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June 25, 2001

Host: Rich Robertson
Topic: Power
Executive Producer: David Majure
In-Studio Guests:
Bill Mundell, chairman of the Arizona Corporation Commission. But first Don Robinson, vice-president of regulation and planning for Pinnacle West Capital Corporation, parent company of APS, the state's largest electricity utility.
Greg Patterson, Director of the Arizona Competitive Power Alliance, a coalition of merchant powerplants.
Tim Hogan, Director of the Arizona Center for Law in the Public Interest.

Rich Robertson: Tonight on "HORIZON," we can't live without it, especially during the long hot summer. See what Arizona is doing to grow a reliable supply of electricity. Good evening, I'm Rich Robertson sitting in tonight for Michael Grant. A Channel 8 poll conducted over the weekend shows a majority of Arizona voters believe there is a strong need to build new powerplants in Arizona during the next 10 years. 33% said there is some need. And only 8% think new powerplants are not needed in our state. Given three choices of what new powerplants should be fueled by, 37% said they preferred nuclear energy, 30% said natural gas, and 10% want new powerplants to be fueled by coal. This statewide poll of 404 registered voters was conducted over the weekend, has a margin of error of plus or minus 4.8%. Join poll director Bruce Merrill Thursday on "HORIZON" for more results. Now later in the Fram we will talk with Bill Mundell, chairman of the Arizona Corporation Commission. But first Don Robinson, vice-president of regulation and planning for Pinnacle West Capital Corporation, parent company of APS, the state's largest electricity utility. And Greg Patterson, Director of the Arizona Competitive Power Alliance, a coalition of merchant powerplants. And Tim Hogan, Director of the Arizona Center for Law in the Public Interest. He's an active watchdog of the state's approval process for new powerplants. We'll talk with our panelists after this brief look at Arizona's electricity supply and demand.

>>(DAVID MAJURE/reporting) One megawatt of electricity. In most places it's enough for about 1,000 homes. But in Arizona, in the summer, one megawatt is barely enough for 350 houses. Powerplants are working full tilt during Arizona summers, and local utilities must often import power from other states. But overall, Arizona generates adequate amounts of electricity to satisfy its needs. Still, the supply gets tighter as we continue to grow.

>>(JERRY SMITH/Utilities Engineer, Arizona Corporation Commission) The metropolitan Phoenix area is growing roughly at the rate of 500 megawatts per year. Which is the equivalent of a large powerplant per year. So when you look at that, you can say the state has a need for at least a major powerplant per year just to meet the load growth occurring in the Phoenix metropolitan area.

>> (MAJURE) 13,000 megawatts, that's Arizona's peak demand, the most electricity consumed at any single moment in time. 16,000 megawatts is what the state's 21 major powerplants are capable of generating. Arizona's 16,000 megawatts of generating capacity could more than double in the next decade if some 21 proposed powerplants are built here. 13 of those plants are already approved. If built, they'll add an extra 12,000 megawatts to Arizona's generation portfolio.

>>(ROBERT WALTHER, President of Industrial Power Technology) We have here information about our 833 megawatt plant that we're building out at Gila Bend.

>>(MAJURE) Bob Walther is president of industrial power technology, a California-based company that's been approved to build an 833 megawatt natural gas-fueled powerplant in Arizona.

>>(WALTHER) We have for the first two years of our existence, we must offer all of our power to Arizona on a competitive market and if Arizona is interested in that power and Arizona base load certainly our power would be delivered to Arizona. After the two years, we would have the right if one would make it a right under interstate commerce policies to sell our power anywhere within the United States. We could not only sell to it go west to California, we can sell it south and east to New Mexico. We can sell it up to Colorado. We could sell our power in anyplace, but we would sell our power where the market is, and the market is here in Arizona.

>>(MAJURE) These types of merchant powerplants are a growing trend. Today only two merchant plants are operating in Arizona, but that's changing fast.

>> (SMITH) As we move forward in time, probably within the next five years about half of the plants, half of the generation in the state, megawatt-wise, will be through merchant powerplants.

>> (ROBERTSON) Well, Don, are new powerplants being built in Arizona just for Arizona?

>> (DON ROBINSON/VP of Regulation and Planning/Pinnacle West Capital Corp.) The new powerplants that pinnacle west energy is building are primarily for our Arizona customers. Arizona public service company is actually 1200 megawatts short of capacity this year and has had to go out and buy that. So much of the new power that we generation will be going to Arizona customers.

>> (ROBERTSON) Greg, you represent a number of the small merchant types that were mentioned in here. Are they generating -- or the power capacity they're building going to be for Arizona?

>> (GREG PATTERSON/Director, AZ Competitive Power Alliance) Well, as Bob said in the set-up piece, there have been restrictions on many of the plants that in the early years they have to offer their power first to Arizonans. I think that these projections that we're going to have this huge glut and that the power is going to be sold somewhere else remind me of the California situation. Three years ago they were saying we have a huge glut, extra power, we don't need to build plants and we will deregulate to take part of market conditions. Lo and behold those projections are wrong. Now some of those same people are saying here we have a tremendous growth in powerplant capacity, surely we can't use it. Arizona is growing rapidly enough that we could quickly have a full need for those plants, and they should be ready. They should be here. We need to keep the lights on.

>> (ROBERTSON) Tim Hogan, do you think new plants being built in Arizona should be for Arizonans?

>> (TIM HOGAN/Executive Director/AZ Center for Law in the Public Interest) Well, I think we ought to share the burdens of these powerplants among the states that are going to use them. Arizona is disproportionately burying the burden of these new powerplants. If you look at California, if you look at Nevada, New Mexico, Arizona is building more than any of those states. And we're willing to let these plants use massive amounts of water, pollute the air -- I mean, there are significant burdens associated with these and the benefits flow out of state. So I've been an advocate for trying to do some planning on a regional basis here so states within the western region here share those burdens and share the benefits. But that's not happening right now. We're building three times as much power in this state as we need or as we used last summer. We're not going to use all that power, not for a long, long time, no matter how fast we grow, we can't use that power.

>> (ROBERTSON) Is that true, Don, does APS not consider the market threat the region when it's designing plants --

>> (ROBINSON) The plants -- primarily the plants we have built we're looking to serve the Arizona load. We do sell excess power off to other states but quite frankly one of the things that needs to be said in this is there is not enough transmission to generate and send all this power to California or other states as people are talking about. Much -- in fact, most of this power has to stay in the Arizona area because there's no place else it can go to.

>> (ROBERTSON) Do you agree with that, Greg?

>> (PATTERSON) That's exactly right. You want to be close to a commodity during commodity shortages. Lobster is cheap in Maine. You want to make sure you have powerplants close to you. We saw recently the cost of power was low in Southern California at the same time they were going to be rolling blackouts in Northern California. So obviously being close to production is important.

>> (ROBERTSON) Tim, is this going to be a process that will work out? Obviously they will add transmission lines --

>>(HOGAN) Sure, there are transmission lines in the approval process right now and while pinnacle west, APS, may be using its resources to serve their native load here we are talking about 20 other powerplants where the power is going somewhere else. We've got a line from Tucson to Mexico in the works right now. We've got lines to California in the works. I mean, mathematically this power has to go somewhere else. It can't be absorbed here.

>> (ROBERTSON) Ok. Many companies are interested in building powerplants in Arizona. We asked the president of industrial power technology why his company chose to do so.

>> (WALTHER/on tape) Arizona is a very business friendly state. It is a reasonable state to do business in, certainly. It is not a state without very severe and strict regulations. And certainly the Arizona meets all of the federal regulations and administer them very -- they enforce them very strictly, but they administer them very fairly.

>> (ROBERTSON) Tim Hogan, Arizona is a business-friendly environment. Is it easier to get a powerplant built in Arizona?

>> (HOGAN) Yeah, that's a charitable way of putting it, I think. The -- I don't think the powerplant and transmission line siting committee has ever said no to a company wanting to locate a powerplant where it wants to locate it for how much power it wants to produce. The fact is it's cheaper to do it here, it's easier to do it here, we basically invite these people to come and litter Arizona with powerplants.

>> (ROBERTSON) Greg, those are your clients, littering Arizona.

>> (PATTERSON) And wonderful clients they are. It used to be that when you brought in high-tech manufacturing, that brought in high-paying jobs that were clean, that you called that economic development. And now for some reason we're viewing these powerplants somewhat differently. When the fab 12 plant went into Chandler for $2 billion for Intel, the people in Chandler were thrilled and they should have been. And when you go to Harquahala Valley and the PG & E plant is coming online and it has a 17-fold increase in property tax values and it's cleaner than other plants in the market and when you turn that plant on, a dirtier coal plan turns off, those people are thrilled to have that powerplant in their area and they should be.

>> (ROBERTSON) Tim, everything is a trade-off.

>> (HOGAN) You can ask Don if they are turning off coal-fired powerplants. They're not. They're going to continue to operate those dirty plants so long as the power they produce from those plants is profitable to market. And it's going to be profitable to market for the foreseeable future. We're not going to see any of those dirtier powerplants, any of the coal plants -- they're not shutting off the nuclear plant either. They're all continuing to operate because the cost of operating them on a marginal basis makes it profitable to market that power.

>> (ROBERTSON) Jump in, Don.

>> (ROBINSON) First off, let me say the cheapest plants we operate and therefore the ones that produce is lowest cost to our customers are, number one, the nuclear plant at Palo Verde which produces no pollution into the environment. The second are our coal plants, which Tim characterizes them as dirty, but they do comply with all the federal and state emissions requirements. As far as the new plants are going online, the technology is it does burn natural gas, which is a cleaner burning fuel, they have better heat rates than the older natural gas plants, or certainly the diesel plants. So I think that putting those kind of plants in is the right thing to do for the environment as well at this point in time.

>> (HOGAN) Just so we get this clear, I didn't say they were dirty. Greg said they were dirty. And that his clients are going to be replacing that dirty power.

>> (ROBERTSON) And they're not doing coal or nuclear.

>>(ROBINSON) And his clients aren't replacing any of our coal plants because they won't be cheap enough --

>> (PATTERSON) I am not talking specifically about our friends at APS. The physics of the system says when one plant goes on it competes with other plants and these plants, the new combined cycle, gas fired turbines are clean, efficient and cheap and because of that somewhere along the line when one of them goes up, another one doesn't. They are dispatched in order. So this one is dispatched and another one isn't. The ones that are not dispatched are generally the ones that are grandfathered in, they're older plants, less efficient, dirtier, more expensive. That's the physics of the system. Don may be running his very clean coal plants and his are. However, somewhere along the line there is an old diesel generator, there is an old coal plant, something doesn't turn on because one of the new clean gas-fired plants does and that's good for the whole system.

>> (ROBERTSON) Ensuring Arizona has enough electricity is one thing. Making sure it's affordable is something else. All the new powerplants being proposed run on natural gas which raises red flags for some.

>>(SMITH/on tape) Our state has historically had a pretty good balance between coal-fired units, hydrounits and nuclear with a fairly small segment of our generation mix being gas-fired. As we look at bringing on all of the new gas-fired units, we are seeing probably our generation mix here in the state will grow to be close to 50% natural gas-fired. So that does raise a concern to what degree are we becoming too dependent upon natural gas.

>> (ROBERTSON) Is Arizona setting itself up, Tim, to -- the swings and prices of natural gas?

>> (HOGAN) Well, sure. I mean, natural gas prices were relatively stable for a long period of time until we saw all the gas fired units going in. And all of a sudden we see these price spikes at the state border to California. I mean -- of course, that's under investigation now by California authorities and they found at least some preliminary evidence of wrong doing and price fixing and supply manipulation there. I mean, as long as you've got that issue, you're going to have that problem.

>> (ROBERTSON) Why all natural gas? I mean --

>> (PATTERSON) Natural gas is clean and efficient. Remember that a coal plant, not Don's coal plants, other coal plants, 70% of the BTUs that go in are waste heat oftentimes. The combined cycle natural gas plants are extremely efficient. And the key is who is burying the risk here? It used to be if you built an inefficient plant, you went to the Corporation Commission, groveled, said, We did the best we could, we need higher rates. People have to pay for this because we're a captive regulated monopoly. Now if you build a merchant plant and natural gas prices go up and you haven't done anything about that, you can't sell your power. You go out of business. Do the people of Arizona pay for that? Absolutely not. Are consumers at risk? Absolutely not. Owners are at risk for in that the competitive system. I wish we had that when we were building nuclear plants in other plays in the '70s.

>> Rich: APS is clearly more diversified in that kind of generation. Do you agree --

>> (ROBINSON) I think we are absolutely more diversified. In fact, right now 15% or so of our portfolio is natural gas and even with all the gas units we're putting in, it will only be somewhat over 20%. We believe having a diversified portfolio gives our customers the best opportunity to benefit from the mix of fuel. True, at times the natural gas prices have started to go up as Tim suggested, but, at the same time, there is like 900 new natural gas wells being dug. If those produce gas, the price of gas will again probably come down. You're in a position then to use that, but we also have the advantage that we do have the cheap coal and the cheap nuclear fuel to fall back on as well.

>> (ROBERTSON) Are Arizona customers, do you feel, guaranteed that they're not going to be hit with significant price increases like happened California?

>> (ROBINSON) I can guarantee Arizona public service customers are not going to be hit with rate increases like they have in California. In fact, in just a few days On July 1st we will be lowering our rates by 1.5%. We will do that again in 2002 and 2003 as part of the terms of a settlement we had with the commission. We're committed to keeping our customer prices very low and very competitive.

>> (ROBERTSON) But your price reductions were by agreement, not because of the open market.

>> (ROBINSON) Our price reductions were by agreement but they were predicated on our ability looking out into the future of controlling our costs and still managing to make a profit within those constraints. When we're into the open market with all the powerplants everybody is talking about being built here, I think you're going to see a decline in the price -- market price for power from what it has been for the last few months because the biggest reason that prices have been as high as they have is there's much more demand than there is supply and basic economics come into play and said -- California did everything wrong. They had hadn't a powerplant built in two decades. They created an artificial structure with the power exchange that guaranteed their customers paid the highest prices of any producer in any given hour. Arizona hasn't done any of those things. And with our customers, I think they're sitting really well. If you look at the surrounding states, we are the only company or the only state that is not having price increases right now and our customers won't for the next three years at least.

>> (ROBERTSON) Tim Hogan, it's still early, I guess, in this deregulation phenomena in Arizona. Are you confident we're insulated from those kind of spikes?

>> (HOGAN) No, absolutely not. I mean this, agreement lasts for three years and then these price caps come off. APS has to go out and buy power on the wholesale power market just like they're doing in California. And just -- I mean, the faulty assumption everybody makes about this is we're dealing in pure markets and textbooks here. That's not the real world. The real world is what's happened in California and where you you see prices being manipulated. That's why Greg's clients get into the business, to profit from this --

>> (ROBERTSON) To manipulate?

>> (HOGAN) I think there is some allegation those companies have manipulated the prices and there's some serious evidence to suggest that they have. There's nothing in place to prevent that. The Corporation Commission doesn't enforce antitrust laws. That's what we're talking about here. So we're going to be at the mercy of the market basically in three years and society question is, you can sit here and talk till the cows come home about what you think will happen in three years, but the fact is nobody knows and the fact is there's no protections in place for Arizona customers if it doesn't work out as rosy as some people are projecting.

>> (ROBERTSON) Greg, how rosey is it going to be?

>>(PATTERSON) Tim can't have it both ways. You can't say there's no needs for the plants we're going to have a huge glut and more on the market than we could possibly use and at the same time say the price is going to be outrage us and we will have to pay for it because we can't get enough. You have to pretty much choose one or the other there. In 2004, the price caps come off 7 we've got. We will have had 7 1/2% decrease in APS's prices. We are the only state in the west in which that has happened. We will have a tremendous amount of new powerplants that are dedicated to selling to Arizona first and meeting Arizona's needs first. Arizona, because of the efficiency of these plants, should profit by the fact that it should have a very low wholesale price of power right here and making sure that we make the right choices now is how that happens. If we try to shut off the spigot now where we could end like California. We say, we've got a glut, we're not going to build, three years later, we get the lights off.

>> (ROBERTSON) Thank you, gentlemen. Appreciate it. Coming up, chairman of the Arizona Corporation Commission shares his thoughts on electricity in Arizona.

>> (ANNOUNCER) For more information about electricity in Arizona, please visit Channel 8's website. The address is www.kaet.asu.edu. Click on "HORIZON" for links to a variety of energy-related websites, including the PBS Frontline documentary "Blackout," a comprehensive report on California's energy crisis. You will find links to organizations represented on tonight's program as well as up to date program listings and transcripts of "HORIZON." Again, the address is www.kaet.asu.edu.

>> (WALTHER/on tape) This anomaly that's happened in California recently will not happen again, and the plants are going to be competing with one another to build a better mousetrap and to sell their product for a lesser price.

>> (ROBERTSON) Joining me now is Bill Mundell, chairman of the Arizona Corporation Commission. A three-member panel that regulates Arizona's electric utilities. Bill, welcome.

>> (MUNDELL) Good evening.

>> (ROBERTSON) You heard these final gentlemen discussing their perspectives on this thing. Do you think that consumers are protected in this open market?

>> (MUNDELL) I think we're right where we want to be. I heard law in the public interest, they were concerned about building powerplants in Arizona and the concern for air and water and that's a concern of mine and the commission. On the other side of the coin, the utilities have said we have been too tough. So we're balancing protecting the environment in Arizona on the one hand and making sure we have affordable, reliable electricity on the other and it's not just because bill Mundell thinks it's a good idea. It's because we have a state statute that says we're supposed to do that. So back to your original question, we need to make sure we have affordable, reliable electricity on the one hand and on the other hand we're supposed to make sure we protect the air and wAter in Arizona and that's what we're doing.

>> (ROBERTSON) But is it affordable reliable electricity for Arizonans? How does the Corporation Commission as a regulator get into providing similar stuff for other states?

>> (MUNDELL) As one of your guests said earlier, we have rate reductions for APS customers. 7.5% over the next three years, from 1992 until the year 2003 you are going to see a 16% reduction in residential rates for Arizona consumers and if you look at what's happening in California with 60, 70% increases and all through the west, I think we are doing a pretty good job just keeping the prices stable would be important but we actually are having rate reductions over the next few years.

>> (ROBERTSON) But as Tim Hogan said, at the end of the three years, then what? These are negotiated rates, not open market rates.

>> (MUNDELL) We have retained our jurisdiction over APS, the regulated entity, but not pinnacle west. So we will be having a rate case. In fact they are required under the settlements to file a rate case in 2003 and we will look at all their expenses to make sure they made prudent purchases. The real concern and it's a fair question is what happens if there is not sufficient electricity on the open market on the wholesale market and the prices skyrocket? That's one of the reasons why we've sort of phased our deregulation in in the State of Arizona. We're building powerplants so we just didn't throw the consumer out in the open market like they did in California with no new powerplants in over ten years and so it's a phased in -- it's really not deregulation. People call it deregulations, but it's a new form of regulation. From my perspective, it's like any other public policy, I will continue to evaluate it as we gather more information and more material to make sure that the consumers in Arizona are protected.

>> (ROBERTSON) But at some point, this is not an exact science, balancing the supply and demand, if the demand for electricity outstrips the supply in the future, we could be at the mercy of the same kind of situation that California has, correct?

>> (MUNDELL) If we were not building powerplants, but we are building powerplants as your set-up pieces indicated. We are building powerplants. In fact, we have 2,000 megawatts of electricity coming onboard this summer and over the next couple years we're going to have, I believe, excess electricity, and so that's the key. Like I said, if you just looked at the a vacuum, opened up the market, not build powerplants, I believe you'd have the same problem you have in California. But we're building powerplants and phasing in and that's why we have the 2004 time period to make sure that we have this excess capacity before we throw the consumer, you and I, onto the open marketplace. Because we are going from 90 years of monopoly in the last area of our American society with electricity. It's really the last area where you can't go out and buy a Ford or Chevy or Sony or RCA. So we want to do it slowly and in my opinion, in a structured fashion. I don't want to do it just quickly. I want to do it correctly.

>> (ROBERTSON) Do you have any concerns about this increased reliance on natural gas?

>> (MUNDELL) Certainly. And I think that we need to be very careful that we have a balance. Traditionally in Arizona we have been fortunate because we have a balanced portfolio. We have nuclear at Palo Verde. We have coal. We have natural gas. And, in fact, the new Tucson electric facility in springerville will be generated by coal. So, yes, there is a concern that we're going to be too heavily relying on natural gas but we are trying to diversify the portfolio. One of the other things we did which I think is important is we've required our utilities to start using renewable sources of energy, whether it's solar, natural gas from landfills, and in Tucson, instead of burning up the gas from the landfill up into the atmosphere, they are using to it power the generation facility in Tucson and it's providing electricity for 5,000 homes. So we're also stepping up to the plate with renewables.

>> (ROBERTSON) Short answer, bottom line for all of those in Arizona, are you confident that this experience in California is not going to be repeated in Arizona?

>> (MUNDELL) I feel pretty confident the way we have done our deregulation.

>> (ROBERTSON): Very good. Thanks. Tomorrow on "HORIZON" we will talk about some issues affecting children and teenagers in Arizona at our "Community Roundtable." And on Thursday, more results from the KAET poll on energy. Plus what you can do to save both electricity and money. That's our program for tonight. I'm Rich Robertson. Thanks for joining us tonight. Have a good night.