Shock Treatment

The three fundamental C's of Arizona -- copper, cotton and cattle -- have a new partner. California power.

Twenty massive power plants are under construction or in the planning stages in Arizona.

The bulk of the power from those plants, as much as 15,000 megawatts, will be sold to California. By 2003, Arizona will produce enough power for more than 20 million people.

The plants are being built in Arizona because it is one of the easiest and cheapest places in North America to get an energy facility approved and built.

Companies are rushing plants through approval and construction processes to get in on some of the biggest profits in the electricity industry, which will be made in the next two to three years.

In effect, it's a land rush, a feeding frenzy. Right now, the early bird gets the juiciest long-term contract.

The issue, then, is not blackouts. Arizona soon will have three times more power than it needs.

"There's not going to be a power shortage in Arizona," says Peter Navarro, a top California energy analyst and associate professor at the University of California-Irvine. "The question for Arizona is what you're going to get in return for being California's power farm.

"Then, of course, there's the issue of what sort of nasty little problems you're going to find once this frenzy is over."

In some ways, Arizona has already given away the farm in incentives and tax breaks. One state law passed last year, for example, allows power plants to piggyback on a state tax law originally designed to help mom-and-pop entrepreneurs get started in the state. In effect, power plants get a 30 percent tax cut in their first two years, a break that could shortchange the state more than $60 million.

In some cases, local county boards and economic councils have given up much more.

And those nasty little problems Navarro mentions are already appearing. Cries of foul play and foul planning are emanating from around the state.

The most egregious ramrodding would appear to be taking place in Mohave County, where Arizona's first new plant will fire up this summer and a second is being slammed through local and state committees. (See the related story on page 32.)

Even SRP, the Valley's fatherly public utility, is being accused of soiling the Valley's air and draining its water to profit in California. SRP counters that it's rushing to put a plant the size of the new Cardinals stadium in residential Gilbert to meet a critical need in the East Valley.

But there are upsides to becoming a power farm.

As long as all of California doesn't seek refuge in Arizona, the state will have enough electricity in the short term. Within two years, Arizona will be producing much more power than it needs.

Although the bulk of the energy will flow west, in the short term, power produced in Arizona will stay here if Arizona needs it, thanks in part to local consumer advocates who took the issue to court.

Natural gas and who controls supplies and shipping is also a major factor in Arizona's power picture because natural gas is what's needed to fuel these new plants.

In two years, prices should drop as new generation plants and transmission lines come on line and as old gas wells in Texas and the Four Corners region are revived and new wells are drilled. Reacting to price signals, the number of operating gas wells in the United States has more than doubled in the last year.

By 2004, there should be enough power for sale by enough different entities that wholesale prices should fall, and those lower prices, theoretically, would be passed directly on to retail customers.

But one maxim of the modern deregulated power industry, analysts say: The beast is always hiding in the details. And there are signs, such as the recent emergency burning of diesel fuel at SRP's natural gas plant in Gilbert, that natural gas supplies and prices could be the Achilles heel of Arizona's increasingly gas-dependent power grid.

"Natural gas supplies are a legitimate concern," says SRP's Mark Bonsall.

Which is why El Paso Natural Gas, the company that sends natural gas to the Valley, is emerging as a power player. The company could use its mammoth market clout to squeeze central Arizona as it is accused of squeezing Southern California.

El Paso, after all, will be building the gas lines and providing the gas to many of these new plants.

"Beware of the Texholes," one California antitrust lawyer warns, dusting off an old epithet for Houston-based oil barons, who, thanks to deregulation, now own much of the generation capacity in the West.

Indeed, it is the emergence of a feeding frenzy among companies so often accused of collusion, not the blackouts in California, that could be the harbinger of doom for Arizona.

"The alt fuel thing, the real estate crash -- all the really bad things in Arizona happen when there's a frenzy like this," says Pat Sherrill, who has been fighting the proposed Caithness plant northwest of Phoenix in Mohave County. "You've just got to wonder what is lying in wait for us down the road. History tells us it just can't be good."

In 1996, California's major regulated utilities, Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison, got what they thought would be a smokin' deal.

The three utilities had been in trouble. They were saddled with heavy debt from bad investments in obsolete nuclear and coal plants. State-imposed rate caps were blocking them from the profits they felt were fair in a rich national economy. Big industrial customers were threatening to build their own on-site generation using new natural-gas turbine technologies or buy from elsewhere.

So the utilities successfully pushed through a law that, among other things, allowed them to impose surcharges on customers to offset their bad investment costs. Rate caps were put in place that would remain until the utilities' investments were paid off. After that, the utilities and the market would dictate the rates.

As part of the deal, utilities had to sell off their power plants, which freed them from the bad investments. The utilities would buy their power on the wholesale spot market. At the time, there was an abundance of cheap wholesale electricity being generated using cheap fuel supplies. In theory, wholesale spot prices would dive and, unburdened by expensive long-term contracts, dying plants and rate caps, there would be a fat new margin for utilities.

What they didn't predict, though, was that customers, buying at fixed low costs, had little reason to conserve. They didn't think about the power needed to create and run all of California's new high-tech industry, bursting with powerful computers and other electric gadgetry.

The utilities were caught off guard when California's economy turned robust, which cranked up demand. At the same time, hydro generation dried up, summer temperatures soared and winter temperatures plummeted.

In the old regulated market, utilities rescued one another when necessary because that was the cost-effective thing to do.

The new market, though, was built for sharks. As California became fatter and more vulnerable, the sharks, in the form of America's new breed of wholesale power merchants, circled.

In the months following deregulation, numerous power company executives and power investors met to discuss how best to profit from the California market. Many companies began buying up power plants in California, some began planning new plants in Arizona or Nevada. Within months, the nation's major natural gas distributors and wholesalers, wise from years of playing the natural gas wholesale spot markets, began re-creating themselves as electric power generating and marketing companies.

It seemed every energy executive in the country saw the critical loophole in the California law: Relying totally on a spot market for a vital and unstorable commodity only works if there is ample supply. If there isn't ample supply, prices will continue to skyrocket because utilities have no choice but to buy the commodity quickly.

In essence, it's the market power you get selling the only glass of water on a bus of billionaires stranded in the desert. California would have two choices: Pay up or go dark.

The billion-dollar question, then, is whether California's supply crisis was all bad luck and bad planning or rather a mix of bad luck, bad planning and collusion. Did the sharks push California off the dock?

Perhaps the most important of these early industry meetings was held on September 26, 1996, in Room 431 of the Embassy Suites Hotel near Sky Harbor Airport.

The meeting was attended by senior management of SoCalGas, San Diego Gas & Electric and El Paso Natural Gas. Notes of the meeting were obtained by Lance Astrella, a Colorado energy attorney, during discovery in a different antitrust case. But the attorney quickly realized the wider ramifications of what he saw.

In a lawsuit filed late last year in Los Angeles County by top antitrust attorneys, executives of the three companies are accused of agreeing to kill projects that would have undercut each others' control of natural gas markets (and thus electric power markets) in Mexico, Southern California and the Southwest.

At the time, SoCalGas' and San Diego Gas & Electric's near-monopoly of northern Baja and Southern California was being threatened by two Tenneco pipeline projects that would have doubled the natural gas flowing into the region. In the months before the Phoenix meeting, El Paso had purchased Tenneco.

After the meeting, El Paso killed the Tenneco projects. California's natural gas power plants, which sucked up 18 percent of SoCalGas' capacity, would remain captive customers of SoCalGas.

El Paso had wanted to run a pipeline to a massive natural gas power plant in Mexico, but SoCalGas had submitted a lower bid on the project. After the meeting, SoCalGas withdrew its bid.

According to the lawsuit, this tit for tat and several other subsequent agreements strangled the California and Baja supply and left the region at the mercy of monopolies.

"Fearing a new era of open competition and lower prices," the complaint alleges, "these latter-day captains of industry gathered secretly to hatch a conspiracy to dominate the unregulated aspects of the natural gas and electricity markets. . . . The conspirators sought to eliminate competition, take advantage of electric deregulation, drive up the price of natural gas and profit from the increased prices."

All three companies vehemently deny any wrongdoing. In essence, they accuse the plaintiffs of looking for media attention and an easy scapegoat in a complex crisis.

Also during this time, El Paso essentially sold the remaining available capacity on its lines to its own merchant subsidiary. Critics say this move gave El Paso control of all the noncontracted available space on the pipeline and, so, complete control of all available natural gas in California.

For Arizona, the deal, collusion or not, also had a profound impact. Tenneco's lines would have taken cheap gas into northern Baja. With the pipeline, attorneys in the case say, northern Baja would have been the easiest and cheapest location to build new natural gas-fired plants to feed Southern California.

But when the pipeline died, leaving Baja with expensive SoCalGas fuel, power companies needed a new power farm.

Where could they get facilities planted quickly next to major pipelines? Where was land and labor cheap?

"Arizona," says Astrella, a top energy attorney and one of the lead attorneys in the California class action suit.

"Basically, Mexico made the most sense for plants, followed by Arizona and Nevada," he tells New Times. "When that pipeline was cut, all eyes turned to Arizona. You would not be seeing this rush to your state if that pipeline had remained."

In 1998, as deregulation was rolling into effect in California, power companies began flooding the Arizona Corporation Commission with plant proposals. Arizona, with loose regulation, cheap land and labor and a penchant for tax breaks, was the most fertile ground for a quick crop of plants.

The plants were nearly identical in concept: Prefab buildings with several natural gas turbines, essentially engines like those on a 747 jet. Plants would produce an average of 800 megawatts of power. (One megawatt generally serves about 1,000 residents.)

Most would sit along an El Paso Natural Gas main line, which would allow them to avoid gas-delivery charges of subsidiary companies such as Southwest Gas.

Four plants are being constructed next to the Palo Verde Nuclear Plant west of Phoenix. The spot allowed plants easy access to the power grid and put them just outside the highly regulated Phoenix air shed.

Other companies looked for land anywhere in rural Arizona with infrastructure, organized support for economic development and, critics argue, unorganized opposition to questionable economic development.

As the proposals flowed into Arizona, so did company representatives, lobbyists and public relations people. Tax incentives, sketchy environmental impact studies and company-controlled public polling followed. And nobody, including the Arizona Corporation Commission or state government, seemed to be asking two critical questions:

What is the cumulative effect of all these plants?

And do we really need all this power?

"This rush for plants is all unprecedented," says Tim Hogan, director of the Arizona Center for Law in the Public Interest. "But even with all the unknowns, we keep blithely approving them. Beyond the critical environmental issues, I still have yet to hear any convincing argument that this whole mess will ever benefit the average Arizona customer."

The first three merchant plants sailed through the Corporation Commission quickly and quietly early last year. Consumer and environmental advocates were caught off guard.

Griffith Energy L.L.C. was the first to apply for approval from the Commission. It wanted to build a massive merchant plant up by Kingman in Mohave County.

Reliant Energy followed. Then two from Pinnacle West (APS' parent), then Harquahala Generating Co., Duke, Panda Gila, Caithness, Mesquite, Gila Bend Power Partners, SRP (twice) and Sundance Energy. Several other companies and utilities are expected to present proposals to the Commission in coming months, according to industry analysts.

Never in its history has the Commission seen so many proposals being filed so quickly.

"The dam broke," says Dennis Sundie, an official with the Arizona Department of Water Resources who sits on the Commission's Power Plant and Transmission Line Sighting Committee, which, like a planning and zoning board, evaluates proposals before passing them on to the three corporation commissioners for a vote. "We hadn't seen a new power plant since the early 1980s. Then boom."

As the permit applications arrived at the Commission's office in Phoenix, plant supporters began pushing their projects through local public hearing processes. They needed the megawatts to get in on the California boom, which they knew government regulators would eventually stop. And the first companies to get plants approved and operated would have the best arguments that they were offering a much-needed product.

Last spring, Hogan and other consumer advocates began to ask questions about the power plants. Hogan's group sued the Corporation Commission, alleging it was not following Arizona law that required the Commission to balance the need for a power plant against the plant's environmental impact.

The power companies intervened in the case, and a settlement was reached.

As part of the settlement, power plant owners had to guarantee that power would be available to Arizona customers during peak periods over the next two years. Subsequent plants will also have to prove they are needed.

Hogan and others also want a comprehensive study of the cumulative impact of these new plants, particularly the cumulative effect of the four plants locating themselves just upwind of the Valley near the Palo Verde Nuclear Plant, about 30 miles west of Phoenix.

"I'm not denying these things are cleaner than coal or nuclear plants," Hogan says. "But nobody has answered what the cumulative effects of all these plants really might be, if there is one. The utilities say there isn't one because they are highly mobile pollutants, but that's not always real comforting to only hear from a private utility company."

Steve Branoff, an engineer with the Environmental Protection Agency, says the plants are environmentally sound.

And since modern natural gas-fired plants are all nearly identical, Branoff says, the EPA can make projections of the plants' impact based on already existing plants.

"Despite the fact that these are very large plants, their emission specs really are very low," Branoff says.

Hogan has one other pending lawsuit, against Arizona Public Service. In that case, Hogan questions the legality of Arizona's plan to remove price caps in 2004.

The problem there, Hogan says, is almost the reverse of one of California's major problems. In Arizona, companies such as Pinnacle West didn't have to sell off their generation assets. They just had to separate their distribution and generation assets. One subsidiary will sell power to the wholesale market, the other will buy the power and sell it to customers.

That's dangerous territory for customers, Hogan says.

"The way the law sits now, APS is going to be able to charge whatever they want on the open market for wholesale power and then pass on any cost increases to their customers. I believe deciding now that we're going to let them pass costs on is not only illegal, but a really bad idea until we know what the situation is with deregulation in Arizona."

If an adequate supply is in place, others argue, the market will take care of itself. With lots of power out there, wholesale market prices will remain low.

That is, as long as there is enough inexpensive natural gas. Besides the cost of construction of the facility, paying for natural gas is the greatest expenditure in operating the new high-tech turbine plants. Natural gas prices, SRP officials and others argue, are higher than they should be right now. And that doesn't bode very well for the future.

"Natural gas prices have to rise to the $3 range, that's reasonable considering they have to get a new supply," says SRP's Mark Bonsall. "But we've been seeing six bucks, eight bucks, and that's just way, way too high."

"This is all unprecedented territory," Hogan says. "We better know what we're doing or it will be a disaster."

In 1999, representatives of Arizona's public-power utility, SRP, and two private utilities, Dynegy and NRG, approached Tempe and Gilbert officials with a plan.

Dynegy and NRG, two of the most aggressive and most profitable companies in the new power market, were going to help SRP enter into "the brave new world of deregulation," Gilbert councilman Mike Evans says he was told.

SRP proposed a new 825-megawatt plant. Dynegy and NRG would build and operate the plant. SRP would provide the land. SRP would use the power from the plant for its burgeoning Phoenix market. In return, SRP would give 500 megawatts to Dynegy and NRG for the companies to market in California.

SRP officials say the deal was the cheapest way for SRP to get much-needed power generation in the East Valley market. Bonsall says that while the utility has power to spare elsewhere in the state -- northern Arizona and the West Valley -- it is short in the East Valley and would need to build massive new power lines to ship its own power there.

Power lines are expensive, hard to get approved, ugly and just move existing power around. The Dynegy/NRG plant would have allowed SRP, for the same price as new transmission lines, to get more efficient power and a much-needed generating pillar to support the East Valley power grid.

Critics, though, question SRP's timing and logic. They say SRP, like other power companies, just wants additional power to sell to California. They point out that Dynegy and NRG have been two of the companies profiting most from California's woes.

Worst of all, in SRP's case, the generators weren't being planted in remote desert. They were being planted in the suburban East Valley.

SRP's first choice for the new plant was in Tempe, where SRP has an existing substation located on top of the El Paso gas line.

SRP figured it could use its legal status as a quasi-government entity to avoid a review process by the City of Tempe. But critics pointed out that with Dynegy and NRG involved, much of the power would, in essence, be shipped out of the Valley. The plant would be a merchant plant.

Because companies other than SRP were involved, the plant would have to go through the normal Tempe review process.

The deal collapsed. A much smaller Tempe plant will be built without Dynegy and NRG.

But SRP soon came up with another proposal -- to add 825 megawatts of power at its substation at Val Vista and Warner roads in Gilbert.

The Gilbert plant, called San Tan, will sit 250 feet from a recently built subdivision of middle-class homes.

On February 12, after five months of hearings, the Power Plant and Transmission Line Sighting Committee approved the plant. The full Commission, which has never turned down a facility cleared by the committee, is expected to vote on the proposal in April.

The San Tan plant has been a public relations nightmare, infuriating Gilbert residents who live close to the site. The plant is the only one of its size in the country being proposed within an urban area. (A local planning commission in San Jose, California, recently rejected a similar proposal because the plant was too close to the neighborhood.) Beyond the question of why the city of Gilbert allowed houses to be built so close to the SRP property, critics say SRP has used its vast political power to manipulate the plant-approval process.

On several points, documents support their concerns.

SRP commissioned a poll allegedly intended to find out how residents near the proposed plant felt about the project. The poll results, SRP representatives initially said, showed 69 percent of nearby residents in favor of the plant.

Critics of the plant were skeptical. They had petitions signed by thousands of residents saying they didn't want the plant.

So critics got hold of the questionnaire used in the poll. As they expected, it wasn't a survey, it was a series of questions slanted in such a way to get the desired results.

"The thing was absolutely absurd," says Evans, the councilman.

SRP was slow in describing the size of the plant. When SRP finally presented a drawing of the plant to nearby residents, the 150-foot smokestacks drew gasps. By the next hearing, the artist's rendition included what, by scale, would have been 90-foot trees in front of the plant.

"It was the funniest thing I've ever seen," says Kathy Lopez, an opponent of the plant. "If we're lucky, it will look like that in 20 years."

Dale Borger, a Gilbert resident who spent 45 years building and inspecting power plants in the eastern United States, began attending hearings. He says he was shocked by the misinformation being thrown out by SRP.

The plant is being built without a containment building, Borger says, which would lessen the impact of an explosion. For that $2 million in savings, Borger says, the plant will put neighbors in greater danger in the event of an explosion.

"If it blows, you've got several thousand people who are going to feel it hard," he says.

Residents argue that SRP's San Tan property is zoned incorrectly and that, regardless of zoning, SRP had a duty to inform nearby residents that the small, intermittently operated plant on the property could be expanded in the future.

Environmental activists argue that the massive natural gas-fired plant isn't as clean as proponents say. Of particular concern is ammonium sulfide, a byproduct of the technology the San Tan plant will use to cut down other harmful emissions.

"Plenty of people are allergic to these sulfides and they've been proven to shorten lives," says Steve Brittle, head of Don't Waste Arizona. "But it's a byproduct of this technology that hasn't been properly studied."

But Steve Branoff, the EPA engineer, says the plant is safe. Because SRP is supposed to improve emissions on the plant's existing generators, the plant will actually be cleaner, he says.

Borger also doesn't buy SRP's claim that the San Tan facility is an absolute must. Like most everyone opposed to the project, Borger doesn't question that the East Valley is growing and that more power is needed. He and others simply believe the plant could have been placed farther from a heavy concentration of people.

"They could bring it in from around Coolidge," he says. "Coolidge wants the plants, the lines are there and being built and you would only lose about 1 percent of the power transporting it only 20 miles."

In fact, SRP has already contracted with one of the new merchant plants for the plant's total output, according to SRP's Bonsall. He would not divulge the company.

But that isn't enough, he argues.

SRP does need the Gilbert plant, Bonsall says -- badly.

"San Tan is just part of a larger picture," Bonsall says.

SRP officials scoff at the idea that they are using Gilbert as a power farm for California.

As a public utility, SRP doesn't have a profit motive, utility officials say. Its only motive is to provide cheap, reliable electricity for customers.

Basically, SRP, officials say, like a lot of other Valley planners, didn't foresee that the East Valley would grow so big so quickly. Residents are using more power for everything from computers to swimming pools.

Industry, too, is sucking up more power. For example, Intel's expanded plant in south Chandler will increase its power needs from 40 megawatts to 100 megawatts.

And if the East Valley hopes to attract more high-tech companies, it must have an ample source of reliable, affordable power.

Utilities in the Southwest have traditionally swapped power with utilities in the Pacific Northwest. The Southwest needs power for the summer, the Northwest needs power in the winter. SRP would trade with Northwest utilities at low prices to provide extra summer power for the Valley.

"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.

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."

At some point, Novac says, it will stop being profitable to build more plants.

"This frenzy will peter out eventually, maybe even within the next two years," Novac says. "But the end result is that there will be lots of power. This should be a good thing for Arizona. As long as Arizona is smart."

"I don't care how smart we are, we still will have a load of power plants and all the problems that come with them," Hogan says. "We're going to have more than our fair share."

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Robert Nelson