Shock Treatment

California eats lots of power, but it doesn't like growing its own power plants. Instead, Arizona is becoming the new power farm for the Coast.

"It was a good deal for both sides," says Bonsall. "It meant both sides didn't have to build as much capacity."

But with shortages in California, and everybody selling to California, "those kinds of deals are pretty rare if not impossible to find," he says.

And ample power generation means ample market power. The more power SRP generates, the less it must buy. The less it must buy, the less it is at the mercy of volatile markets and merchant predators.

Joe Forkan
Gilbert residents fought SRP's plan to greatly expand its San Tan plant.
Paolo Vescia
Gilbert residents fought SRP's plan to greatly expand its San Tan plant.

SRP says it can build the San Tan power plant for less money and in less time than bringing in electricity from outside the Valley. The utility says that also means less opportunity for system failure and less loss of power than shipping power over long distances.

And if it doesn't have to transport that existing energy to the Valley, it can sell it. And if it can sell power in the present inflated market, SRP can hedge against price spikes to its customers or use that money to pay for new power plants.

"If there is one fundamental lesson here, it is that no matter what market structure you create, you must have sufficient supply," Bonsall says. "If you get a limited supply coming up against an elastic demand, watch out."

"The bottom line," says Evans, the Gilbert councilman, "is that SRP's customers will benefit on the backs of the people close to the plant. It's not fair, and the process was awful. But that's power politics in Arizona."

Actually, that's power politics everywhere.

"As far as how they treat people, you've got to remember the context," says Mary Novac, an energy industry analyst. "SRP is a bunch of angels compared to some of the people operating out there. You don't know how good you have it."

Whether the California crisis was an accidental conspiracy or a coordinated conspiracy, things sure are working out well for natural gas companies and electricity providers. Profits are at record levels.

In two years, thanks in large part to the emerging Arizona power farm, there will be a glut of power for sale in the West.

At the same time, all that natural gas from the new and reopened wells will be flowing west. Transmission lines are going up to carry the power. And power providers are currently studying Arizona's power grid to ensure power from new plants can be distributed to where it is needed.

This should mean an ample supply powered by inexpensive fuel. Prices should drop.

But with the blackouts and widespread panic in California, the new cry from policymakers in that state is for regulation and long-term contracts.

Those long-term contracts would be made at the peak of volatility and concern about supply. California is in its weakest position right now. The killing will be made in the next two years.

That is why, analysts say, power providers are rushing so quickly to get their plants up and running in Arizona.

"The quicker, the better," Novac says. "You want to get your plant in while California is still needy to get good contracts. There are a lot of people promising investors and everybody else that they'll be up and running by the summer seasons."

But how much of this windfall will pass to Arizona taxpayers and customers is unclear.

The plants will cost roughly $8 billion to build and will employ as many as 6,000 people in their construction. Once completed, the plants will create 400 to 600 new jobs for Arizona.

They could generate as much as $60 million in new property taxes, about $35 million of which would go toward Arizona's schools.

But that number could have been much higher if not for numerous tax breaks and incentives given at county and state levels.

For example, Reliant Energy's plant in Casa Grande will be given to Casa Grande and leased back to the company for $4 million a year for 40 years. The deal allows Reliant to avoid about $9 million in taxes.

Other plants have similarly lucrative deals with cities and counties throughout the state.

State legislators also revised state statutes to allow power plants to be assessed at a fraction of their value for the first four years of operation. That law was originally put in place to help small companies in Arizona survive their first few years as they built a client base.

Most of the power plants will have contracts for their power by the time they fire up. They will have revenues, on average, from $1 million to $3 million a day.

"They don't need the help they're all getting," says Joe Hart, former state representative from Kingman who has been one of the main critics of the Mohave County plants. "We're just helping them all make even more of a killing."

If all 20 new plants go through, they will consume approximately enough water to supply a city of one million people, based on estimates of average water use for existing and proposed plants.

Hart, Hogan and others say it's time for Arizona to stop and take a comprehensive look at what it is giving away.

"All I'm saying is, I think there's a huge case for heightened scrutiny of what is going on," Hogan says. "The ramification of all this building will impact the state for decades to come."

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