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Date: Wed, 14 Nov 2001 10:23:28 -0800 (PST)
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Subject:      Calpine Corp. Becomes One of the Few Companies to Penetrate
             Florida&#8217;s Wholesale Market
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November 14, 2001=20



Calpine Corp. Becomes One of the Few Companies to Penetrate Florida's Whole=
sale Market



By Will McNamara
Director, Electric Industry Analysis


[News item from Reuters] San Jose, Calif.-based Calpine Corp. (NYSE: CPN) a=
nnounced 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 s=
tatements. Calpine said in June that it had received Florida's regulatory a=
pproval for the plant, and that it was expected to cost $250 million to bui=
ld. Calpine also said that it is "continuing to move forward" with the prop=
osed 1,080-MW Blue Heron Energy Center, slated for Indian River County, Fla=
.=20

Analysis: With the onset of construction on this plant, Calpine now reporte=
dly 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 a=
s Enron have made similar attempts to begin construction on new plants (or =
gain control over existing plants), only to be blocked by community and reg=
ulatory resistance. Calpine, which now ranks as the largest builder of powe=
r plants in North America, has gained entry into Florida by agreeing to sel=
l the output from the plant to one of Florida's existing utilities. Neverth=
eless, it is a concession that supports Calpine's larger strategy for expan=
sion, both within Florida and across the United States. Along with the Ospr=
ey and Blue Heron facilities, Calpine also plans to eventually build a 1,08=
0-MW, $500-million plant near Vero Beach, Fla., which certainly positions t=
he company as the leading out-of-state generator in Florida's rather cloist=
ered wholesale market.=20

It is important to note that the Osprey Energy Center, which will be a comb=
ined-cycle, natural gas-fired facility, will be the first power plant of it=
s 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 as=
pects of Florida's $13-billion electric market that should be established f=
or context. First, Florida represents the third-largest electric market in =
the United States in terms of consumption (193 million megawatt-hours, acco=
rding to the Energy Information Administration), so deregulation of the sta=
te remains of great importance to many stakeholders. However, Florida has t=
aken a "go slow" approach toward electric competition and, at this point, t=
here is no plan to initiate retail competition in Florida. Leaders of the s=
tate (including Gov. Jeb Bush) have supported competition in the state's wh=
olesale market in an effort to move cautiously toward total deregulation. F=
lorida'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 powe=
r to the state's incumbent utilities.=20

However, the Florida Supreme Court has banned out-of-state companies from b=
uilding merchant plants in the state, which would be free to sell power any=
where and are not subject to rate regulation by the state's regulatory comm=
ission. A good example of this is Enron, which has attempted several times =
to build new generation facilities in the state. A proposed plant in Pompan=
o Beach, Fla., was rejected amid strong community resistance. Enron was giv=
en governmental approval to proceed with a peaking unit in Deerfield Beach,=
 Fla., for which the company is still attempting to obtain air quality perm=
its. According to Enron, the Deerfield Beach plant was approved because it =
was classified as a peaking unit, and will be allowed to generate only duri=
ng times of peak demand. It is not known at this time if Enron will continu=
e with its plans to build this plant now that it is being acquired by Dyneg=
y Inc. Southern Company has also moved into Florida (its first expansion ou=
tside of its service area) after receiving preliminary approval to build a =
633-MW natural-gas generation facility in Orlando. Southern Company has agr=
eed to sell the total output from this plant in a 10-year contract with the=
 Orlando Utilities Commission, Kissimmee Utility Authority and Florida Muni=
cipal Power Agency.=20

Nevertheless, the important point is that Florida has been a notoriously di=
fficult state for outside generating companies to enter and obtain permissi=
on 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 a=
re small enough as to not need approval from the Florida Public Service Com=
mission, although they still must obtain approval related to zoning laws an=
d air pollution permits. One proposal under the 2020 plan has suggested eli=
minating the involvement of the governor and the State Cabinet in approving=
 proposed plants, and limiting the ability of local governments to block pr=
ojects.=20

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 l=
ong-term contract, which meets the Supreme Court standard that out-of-state=
 generators cannot build merchant plants. Second, Seminole is a public util=
ity and outside of the jurisdiction of the Florida Public Service Commissio=
n, which presumably made it easier for Calpine to gain access into the stat=
e. Seminole Electric is a generation and transmission cooperative headquart=
ered in Tampa, Fla. It provides bulk supplies of electricity and wholesale =
energy services to 10 cooperatives located throughout peninsular Florida. A=
s of December 2000, more than 1.5 million business and residential consumer=
s in 45 counties received electric service from Seminole and its members. A=
ccording to information from Seminole, the bulk of its generating reserves =
is provided through a 20-year agreement with Calpine, which runs through 20=
13. Additional terms of the contract were not disclosed.=20

The Osprey facility will be located next to Calpine's existing 150-MW cogen=
eration facility in Auburndale, Fla., where a new 115-MW simple-cycle peaki=
ng unit is also under construction and expected to come online next year. R=
egarding the planned 1,080-MW plant near Vero Beach, Fla. Calpine reportedl=
y has found buyers for about one-half of the power it would produce from th=
e 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 off=
ice in 2000 to support its expansion in Florida and the Southeast, which in=
dicates that the company intends to remain a major player in this region, w=
hich has been comparatively slow to embrace electric deregulation.=20

Further, Calpine participates in a group known as the Florida Partnership f=
or Affordable Competitive Electricity (Florida PACE), which has attempted t=
o persuade lawmakers in the state, including Gov. Jeb Bush, to deregulate F=
lorida'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 t=
o 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.=
=20

Ironically, public resistance to new power plants in Florida comes at a tim=
e when new reports suggest that the state faces an imminent power supply pr=
oblem. According to representatives from the state's Energy 2020 Study Comm=
ission, Florida's electric reserve is significantly less than the 16-percen=
t reserve that incumbent utilities have claimed exists. In fact, the commis=
sion 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 ca=
lculations. If interruptible load is considered, then Florida most likely d=
oes have a roughly 16-percent electric reserve. Thus, Florida's policy of r=
equiring out-of-state generators to sign long-term contracts with incumbent=
 retailers could be considered a very prudent move, as any new generation t=
hat gets developed in the state is committed to a retail provider (reducing=
 the possibility that power could be withheld to drive up market prices).=
=20

As a whole, Calpine has a generation arsenal that includes some 37,700-MW b=
aseload capacity of mostly natural gas-fired and renewable geothermal resou=
rces. 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 sup=
plies are strained.=20

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 increas=
e in demand across the United States, along with the need to supply power d=
uring periods of peak demand. Other companies competing against Calpine in =
this space include Reliant Energy, Mirant Corp. and Duke Energy, which coll=
ectively have reportedly announced plans to build some 422,000 MW of genera=
ting 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.=20

Many of these plans for new generating facilities were outlined over the la=
st year or two, when the United States faced a well-publicized energy crunc=
h. Now, the pendulum has swung back to leave many of the same companies wor=
ried 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 la=
rge portion of the generation planned while supply was compromised and pric=
es were high will be canceled or delayed. However, as one example, Calpine =
appears to be following through with an aggressive generation expansion str=
ategy. One approach that might help Calpine to beat the odds against an ene=
rgy 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.=20


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/>=20


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