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Editor's Note: Yesterday's IssueAlert incorrectly identified Las Cruces as 
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IssueAlert for  February 20, 2001 

Florida Study Recommends Wholesale Deregulation

by Will McNamara
Director, Electric Industry Analysis

Florida's political and business leaders moved cautiously toward deregulating 
the state's electric industry in a move last week, while vowing to avoid 
problems such as those in California. Florida's Energy 2020 Study Commission 
unanimously recommended that the Florida Legislature consider deregulating 
wholesale electricity. The move could spark construction of a number of power 
plants in the state. 

Analysis: Florida Gov. Jeb Bush created the Energy 2020 Study Commission with 
the intent of submitting an initial deregulation proposal for consideration 
in this spring's legislative session. Florida's energy market represents a 
$13 billion industry, so obviously there has been great interest on the part 
of new energy suppliers that want to begin serving the state.  

Florida continues to move slowly toward deregulation across all levels. 
Competition on the retail side may take several more years, especially as the 
California crisis is causing many states to adopt a more cautious approach to 
removing state regulations. The commission's recommendation to initiate 
deregulation on the wholesale side is considered a small step toward reaching 
the ultimate goal of total deregulation in the state.  

Specifically, the commission has endorsed a plan that would allow 
out-of-state companies to build new merchant power plants in Florida and sell 
wholesale electricity to the state's utilities. Florida law forbids 
out-of-state electric utility companies from providing year-round service to 
utilities and customers, but merchant plants can provide backup service to 
existing utilities when energy reserves are stretched thin, to avoid power 
outages and rolling brownouts. Also under the commission's plan, in-state 
utilities would also be allowed to sell their regulated plants at depreciated 
values to affiliated companies that would compete head-to-head on the 
wholesale market. In addition, the state's utilities could engage in 
long-term power contracts with suppliers instead of relying on the open 
market (a major difference from California's original plan), and state 
regulators would still review all wholesale contract prices. The commission's 
plan must still be approved by the Florida Legislature, and the commission 
readily admits that approval may not be easily obtained due to the ongoing 
crisis in California. 

At the present time, no official start date for electric competition in 
Florida has been announced. The state's "go slow" approach is characteristic 
of other Southeastern U.S. states, many of which continue to enjoy 
comparatively low electric rates. Florida's renewed interest in deregulation 
is being driven by the belief among several commission members and other 
officials that competition eventually will result in lower rates for 
consumers. Or, at the very least, competition should prevent rates from 
continuing to increase as they reportedly would under a regulated structure. 
The commission's plan also is intended to prevent power supply problems in 
Florida similar to those in California, by allowing for new generation to be 
built in the state by external companies. Florida law requires power 
companies to hold 20 percent of their power supplies in reserve to that they 
can handle periods of extreme usage. However, both the commission's chair and 
Gov. Bush have suggested that Florida will face a shortage of electricity in 
the next decade unless out-of-state companies build new plants.  

Consumer groups and municipal electric providers have resisted the 
commission's recommendation. In general, such groups fear that deregulating 
Florida's wholesale market would lead to higher electricity bills since big 
utilities in the state would be allowed to earn higher profits that may or 
may not result in benefits for consumers. In fact, the Florida Municipal 
Electric Association recently argued that annual electricity prices in 
Florida would rise by between $700 million and $1.6 billion if the 
commission's plan to initiate wholesale deregulation is approved. In 
addition, Florida's utilities have been rather effective in persuading state 
officials to move slowly toward deregulation, perhaps out of concern about 
losing their monopoly status. Walter Revell, the chairman of the Energy 2020 
Study Commission, denied that the group is considering any plan that would be 
partial to the state's largest investor-owned utilities, which include 
Florida Power & Light, Tampa Electric, Florida Power Corp. and Gulf Power.  

The commission's recommendation supports what is already a fast-growing 
wholesale business in the state of Florida, with outside power companies such 
as Duke, Enron, Calpine Corp. and others aggressively trying to penetrate the 
state and gain a foothold for when deregulation emerges in full force. Such 
power suppliers may be accurately surmising that Florida is headed toward a 
supply / demand imbalance, as has occurred in California. An imbalance of 
this sort would offer competitive opportunities for power suppliers in the 
state. According to a report in the St. Petersburg Times, merchant power 
companies have announced plans to build some 20 plants across Florida just 
over the last year or so. However, the article stated that the Florida's big 
utility companies still have enough clout to block any plant proposal. 

For instance, Florida Power, Florida Power & Light and Tampa Electric joined 
forces last year to block Duke Energy from constructing a plant near Daytona 
Beach. Yet, Duke pushes forward and recently said that it would revive plans 
to build a merchant plant in New Smyrna Beach, Fla. Duke's plans to build the 
plant had previously been blocked by a Florida Supreme Court ruling that such 
plants were prohibited under state law. 

Enron unveiled plans for two "peaker" plants in Pompano and Deerfield Beach, 
Fla., several weeks ago. Construction on both sites is pending city and state 
environmental department approval, but Enron hopes to have both 500 MW 
facilities running by summer 2002.  Enron expects the Department of 
Environmental Protection to license each peaker plant for 125 days each year, 
with roughly 83 days powered by natural gas and the rest by oil. Enron is 
also in the preliminary stages of planning a 90-mile liquefied natural gas 
(LNG) pipeline between the Bahamas and Port Everglades, Fla. The company has 
an option on a 90-acre site in the harbor of Grand Bahamas Island, where it 
hopes to build a conversion and treatment terminal for LNG. 

Calpine received approval to build a 529-MW natural gas-fired plant to supply 
electricity to Seminole Electric Cooperative. The plant will be part of the 
proposed Osprey Energy Center in Aurburndale, Fla., next to an existing 
Calpine 150-MW cogeneration plant. According to Calpine, beginning in June 
2003, Seminole Electric Cooperative will distribute electricity from Osprey 
for 17 years to 10 member electric cooperatives.  

Reliant Energy is also finding its own way to penetrate the new openings into 
the Florida market. Just last week, Reliant Energy Services, an unregulated 
wholesale power subsidiary of Reliant Energy, announced that it has entered 
into agreements with affiliates of El Paso Energy Corp. to purchase future 
supplies of power from several new facilities to be built in Florida. Under 
the tolling agreements, Reliant Energy Services has secured the right to 
utilize and dispatch electric generating capacity totaling approximately 
1,100 MW. The electricity will be generated by two new natural-gas fired 
simple-cycle peaking plants, to be owned by El Paso Energy, that will be 
located in Pasco and Hardee counties. The new plants are scheduled to be 
completed by the spring and summer of 2002.  

These are just a few examples of the many companies that plan to take 
competitive advantage of the anticipated opening of Florida's market. While 
Florida clearly has no plan to open deregulation on the consumer level any 
time soon, competition in the state does appear to be gaining momentum, at 
least on the wholesale level. Of course, the commission's plan has not yet 
been fully approved by the Florida Legislature, and critics claim that the 
state's big utilities still wield a great deal of influence over the extent 
to which competing power suppliers will be allowed to participate in the 
state's market. There are many debatable nuances within the Florida 
commission's plan. Yet, one positive thing is that Florida does appear to be 
making valuable steps to increase its own power supply, addressing a problem 
that many have accused California of ignoring. Having learned the lesson from 
California, Florida seemingly acknowledges that there is simply no guarantee 
that power will be readily available at tolerable price levels on the open 
market. Thus, this plan to increase the availability of power supply within 
the state through increased merchant plants seems to be a prudent approach. 

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