If merchant power plants are the key to Louisiana’s economic future, will we board on time? Or is this even a trip we want to take?
November 28, 2001
There’s a new breed of industry putting its roots down in Louisiana. Some are talking about the fruit it will bear and the hunger it will feed. Others are talking about the leaves it will shed and the mess it will leave behind.
Whether these new power plants are called “merchant” or “independent,” the exotic new birds are migrating to Louisiana in hopes of bedding down for more than just the winter.
The state and the energy industry are preparing the nest and welcoming the newcomers. Others warn that the nest is already overcrowded and that what we’re really welcoming is more of the same old problems.
The Times examines the issues in the first of a two-part series.
Doing the Math
David Dismukes is no stranger to developing energy issues. As an economist, he’s studied the developing energy infrastructure in Mississippi and helped conclude a study in Alaska that examined the use of natural gas by the state’s power facilities. He’s a full-time associate professor at Louisiana State University’s Center for Energy Studies and an adjunct associate professor at LSU’s economic department in the E.J. Ourso College of Business Administration. When he was employed as a senior economist with Econ One Research (an economic consulting firm based in Los Angeles with offices in Sacramento, Calif., and Houston) he began taking a look at the numbers involved with constructing merchant power plants in Louisiana.
His recent study on merchant power plant development in Louisiana, “Moving to the Front of the Lines: The Economic Impact of Independent Power Plant Development in Louisiana,” is 86 pages examining “the economic impacts associated with new independent power generation resources.”
He presented his findings in October at a conference organized by LSU’s Center for Energy Studies. “Merchant Power Generation and Transmission in Louisiana: The Engine Driving Our Energy Future for the Next 100 Years” was attended by some 125 people, primarily energy industry and state officials. Sponsors of the event included the likes of Calpine, Dynegy, Entergy and Williams Energy.
Dismukes says that merchant power plants are “the next step of the industry” and that now is the time to capitalize on the benefits they can bring to Louisiana. But if the state rests on its laurels, it could miss out on a golden opportunity for economic development. “We had better not miss the boat on this one,” he says.
According to Dismukes, there are a number of benefits for Louisiana in fostering the development of merchant power plants. Here’s what his report states.
In A Nutshell
The construction of merchant power plants in Louisiana will bolster the economy, improve energy efficiency, generate tax revenue and provide more cost-effective electricity to industry, businesses and, ultimately, households. If Louisiana doesn’t act soon, there are a number of states that could seize the opportunity and become the premier wholesale electricity provider for the southeastern United States.
There are currently 27 merchant power plants on the drawing board for Louisiana. The new plants would produce an additional 13,578 megawatts of electricity or about 38 percent of the state’s existing generating capacity. Of these 27 plants, three are currently operational. They are the Perryville Power Station in Ouachita Parish, the Evangeline Generating Station in St. Landry Parish and Calcasieu Power in Calcasieu Parish.
There’s a $7.8 billion potential investment in independent power facilities. By 2005, the impact of constructing these plants could total $2.8 billion. The employment opportunities with the operation of these facilities are estimated at 1,483 jobs, with salaries ranging from $50,000 to $60,000 a year.
The construction of merchant power plants would also increase Louisiana’s energy efficiency. “Heat rate” is the standard efficiency rating used in the electric power industry. It defines how many units of energy are required to produce one unit of electricity. A lower heat rate means that the facility is using less energy (British Thermal Units or BTUs) to create electricity (kilowatt-hours or kWhs). A lower heat rate translates to greater efficiency. The average heat rate of a facility in the southeast can range anywhere from 13,000 to 17,000 BTU/kWh. At peak times, the heat rate can reach 28,500 BTU/kWh. Older plants mean less efficiency, and newer technologies in new plants will translate to greater efficiency.
Each new merchant power plant will pay property taxes, taxes on fuel used, income taxes, sales taxes and franchise taxes that could equal $1.9 billion over the next 30 years. While the new industry will be paying taxes, it also will be providing cheaper energy that would translate into more disposable income for citizens, further benefiting the economy. “Louisiana currently pays below national average electricity rates,” Dismukes writes in his report. “However, Louisiana pays considerably higher than national average electricity bills as a result of our state’s energy intensity.”
But most important of all is Louisiana’s allure to potential merchant power plants. Ninety percent of them will be fueled by natural gas. Louisiana is the second largest producer of natural gas, right behind Texas, with the ability to transport the fuel. Texas and Mississippi also have the means to transport the natural gas. Texas will be entering retail competition by the beginning of next year. Mississippi has already begun phasing out its tax for fuel used to attract the new merchants and is also offering “property tax exemptions for merchant power facilities provided a fee in lieu is paid for local schools and counties,” Dismukes writes.
The bottom line is that Louisiana has the fuel and the resources. Merchant power plants are going to be constructed and they might as well be here, where they will be bolstering the state’s economy. The train is pulling out of the station and Louisiana needs to get on board before it pulls into another state.
Traditionally, utility companies have been able to operate as regulated monopolies. Their operation guarantees them a captive market for their electricity. Their prices are set, and they’re allowed to recoup their costs and make a minimal profit for future capital investments. In return, they are required to provide a safe and reliable service to their customers. In 1978, the rules were beginning to change, slowly but surely.
The U.S. Congress passed the National Energy Act. At the time, there was growing uncertainty about the availability of natural resources for energy. The act encouraged conserving energy, looking for alternative forms of fuel and investigating renewable resources. It was also aimed at reducing the nation’s dependence on foreign sources of oil.
Part of the act was the Public Utilities Regulatory Act. It encouraged the production of electricity through cogeneration. A cogenerator is a facility that does not produce electricity as its sole means of existence. It produces a product and one of the byproducts of its production is electricity. The cogenerator can then turn around and sell that electricity back to the utility company.
Four years later, Congress passed the Energy Policy Act of 1992. It created an entirely new class of power providers. These new independent power plants are not subject to the traditional rules of rate regulation. The Federal Energy Commission required that the traditionally regulated utilities grant access to the regulated power transmission grids to these new players in the energy field. The requirement was made official in 1996 when the FERC issued Order 888. “This new order helped create a system in which transmission lines, regardless of ownership, would serve as a common carrier to facilitate wholesale trade,” Dismukes’ report says.
While the face of the power industry was changing, so were some of the rules. “Safe and reliable” was taking a backseat to “supply and demand.” “Either prices must rise to lessen demand or demand must be curtailed though interruptions and rolling blackouts in instances where power is simply unavailable,” Dismukes writes in his report. The recent energy crisis in California is a prime example of this theory.
There are also new tax and environmental issues that arise with the new industry. “California, for instance, with its stringent environmental laws, rules and standards, is not considered by many developers as being friendly towards power plant siting. While the state has recently changed these rules to allow ‘fast-track’ approval process, many of these developments will take time – hardly a concession to ratepayers suffering from high rates and poor reliability,” Dismukes’ report says.
These new merchants of power are private businesses investing in this high-risk venture, a fact that is often overlooked. Their investments could be lost if the market becomes saturated “with large numbers of highly efficient and low cost power plants.”
Louisiana is an intensive user of energy, even though its efficiency has increased since 1973. According to Dismukes’ report, the state continues to import 16 percent or “a significant portion of its power.” The merchant power plants will be more efficient and add to the reliability of Louisiana’s energy.
But none of this will happen without the support of state government. Other states have already implemented catchy new ways to attract the attention of prospective companies. In San Jose, Calif., the state of Minnesota rented a billboard encouraging Silicon Valley companies to relocate there. Gov. Jesse Ventura followed up the campaign with personal letters to some 500 companies in the high-tech industry. The Michigan Economic Development Corporation sent 4,500 glow-in-the-dark mouse pads to high-tech companies in San Jose and San Francisco. The Tennessee Department of Economic and Community Development targeted some 1,000 industrial executives, presenting them with flashlights that read, “The lights are always on in Tennessee.” The Greater Raleigh Chamber of Commerce in North Carolina sent out 9-volt batteries with its 90 letters to company officials, encouraging them to relocate there.
“The strategies pursued by other states are certainly ones that can be implemented in Louisiana if similar ‘big welcome mat’ philosophies are pursued,” Dismukes says in his report. “Given the resolutions of the Public Service Commission, and the Rules Committee of the Louisiana Commerce and Industry Board, Louisiana seems well positioned to move forward in this direction.”
Jeff Copeskey has “been told not to say too much” but he will say this: “I’m concerned with what my kids’ futures are going to be like when it comes to jobs. We’re missing opportunities when it comes to electricity.”
Copeskey is vice president for government relations for Louisiana Mid-Continent Oil and Gas Association. The trade association, with headquarters in Baton Rouge, represents “the major players,” 90 percent of the oil and gas industry in Louisiana. It’s behind the emerging new independent power generating industry and has helped fund Dismukes’ study.
Copeskey says Louisiana Mid-Continent monitors “issues in state government. We try to keep up with what the government’s doing, track what’s happening to inform our folks and map out our strategies to the issues.”
For Copeskey, the need for merchant power plants is a no-brainer. If Louisiana doesn’t welcome them, states with more initiative, like Texas, could take the lead in the developing industry, purchase natural gas from Louisiana, turn it into electricity and sell it back to Louisiana with a markup.
He is also tired of hearing that these new companies are being given tax breaks. To say that they are “is completely asinine and completely bogus, but it makes good print and people keep saying it.” He says the lawsuit brought by Rep. Kip Holden, D-Baton Rouge, against the state Board of Commerce and Industry for allowing property tax breaks to merchant power plants has been nothing more than an exercise in grandstanding. Copeskey adds that companies extract the state’s natural resources for profit every day and that taking natural gas and turning it into electricity is no different from any other form of manufacturing. “I’m not sure why these folks are being treated like second class businesses in this state,” he says.
While the industry is pushing for the construction of that new “big welcome mat,” the state of Louisiana is busy weaving it.
In August of this year, the Board of Commerce and Industry unanimously ruled that merchant power plants could apply for a tax break before beginning construction of their facilities. The board’s resolution defined the new plants as manufacturers, which allows them to qualify for the industrial property tax exemption for 10 years. An amendment to the resolution also encouraged the board to consider the use of groundwater when considering whether or not to grant the exemption to a new plant. The resolution also asked the Department of Economic Development to ask the Louisiana Tax Commission to lower the assessment of power plants from 25 to 15 percent, to urge the Legislature to phase out or even eliminate the sales tax on fuel used by power plants and to consider tax credits for those companies that make contributions to upgrading the state’s power transmission grid.
The Louisiana Public Service Commission issued a resolution on Oct. 4, 2000, stating that “the LPSC finds it to be in the public interest at this time for such economic, efficient, ‘unregulated’ generation capacity to be built within the state of Louisiana in order to satisfy the electrical demands and reliability needs of Louisiana both now and in the future.”
In the regular session of 2001, both houses of the Legislature passed resolutions urging the Louisiana Department of Economic Development “to develop strategies, including but not limited to the establishment of certain incentives, to encourage the new merchant power development industry in this state to build new electric generating plants and to upgrade and expand the transmission grid.” Each resolution was passed “all in an effort to meet and serve the future electrical power needs of the state and the citizens of the state.”
On Oct. 25, 2001, Gov. Mike Foster created the Comprehensive Energy Policy Advisory Commission to “help maximize the use of Louisiana’s natural resources and help alleviate the national shortage of energy.” The commission has been charged with a number of duties, including reviewing energy conservation programs, determining the feasibility of the state constructing cogeneration facilities, encouraging the construction of private electrical generation and cogeneration plants, utilizing the full capacity of the current electrical power line infrastructure and reviewing the environmental issues associated with the plants.
The Acadia Power Partners south of Eunice has been the source of a controversy over the company’s decision to use groundwater from the Chicot Aquifer to cool its plant. The partnership between Calpine and Pineville-based CLECO is slated to be fully operational by next year. CLECO did not return repeated phone calls to discuss the plant’s future. Copeskey says that only a few of the 27 facilities proposed in Louisiana will use groundwater and that the majority of them will use surface water.
One issue that has not been addressed by the energy industry or the state is the question of upgrading the power transmission system grid. Dismukes says that the current transmission is efficient, but that it was designed for reliability and not for the rigors of commerce. There are some 23,000 miles of electric power transmission lines in Louisiana and “most industry analysts recognize that there is not enough to facilitate the growing amount of wholesale trades on the system.” He says the “system is being asked to do a lot of things it wasn’t designed for” and that the current challenge lies in upgrading that system. The looming question, though, is who will pay for that upgrading.
Copeskey likens electricity to the oxygen of our state and says that without the new independent power plants it’s only a matter of time before Louisiana suffocates. The new independent ventures in electricity “will provide the oxygen to breathe future jobs into the state. I don’t care what jobs they are. You can’t expand if you don’t have the necessary energy. We would like the message to be sent out that Louisiana is open for business.”