INFORMATION #1 11-16-1998 - Laserfiche WebLink

Home Browse Search

Power Surge Short-Lived Chaos In Electricity Market Generates a Windfall Utilities Rush to Exorcise Bad Memories of June By Ordering New Plants Pent-Up Demand Is Freed By WILLIAM M. CARLEY StaffReporteJ' of THE WALL STREET Robert Nardelli, presiden! of General Electric Co.'s power-turbine unit in Sch- enectady, N.Y., was home watching TV on a recent Sunday night when the phone rang. The caller was the chief operating of- fleer of a major UiS. utility. The utility had been negotiating with GE to buy new turbines'that produce elec- tricity, and the deal was scheduled to close in the next few days. But the utility execu- twe was so worr4ed that a fleeter purchaser might snatch his place in line for delivery of the units that he called Mr. Nardelli that Sunday night. "I promised the delivery slots," says Mr. Nardelti, who declines to identify the executive. "Within days, we sold him the turbines." The anecdote illustrates one of the sharpest turnabouts in the history of the power industry. For years, Mr. Nardelli's phones, and those of other big power- equipment makers, such as Siemens AG of Germany and the Swedish-Swiss company ABB Asea Brown Boveri Ltd., seldom rang with calls from U.S. buyers. The result was manufacturing overcapacity, a global power-equipment price war, heavy losses for some turbine makers and consolidation in the industry. Siemens, for example, in August completed the purchase of the Westinghouse Electric power-generation business from CBS Corp. for $1.5 billion. Straining Capacity But in recent months, electric utilities and independent power producers have been showering orders on turbine builders. "There's been an enormous surge" in or- ders, says Randy Zwim, chief of Siemens's power operations in the U.S. The sudden- ness and strength of the turnaround, says GE's Mr. Nardelli, is "unprecedented." Indeed, the capacity of some of the power-equipment makers is even being strained. GE and Siemens say delivery dates for their gas turbines are nearly sold out into the summer of 2001. OnaOle to get quicker clelivemes, so,ne :lesperate utilities are buying deliver3 slots from other customers whose need is less urgent. "Hundreds of thousands of dol- lars are changing hands" to buy delivery dates, says John Reed, president of Reed Consulting Group Inc., Burlington, Mass. Industry executives say the practice is con- ducted as quietly as possible, with pay- merits often hidden in other transactions. That's because utility customers fear antagonizing power-equipment makers who would prefer to reap the windfall for themselves. Asked about the practice of selling delivery slots, GE's Mr. Nardelli says, "I've heard of it," and warns that GE's warranty coverage might not be good for such secondary buyers. Rebound in Prices Price-cutting on power equipment. meanwhile, has come to a screeching halt. Prices for power turbines, which had plum- meted nearly 50% since 1993, have re- bounded 10'7~ to 15~ inxrecent months, GE says. Today, a popular turnkey plant-two F-class gas turbines linked to a steam tur- bine and three generators-sells for about S180 million. The ordering binge, bypassing nuclear and coal-fired plants because of safety and environmental concerns, is focusing instead on gas turbines. In these machines, natural gas is ignited and the hot gas expands, spin- ning hundreds of blades on a turbine linked to a generator that tums out electricity. The turnabout was triggered, at least in part. by the chaos in the Midwest in June. when utilities literally ran out of electric- it.,,,. The impact was enormous, ranging from tens of thousands of residential cus- tomers going without full air conditioning on a sweltering day to the shutdown of huge mines and factories across the re- gion. "It was devastating," says Mark Mil- let, vice president of Steel Dynamics Inc., which shut down its electric furnaces near Butler, Ind., and lost more than 12.000 tons of steel production that month. Trouble in the Making The crisis didn't develop overnight. For years, U.S. utilities, concerned about over- capacity and the uncertainties of deregula- tion, put off buying power plants even as the economy grew. Their reserve margin- the difference between total capacity and projected peak electricity demand-fell from 25% of capacity in 1985 to 16~ this year, and in the Midwest to only 13~. Utilities also became cautious about buying power plants because manufactur- ers, racing to design more-efficient tur- bines, ran into spectacular technical sna- fus. At utilities in the U.S. and around the world, many of GE's new F-class turbines cracked in 19~5, resulting in one of the biggest product recalls in industry history. GE flew_huge turbine rotors in ~hartered jets from as far away as South Korea and England to be repaired at its Greenville. S.C., gas-turbine plant. New ABB and Siemens turbines also cracked and broke down, making utility executives anxious about buying any more of the new units. By summer 1997, power was running short, and a few big industrial plants were briefly shut down. By May of this year. ex- perts were warning power supplibs might Please Turn to Page ,46, Column I