Pam Boschee
Managing Editor

This describes the overall tone conveyed by the keynote speakers at POWER-GEN International 2002 in Orlando last month. Don't get me wrong—it wasn't doom and gloom, but it also wasn't a tent revival. It seemed to be somewhere right in the middle.

James F. Wood, president and CEO of Babcock Power Inc., began the conference citing a Wall Street Journal comment about this industry being in its worst credit crunch since the Depression. And recent single-digit spark spreads aren't helping to ignite any quick recovery.

Commenting on the last two years, Wood said 140 GW of new gas-fired capacity came on-line in 2000 to 2001. In 2002, this added capacity combined with lower overall demand (due to a slowed economy) resulted in increased peak margins across the country. These factors served to hold down electricity prices.

He added that 24 states and Washington, D.C. have instituted open access and choice in their electricity markets.

"I'm afraid that moderation of electricity prices has deluded the public that deregulation has worked. Danger lurks in complacency."

Looking ahead, Wood forecast the brewing of "perfect storms" in our industry. For example, electric load growth over the next 10 years is predicted at two percent annually. However, transmission capacity growth over the same period is expected to be 0.5 percent.

Labor changes may also contribute to perfect storms in the not-so-distant future. Wood pointed out that plant outages now occurring only once or twice annually have resulted in less demand for boilermakers. In fact, in 2001, less than 15 percent of boilermakers were classified as apprentices and trainees. That means there will most likely be a shortage of men to "come up the ranks" over the next few years to fill the steel-toed boots of those who retire

Rick A. Bowen, Dynegy's executive vice president, generation, was next up to the podium. Starting his speech with humor, he turned around to show the audience the target he wore on his back. Dynegy's merchant power and speculative trading businesses were bullseye in the California mess and post-Enron, respectively. He began, "It's great to be here—well, it's great to be anywhere today."

Bowen summarized the current state of affairs, highlighting several contributing factors.

He agreed with Wood that the "overbuild in generation and slowing of economy got us to today's situation." Regarding California, he said, "Blaming energy merchants was the easiest thing to do," while pointing out that the Cal-ISO itself concluded that limited power supplies and limited transmission were the causes of the crisis.

The failure of Enron lead to a fast and furious domino effect. According to Bowen, because the rating agencies were taken by surprise by Enron's financial shenanigans, they overcompensated by "attacking energy merchants" by immediately lowering ratings. As a result of the lowered ratings, customers then demanded more collateral. Rating agencies saw this unfavorably and again lowered ratings. Shareholders fled and customers panicked.

Bowen contends that rating agencies didn't allow enough time for recovery. Currently, all energy merchants are at below investment grade or one level above. He added that he is often asked, "When does the bleeding stop?" His answer: "Perhaps in the next 12 to 24 months."

Wood summed up the overall tone in his conclusion. Making reference to his own parent company's recent filings of Chapter 7 and Chapter 11 bankruptcy, Wood ended his remarks with the wry comment, "Stop by our booth for a glass of beer. We'll either cry in it or toast to better times ahead."

Here's to better times ahead in 2003 from the staff of EL&P.