New Breed of Electric Companies Has Its Eye on South Carolina

- Taking a dim view of the economy, many businesses have pulled the plug on their capital-investment plans. But not the electric industry.

With demand on the rise, generating capacity at the national level has quadrupled to roughly 320 gigawatts since 1997, according to a report released last month by the Electric Power Supply Association. That's enough juice to light up 256 million homes.

This year, the output of ions will jump 25 percent, the Washington, D.C.-based trade group projected.

"The U.S. power supply industry is continuing to change -- and change dramatically," said Lynne H. Church, the association's president.

While most states debate whether to bust up their old-line power monopolies, a fast-growing breed of entrepreneurial electricity providers has announced dozens of speculative generators all over the country, promising new jobs and bigger tax bases for local communities.

Yet as it works its way through South Carolina, this power surge has sparked concerns, prompting regulators to take a closer look at them. At the same time, a lawmaker is considering legislation to short-circuit the trend, at least temporarily.

Since 1999, five independent power companies have announced plans to develop eight "merchant" plants in South Carolina, mostly in the Upstate. One already is in service. Two weeks ago, a Maryland-based energy concern disclosed that it too is "interested" in a South Carolina site but offered few details.

The proposals, totaling more than $3.1 billion in value, do not include new power stations that three traditional utilities -- Santee Cooper, South Carolina Electric & Gas and Duke Energy -- either are already building or are planning to build within the state.

Merchant plants began sprouting up after the passage of the 1992 Energy Policy Act, which allowed the sale of excess electricity at the wholesale level.

They differ from utility-owned generators in that they are privately financed and purely speculative -- meaning they do not serve a guaranteed base of rate-payers. Rather, they rely on sales from the open "spot" market and long-term contracts, often with buyers in other states. Customers typically include traditional utilities that sometimes need more power than they can make themselves.

Another key difference is that regulators have no say over the rates that merchant plants charge. That has brought the industry under scrutiny in California, where legislators accused operators of price gouging when demand began to outstrip supply during the state's energy crisis.

Whether merchant plants will benefit consumers is hard to predict. Rate-payers do not pay for them, as they do for utility-owned generators. And the additional capacity increases competition, which tends to hold prices down.

Yet there are some potential pitfalls, as demonstrated in Mississippi, where merchant plants account for two-thirds of the state's power supply. Some officials there now worry that rate-payers will be stuck with the huge cost of upgrading the transmission lines to accommodate the loads of electricity shipped elsewhere.

Also, experts have said that merchant plants could put more pressure on states to open their retail electric markets to competition. Industrial companies have been among the strongest backers of deregulation because they would have the most clout to negotiate lower costs. A concern is that smaller customers would end up paying higher rates if too many big users jump ship.

All but one of the plants proposed for South Carolina would run on natural gas, drawing them to sites along the Transco interstate pipeline, which cuts a 100-mile swath through the Upstate. Another draw to the area is access to a nearby high-voltage transmission system owned by Duke Energy.

The growing thirst for power is fueling the building binge. While products have become more energy-efficient, an increasing number of everyday gadgets -- personal computers are a prime example -- run on electricity.

Growth patterns at SCE&G bear out this trend. Last year the utility saw power consumption rise 2.3 percent, while its customer base grew by just 1.5 percent, said Neville Lorick, president.

"This has been going on for a number of years, and we expect it to go on for at least 10 more," said Lorick, whose company is planning to meet projected demand by building a new generating station in Jasper County. Likewise, Santee Cooper is set to open its Rainey Generating Station Jan. 1 and will expand its Cross plant in Berkeley County.

While SCE&G has not formally opposed the construction of merchant plants, Lorick said he has some concerns about them.

He noted that the units would use the state's natural resources, including millions of gallons of water a day for cooling, without being required to deliver power to South Carolina homes and businesses.

"They're not going to serve the native load," he said.

And while natural gas plants are cleaner and more efficient than coal- and oil-fired units, they still emit air pollution, Lorick said. Also, they would put more stress on fuel supplies.

"All of those things have to be considered," Lorick said.

John Tiencken, president of Moncks Corner-based Santee Cooper, echoed Lorick's remarks. One of his key concerns is the integrity of the transmission grid. If new construction is not planned properly, the distribution system could malfunction or fail if it is overloaded, Tiencken said.

According to the North American Electric Reliability Council, the nation's already-congested system of high-voltage lines has not been expanded in 10 years.

"It will be an issue," Tiencken said.

Merchant plants are a double-edged sword for traditional utilities. On one hand, they represent competition for customers at the wholesale level. On the other, the projects create jobs and pay substantial property taxes.

"It's kind of hard to turn your back on that kind of economic impact," said Tiencken, noting Santee Cooper has not taken a formal position on merchant plants.

"It's just a question of addressing the issues," he added.

Merchant plant sources said most of the concerns being raised by utilities and others are overblown.

For example, the issue of natural resources rarely comes up when an exporting company like BMW decides to invest in the state, said John Flumerfelt, spokesman for San Jose, Calif-based Calpine Corp., one of the nation's largest independent power producers.

As for emissions, he said, merchant plant developers must abide by the same state and federal rules as any other business.

"We see ourselves as a manufacturer," said Flumerfelt, whose company recently announced plans to build its third merchant plant in South Carolina.

"We essentially manufacture and sell a commodity into the market. In its simplest terms that's no different than cars or widgets or orange juice or anything else."

He added that Calpine usually pays utilities to improve their power lines when it adds a generator nearby. And while the state of the national transmission grid is a concern, the federal government is working to craft a solution, he said.

"At some point we have to continually upgrade that system," Flumerfelt said.

"Certainly there are a wealth of issues on the table," he added. "Who pays for the new power lines? Do generators pay for that or do downstream customers? How do you share the costs, risks and benefits of that?"

Still, residents who live near the sites of the proposed merchant plants are raising objections.

In the Fork Shoals area of Greenville County, where three independent power producers have announced projects near a residential area, a form letter went out to homeowners. It asked them to sign it and forward it to local lawmakers. Among the issues singled out: environmental impact, plant safety and infrastructure needs.

"The county claims the plants will generate millions of tax dollars, but at what cost?" according to the letter. "Who will benefit? The questions are numerous and cannot be asked on one page."

State Rep. Harry Cato, R-Greenville, said he picked up on the merchant plant trend earlier this year.

Cato, chairman of the House Labor Commerce & Industry Committee, recently went before the S.C. Public Service Commission seeking a moratorium on merchant plants, a measure that Kentucky and Tennessee have taken to slow construction.

After learning the PSC does not have that authority, Cato is now debating whether to introduce a bill that would broaden the commission's powers.

"I'm considering that for January," he said.

Gary Walsh, the PSC's executive director, said he has concerns too about the number of merchant plants on the commission's docket.

"Air is an issue, and certainly water is an issue," he said, noting that one of the proposed generators is designed to run primarily in the summer.

"That's when droughts in South Carolina are generally at their worst," he said.

As a result, the commission voted unanimously two weeks ago to hire a consultant to study the pros and cons of merchant plants. The $200,000 report is expected to be completed next summer.

"This is a very large task," Walsh said.