2005 Annual Report

From the President - Robert W. Bryant

Austin, Little Rock, we have a problem.

On April 13, 1970 when Apollo 13 astronaut Jack Swigert made his famous “Houston, we’ve had a problem here” call to Mission Control, alarms were sounding in the command module and on the ground. Mission Control in Houston was monitoring the space flight and immediately moved into emergency response mode. Even though Mission Control could not directly implement needed repairs on Apollo 13, the ingenuity of dedicated professionals both on the ground and on board Apollo 13 narrowly averted disaster.

Thirty-six years later, the continued commitment of policy makers toward reliance on market forces to regulate the electric markets, and less than fully developed policies on how to achieve that end, is increasing the difficulty in maintaining the economical and reliable supply of electricity to consumers. The Electric Reliability Council of Texas (ERCOT) is reporting shrinking reserve margins, and while the Southwest Power Pool (SPP) reports overall adequate capacity reserve margins, existing transmission limitations within the SPP restrict the ability to flow power to where it is needed. Southwestern Public Service Company, for example, forecasts a serious capacity deficiency for 2007 and at least eight years beyond which can only be addressed with new generation within the SPS control area or significant improvements to the transmission system to allow access to resources outside the SPS system. Alarms should be sounding locally, in Austin and also in Little Rock, Arkansas, home of the SPP. However, the ability to bring to bear the type of focused response shown by NASA Mission Control when Apollo 13 encountered trouble simply does not exist today in the electric market.

“ALARMS SHOULD BE SOUNDING LOCALLY, IN AUSTIN AND ALSO IN LITTLE ROCK, ARKANSAS...”

The problem is particularly acute in the SPP, where efforts at developing competitive markets are in the earliest stages and that effort is undermined by significant transmission limitations. The success of that effort depends entirely on the timely construction of new transmission facilities that are adequate to support a robust wholesale power market. The SPP is attempting to implement changes that will result in the construction of needed transmission facilities, however, this is a daunting task. Like NASA Mission Control, the SPP cannot directly cause the construction of needed new facilities. The SPP must work with many different transmission owners to cause an expansion of the grid. The risk is that the SPP may simply be unable to timely encourage or require needed transmission network improvements to assure reliability and to enable the most economical flow of electric power from the generators to the loads.

The Apollo 13 crew got direction and assistance from Houston, but ultimately had to rely totally on themselves to implement the solutions needed to assure a safe landing. Like that crew, we will need to rely substantially on ourselves to expand generating resources, encourage construction of critical transmission facilities and encourage demand side management and conservation to assure a safe landing for electric consumers.

Golden Spread’s SPP area loads now exceed 900 megawatts and continue to grow. Golden Spread has constructed a new combustion turbine-generator, and that unit is operational and nearing final completion. It will be needed to serve Golden Spread’s peak loads for 2006 and beyond. This new unit was necessitated when SPS chose to terminate its cost-based wholesale power service to Lyntegar Electric Cooperative. SPS then sold the capacity it previously had used to serve Lyntegar at higher market based rates to off-system customers. With few, if any, options due to SPP transmission limitations, Lyntegar turned to Golden Spread for assistance. When Lyntegar became a Golden Spread member, planning for its loads became a Golden Spread responsibility. The lack of transmission made new generation the only option for serving this added load.

“THE RISK IS THAT THE SPP MAY SIMPLY BE UNABLE TO…REQUIRE NEEDED TRANSMISSION NETWORK IMPROVEMENTS TO ASSURE RELIABILITY…”

Also, Golden Spread must now plan for additional resources to serve loads which are now supplied with cost-based wholesale power purchases from SPS. Like Lyntegar, Golden Spread has received notice from SPS of contract termination to be effective as of 2012. Golden Spread has now undertaken the planning for new generating resources to replace that contract as well as planning for resources needed to serve new load growth.

Even with the shift of load planning and serving responsibilities to Golden Spread, the SPS load forecast shows a significant capacity deficiency for 2007 to 2015 and perhaps beyond. SPS only recently issued a request for proposals to install 250 to 500 megawatts of new capacity for 2008 and/or 2009 – a challenging task considering siting and permitting requirements as well as equipment acquisition time frames. Perhaps in connection with its RFP, SPS recently submitted transmission requests to the SPP for imports of almost 600 MW of new resources into the SPS system. According to a recently completed SPP study, meeting these SPS transmission requests, as well as the transmission requests of other power suppliers, including Golden Spread, will require massive transmission upgrades. The question remains: will these upgrades be constructed in time to meet the load requirements?

Even if new transmission is built in a timely manner to meet requested imports, growing SPP area loads will quickly utilize the existing SPP capacity surplus. That leaves the problem of developing new resources both to meet load growth and to replace aging generation. With the exception of two small natural gas-fired peaking units built in 1998, SPS has not installed a new generating unit since Tolk Unit 2 was completed in 1985. Nearly half of the SPS generating capacity is 30 years old, and about 18 percent has already or will soon reach age 40. As these SPS owned and controlled units continue to age they can be expected to suffer increased outages, placing additional reliance on interconnections for reliability. New transmission line interconnections are desperately needed to improve both import capability and system reliability.

Within the SPS transmission network, power flows from the northern part of the system to the south are limited. As a result, generating units in the south are run out of merit (not in economic order) to limit north to south flows. The constraint could be eliminated or substantially reduced with the installation of an internal line, and it appears that the cost of the line could be recovered in a very short time through fuel cost savings. This internal network line will be critical to expanding generating resources within the area even if fuel cost savings are discounted. Golden Spread stands ready to work with SPS and SPP and be a part of the solution to this problem.

“...THE SPS LOAD FORECAST SHOWS SIGNIFICANT CAPACITY DEFICIENCY FOR 2007 TO 2015 AND PERHAPS BEYOND.”

Golden Spread’s loads in the ERCOT area are approaching 200 megawatts and are all served with market purchases. While ERCOT resources are currently adequate, ERCOT has reported a substantial shrinkage of current and future reserves. Also, ERCOT shows a continued reliance on natural gas fuels to serve more than 70 percent of the loads. Given the sensitivity of natural gas prices to supply disruptions, weather patterns and storage levels, electric market rates in ERCOT can be expected to remain high and substantially above rates in the Southwest Power Pool.

Golden Spread is seeking coal-fired resources in ERCOT, and began with its successful bid for Oklaunion capacity which was auctioned by AEP. That acquisition cannot be finalized until claims by Golden Spread and others are resolved by the Texas judicial system. In the meantime, Golden Spread is negotiating for additional coal-fired capacity to restructure its power supplies within ERCOT.

Some perceive that wind energy can eliminate or minimize our energy problem. But electricity can’t be stored and while wind is seen as providing economical energy, wind turbines cannot provide dependable (dispatchable) capacity. Integration of wind resources requires that dispatchable capacity be available when the wind doesn’t blow. The requirement for this dispatchable capacity, including the fuel costs associated with cycling it to off-set inconsistent wind generation, impose costs that limit wind energy savings. Public Service Company of Colorado, a sister company of SPS, identified a “wind integration” costs of $4.97/MWh. Overall, wind energy does have a place in the power supply portfolio, but it leaves many challenges to be met.

Ironically, Apollo 13's initial alarm was undervoltage on the Main “B” electrical bus. Undervoltage alarms as well as increased cost alarms could sound for Texans and other consumers if new generation and transmission facilities are not installed quickly.

Robert W. Bryant President