Power plant reverts to lenders
Gila Bend facility casualty of energy glut

Max Jarman
The Arizona Republic
Feb. 6, 2004

A new $700 million power plant near Gila Bend is the latest casualty of the boom-or-bust Western electric power market.

Tampa-based Teco Energy Inc. said Thursday that it would turn the power plant over to lenders after it failed to garner enough customers to operate the plant profitably.

Three years ago, operators of such plants reaped huge profits selling electricity for prices that, in some cases, were 20 times higher than the year before.

Teco said the Gila River Plant, powered by natural gas, would continue to operate through the transition.

Analysts expect the plant eventually to be sold to another utility or investment group. If sold substantially below replacement cost, it would enable a new owner to sell electricity at below-market prices. Eventually that could lower energy costs for consumers.

The Teco plant is the second recently completed power plant in the state abandoned by developers.

PG&E National Energy Group, now called National Energy & Gas Transmission Co., is surrendering its 1,000-megawatt Harquahala Power Plant, west of Phoenix, to a group of lenders led by French bank Societe Generale. It also will likely be sold to bargain hunters.

Billionaires Warren Buffett and Carl Icahn have been picking up ailing power properties at near-liquidation prices. Also looking is David Bonderman, whose Texas Pacific Group is the largest stockholder in America West Airlines.

Duke Energy, which owns a power plant near Palo Verde Nuclear Generating Station, has announced plans to sell a group of Southeastern plants but keep the Arizona facility that sells power to California.

A 600-megawatt plant developed by Reliant Energy in Casa Grande was purchased by Salt River Project for $285 million, less than it cost to build.

The 2,100-megawatt Teco facility can supply power to 1 million homes and is the largest natural-gas-fired power plant in Arizona. It has been on line since the summer.

Owners had planned to sell electricity to Arizona and California utilities that would be stripped of their power plants under deregulation plans.

But after the price spikes and blackouts of 2001, California negotiated long-term contracts for its electricity and Arizona regulators barred utilities from selling power plants to unregulated affiliates.

The moves left operators of the so-called merchant plants without customers.

"Our decision to invest in these plants was made more than three years ago based on the outlook for vibrant, competitive energy markets," Teco Chief Executive Robert Fagan said."Since then, for a variety of reasons, policymakers have retreated from mandating wholesale competition, supplies currently exceed demand, and economic growth has been less robust."

The market has hurt Arizona Public Service Co. parent Pinnacle West Capital Corp. The company built several new plants to serve a deregulated market and now wants ratepayers to pay for them. Pinnacle West also had to borrow from APS to pay off construction loans on the new plants.

The Gila River plant, which has a contract to supply 450 megawatts of electricity to APS, has been operating at 40 percent capacity and, along with another new plant in Arkansas, lost $26 million in the third quarter of 2003. The loss caused Teco to default on loans, prompting foreclosure.

Bloomberg News contributed to this article.