Duke eager to build, not buy, power plants

AUBURNDALE — — The power plant is a decade old but in no way shows its age.

“It looks brand-new, doesn’t it?” said John Flumerfelt, an executive at Calpine Construction Finance Co., during a recent tour of the facility. “Shipshape.”

His description is apt. Run by a 23-member crew that includes old Navy veterans, the plant shows like a well-tended ship. It is a highly efficient combined-cycle generator fueled by natural gas. Calpine built the “merchant plant” to sell power to public utilities.

These days, though, there’s so little demand the plant sometimes sits idle. The Great Recession not only reduced demand for electricity, it spurred investment in power-saving devices and strategies. Power usage around Florida has been flat for years.

So Calpine wants to sell the plant for a bargain-basement price.

The company sees a potential buyer in Duke Energy. Duke wants $1.9 billion from its customers to build new plants to meet future power demand. The Public Service Commission will begin hearings on Duke’s proposal this week.

But Duke has no interest in the Calpine plant, which is in Polk County. Nor does it want two other merchant plants that are for sale in Central Florida. All three — which together have about two-thirds the capacity Duke wants — could be had for about $1 billion. That, Duke insists, would not be cost effective.

Duke has used the same rationale to oppose investment in alternative energy sources like solar power and programs to promote energy efficiency. Now, Duke is insisting that it is cheaper to build new plants than to buy used ones.

Critics say Duke’s strategy is more about making money for utility shareholders.

Florida utilities make a guaranteed return, very roughly 10 percent, on new power plant construction and on selling power. Energy efficiency programs make them nothing. The same goes for buying electricity from merchant plants.

If the state approves all of Duke’s construction plans, the utility would pocket as much as $190 million. Buying the existing plants — on which Duke would also make a guaranteed return — would bring Duke about $100 million.

“It’s just more advantageous to the utility to build new capacity than to run a conservation program or purchase these merchant units,” said Etan Gumerman of Duke University’s Nicholas Institute for Environmental Policy Solutions.

“Duke has figured out the best thing for (itself),” Gumerman said. The Public Service Commission “needs to consider what’s best for the system and what’s best for the customers.”

Duke would not be asking to build new plants if it had not completely fouled up its last two big projects. The utility ruined the Crystal River nuclear plant while trying to upgrade it. It spent $1.5 billion planning to build a new nuclear plant in Levy County only to abandon the project after permitting delays and soaring costs.

Bottom line: Duke customers are paying $3 billion for power plants that do not produce power. They pay monthly electric bills almost $10 more a month than those going to Tampa Electric ratepayers and almost $25 a month more than those served by Florida Power & Light.

Duke shareholders made out better on the two blunders: They pocketed about $250 million.

Starting this week, Duke is seeking PSC approval of new projects that ultimately would deliver about the same capacity as the two nuclear plants.

Specifically, Duke wants to tear down three 1950s-era units and replace them with a new natural gas-fired peak-demand unit. It also wants to make improvements to another plant to improve its efficiency. Duke insists it needs both projects by 2016.

Then in 2018, Duke plans to retire two coal units at its Crystal River power station in Citrus County and replace them with a big natural gas plant.

Total cost for new plants and improvements: $1.9 billion.

Duke insists the only realistic option is building new plants. In written testimony to the PSC, Duke executive Benjamin M. H. Borsch said that, “There simply is no more cost-effective, viable generation resource to meet” the needs of Duke’s customers. Purchase of the merchant plants would require approval from federal regulators, which Duke said is not guaranteed. Any federal approval, Duke said, could require costly new transmission lines.

Duke argues, correctly, that the combined capacity of all three merchant plants would be less than the natural gas plant it wants to build in Crystal River.

The three merchant plants have separate owners, each of whom has asked the PSC to reject Duke’s proposal and order the utility to reconsider either buying their power or buying their plants.

The owners make similar arguments:

1. Duke does not need as much power as it says it does, nor does it need that power as soon.

2. In part, that’s because Duke wants to close two older plants two years before it has to.

3. Their plants are as efficient as those Duke wants to build.

Given all that, the merchant plant owners argue, there’s no need for the PSC to give Duke everything it wants right now. Why not have Duke buy power from their plants, or buy them outright? Why not delay closing the older plants?

If energy demand does not meet Duke’s projections, the public won’t have to pay for power it does not need. If the projections are met, there would still be plenty of time to build new plants.

Much — hundreds of millions of dollars — depends on the accuracy of Duke’s projections of future demand. How has it been doing?

In 2008, it predicted that demand would rise by almost 11 percent by 2013. In fact, demand went down by more than 3 percent.

A notable utility critic sees inflated demand projections as part of a pattern as public utilities desperately try to support profits at a time of increased consumer interest in saving energy and alternative sources, such as solar.

“The fundamental problem here is that the utility has no idea about how much capacity they need,” said Mark Cooper of the Institute for Energy and Environment at Vermont Law School. “They’ve proven over the last 10 years that they have no clue.”

Cooper said that, contrary to Duke’s assertions, the new Crystal River plant would be 50 percent more expensive on a kilowatt basis as the Calpine plant.

“The problem is Duke won’t give us a ‘no build scenario,‘?” Cooper said.

“There’s going to be massive amounts of capacity,” Cooper said. “All of the risk of excess capacity is on the ratepayers to bear.”

Cooper goes further in questioning Duke’s motives.

If the existing merchant plants go unused, it will drive those facilities out of business, Cooper said. That would give Duke the opportunity to sell its excess capacity on the wholesale market with less competition. And, he added, customers would pay for the excess power Duke would sell on the wholesale market.

That scenario is not hypothetical. Duke’s PSC filings in connection with its construction plans specifically note its plans to sell excess power on the wholesale market.

The state Office of Public Counsel, which represents consumers before the PSC, has yet to take a stance on the merchant plant proposal because the analysis is so complex.

Deputy public counsel Charles Rehwinkel said while the total cost of the merchant plant proposals might be about $1 billion, that is just one factor the PSC will have to consider.

Also at issue will be whether Duke can get fuel at a favorable price for the merchant plants, how effectively the plants can be integrated into Duke’s system and how soon federal approval could be obtained.

“One of the central issues for the (Public Service) Commission to decide will be whether Duke has appropriately done the complex analysis that compares .?.?. costs among the competing options,” Rehwinkel said. “This analysis can drive the difference among proposals by tens or even hundreds of millions of dollars.

The question, said Gumerman, the energy policy expert at Duke University, is whether Florida utility regulators will move to prop up a utility trying to regain its footing after billions of dollars in mishaps or act to protect consumers and the state.

“What might make sense for the consumers or the state as a whole might not make sense for the utility,” Gumerman said. “The system that we have doesn’t provide the right incentives for the utilities. Everyone has competing interest.”

Contact Ivan Penn at ipenn@tampabay.com or (727) 892-2332. Follow @Consumers_Edge.

What’s next

• On Tuesday, the Public Service Commission will hold a workshop on the state utilities’ 10-year site plans, which include Duke’s new construction proposals.

• On Wednesday, the commission will hold a preliminary hearing on Duke’s request to build the new plants and improvements.

• On Aug. 26-27, the commission will hold full hearings on Duke’s proposed projects.

All commission hearings will be held in room 148, Betty Easley Conference Center, 4075 Esplanade Way, Tallahassee.

What Duke plans to close

•— Three units totaling 129 megawatts at its Suwannee power plant in North Florida.

—• Two coal units totaling 875 megawatts at its Crystal River power station in Citrus County.

What Duke wants to build

—• 320 megawatts of natural gas peaker units at the Suwannee plant in 2016.

•— 220 megawatts of improvements at its Hines plant in Polk County in 2016.

—• 1,640 megawatt natural gas plant near the Crystal River power station in 2018.

Cost: $1.9 billion

First Published August 9, 2014 8:00 PM

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