calpine to gain approval to proceed with the Osprey plant. First, Calpine seemingly has signed a long-term contract to sell the output of the plant to Seminole Electric Cooperative under a long-term contract, which meets the Supreme Court standard that out-of-state generators cannot build merchant plants. Second, Seminole is a public utility and outside of the jurisdiction of the Florida Public Service Commission, which presumably made it easier for Calpine to gain access into the state. Seminole Electric is a generation and transmission cooperative headquartered in Tampa, Fla. It provides bulk supplies of electricity and wholesale energy services to 10 cooperatives located throughout peninsular Florida. As of December 2000, more than 1.5 million business and residential consumers in 45 counties received electric service from Seminole and its members. According to information from Seminole, the bulk of its generating reserves is provided through a 20-year agreement with Calpine, which runs through 2013. Additional terms of the contract were not disclosed. 

The Osprey facility will be located next to Calpine's existing 150-MW cogeneration facility in Auburndale, Fla., where a new 115-MW simple-cycle peaking unit is also under construction and expected to come online next year. Regarding the planned 1,080-MW plant near Vero Beach, Fla. Calpine reportedly has found buyers for about one-half of the power it would produce from the plant, enough to obtain the necessary state permits. This plant could be under construction by the end of next year. Calpine also opened a Tampa office in 2000 to support its expansion in Florida and the Southeast, which indicates that the company intends to remain a major player in this region, which has been comparatively slow to embrace electric deregulation. 

Further, Calpine participates in a group known as the Florida Partnership for Affordable Competitive Electricity (Florida PACE), which has attempted to persuade lawmakers in the state, including Gov. Jeb Bush, to deregulate Florida's wholesale market. One measure that would help to give the state a competitive kick start, or so says the group, would be to allow companies to build new power plants and resell the electricity to retail power sellers such as Florida Power & Light. A final report from the Florida Energy 2020 commission, which should address some of these issues, is expected Dec. 1. 

Ironically, public resistance to new power plants in Florida comes at a time when new reports suggest that the state faces an imminent power supply problem. According to representatives from the state's Energy 2020 Study Commission, Florida's electric reserve is significantly less than the 16-percent reserve that incumbent utilities have claimed exists. In fact, the commission has found that, "without extraordinary management techniques including power disruption," Florida's reserve is 7 percent. It is important to note that the commission is not including interruptible loads in its reserve calculations. If interruptible load is considered, then Florida most likely does have a roughly 16-percent electric reserve. Thus, Florida's policy of requiring out-of-state generators to sign long-term contracts with incumbent retailers could be considered a very prudent move, as any new generation that gets developed in the state is committed to a retail provider (reducing the possibility that power could be withheld to drive up market prices). 

As a whole, Calpine has a generation arsenal that includes some 37,700-MW baseload capacity of mostly natural gas-fired and renewable geothermal resources. In addition to the baseload generation, Calpine also owns or controls about 8,000 MW of peaking capacity that is presently in operation. Peaking units generally operate in times of especially high demand when normal supplies are strained. 

As the leading builder of power plants in North America, Calpine is one of a small number of generating companies that have banked on a steady increase in demand across the United States, along with the need to supply power during periods of peak demand. Other companies competing against Calpine in this space include Reliant Energy, Mirant Corp. and Duke Energy, which collectively have reportedly announced plans to build some 422,000 MW of generating capacity over the next 13 years. Calpine specifically has acknowledged that it will buy 27 steam engines from Siemens AG between 2002 and 2005 to build 5,400 MW of generating capacity. 

Many of these plans for new generating facilities were outlined over the last year or two, when the United States faced a well-publicized energy crunch. Now, the pendulum has swung back to leave many of the same companies worried about a possible energy glut in which they will have excess power that cannot be sold (or sold at lower-than-anticipated prices). Certainly, a large portion of the generation planned while supply was compromised and prices were high will be canceled or delayed. However, as one example, Calpine appears to be following through with an aggressive generation expansion strategy. One approach that might help Calpine to beat the odds against an energy glut is that the company continues to build generation in markets that are projected to have continually increasing demand. However, from a broad perspective, Calpine may find that, as other companies continue with plans for generation facilities that may have progressed too far to be terminated, the surplus of supply could have an impact on prices, which could in turn impact the market as a whole. 


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