2006 Annual Report

From the President - Robert W. Bryant

Captain Billy Tyne was a professional. Before he cast off from the pier in Gloucester, Massachusetts to fish the Grand Banks, he carefully checked his gear and his boat to be sure that he was prepared to deal with the rigors normally expected of fall weather fishing in the Atlantic Ocean. What Billy Tyne and his crew aboard the Andrea Gail could not foresee was that two weeks later, when hundreds of miles from shore, they would encounter a convergence of meteorological conditions that the National Weather Service called “the perfect storm.” Captain Tyne, his crew, and the Andrea Gail did not survive that encounter. This incident became the subject of a popular movie by the same name.

The Andrea Gail and her crew were not the only victims of the perfect storm: it raged in the Atlantic over the course of several days, and caused a number of deaths and billions of dollars in property damage. The extent of the damage caused by the perfect storm underscores what can happen when separate conditions which taken individually are survivable, unexpectedly combine to create an overwhelming force.

The perfect storm encountered by the Andrea Gail was not reasonably foreseeable. Captain Tyne cannot be faulted for leaving port in October, 1991. However, there are signs that a perfect “electric storm” is developing that will threaten the reliability of service. Professionals in the electric utility industry have a responsibility to take note and to prepare in response to these “storm warnings.” If we fail to act, electric consumers in many parts of the country will be placed at risk.

Consider the effects of electric power not being available when and where it is wanted or needed. To some, an unreliable electric supply will only be an inconvenience. For others, electric shortages and interruptions will cause economic loss and even endanger physical well-being. At a minimum, electric consumers would face lifestyle changes as they adapt to a new world where electricity is not always available at the flip of the switch.

Electricity is a unique form of energy. Unlike gasoline, propane or natural gas, electricity cannot be stored. Electricity must be generated at precisely the same time, and in precisely the same quantity, as required to meet electric load requirements. Consequently, reliable electric supply requires that generating capacity keep pace with growth in electric demand. It also requires that the amount of installed and available generating capacity be sufficient to deal with both unexpected increases in load and unexpected failures of generating equipment. This is why electric utility planners seek to maintain a generation reserve margin, typically in the 12.5 - 15 percent range. The signs are becoming increasingly clear that unless action is taken soon, in many parts of the country, including Texas, necessary generation reserve margins will not be maintained.

For example, residential, commercial and industrial consumers are adding load at an alarming rate to already strained electrical systems. Requests for new service connections are increasing, even as electric rates rise and are forecast to go higher. This increase in load is not being matched by adequate growth in generation resources. As a result, reserve margins are dwindling. ERCOT now forecasts that its reserve levels will fall well below the acceptable minimum level in 2009 – less than two years away! The planned mothballing of an old, inefficient gas generating unit in ERCOT is being delayed just to support reliability through 2008. The southwestern region of the Southwest Power Pool also faces a very tight reserve situation, even though by this summer Golden Spreadwill have added 780 MW of new generation capacity since 1999. Load growth has outstripped capacity additions. Furthermore, legitimate concerns about the effect of electric generation on the environment are making it more and more difficult to timely site, permit and construct new generation.

Last year TXU announced plans to construct 11 new coal-fired generating units. The new generation was intended to both shore-up the ERCOT electric system, and to help mitigate the price volatility associated with natural gas fueled generation. The TXU plan was met with widespread protests. Later, when TXU agreed to be acquired by Kohlberg Kravis Roberts and The Texas Pacific Group, the new purchasers, TXU and environmental groups negotiated a deal that resulted in cancellation of eight of the proposed plants – an enormous reduction in proposed generating capacity for ERCOT.

TXU is not the only utility to encounter difficulties in adding new generating plants to serve ERCOT. Brazos Electric Power Cooperative of Waco and Western Farmers Electric Cooperative of Anadarko, Oklahoma had announced plans to jointly construct a new 750 MW coal-fired unit in Oklahoma, with part of the capacity dedicated to serve the ERCOT market. The joint project would have boosted generating reserves in both ERCOT and in the Southwest Power Pool. But those plans came undone.

While the erosion of generation reserve margins can affect reliability for all customers, it can impose particularly severe burdens on electric utilities that traditionally have relied on the wholesale power markets for their energy supplies. Large investor-owned utilities such as Southwestern Public Service Company, which traditionally have been a source of wholesale power supply to smaller utilities such as cooperatives and municipal electric systems, are terminating those supply agreements to recapture capacity to serve their own growing retail loads. SPS terminated Lyntegar Electric Cooperative’s purchase contract after 70 years as a full requirements wholesale customer. SPS has also served notice of termination of Golden Spread’s partial requirements purchase contract. SPS is not alone in eliminating or reducing wholesale sales. Other utilities have indicated that they will also be limiting the amount of wholesale sales, focusing first on retail customers, in part because of difficulties in adding new generating plants and transmission lines.

If the lights are to be kept on, either new generating plants must be built to meet growing demand and replace aging generation, or new and existing loads must be limited to the capability of the electric system that is built. The choice is no different than that faced by a rancher with cattle to haul. If the rancher has more cattle than his trailer can haul, he either gets a bigger trailer or leaves some cattle behind.

The challenge of assuring reliable supply when faced with growing demand and an aging fleet of installed generation would be daunting if it were limited only to arranging for the purchase, construction and financing of new generation. But as was the case with “the perfect storm,” other forces are converging that dramatically increase the magnitude of this challenge. Environmental concerns are playing a growing role in the generation equation. Some groups favor greater reliance on energy conservation to maintain the necessary balance of loads and resources. Other groups recognize that conservation alone is not the answer, and understand that new generation capacity is needed if Americans are to maintain their lifestyle and economic status. The issue then turns to what type of new capacity should be constructed. Environmental groups and some citizens oppose the construction of any modern coal-fired units. Others believe that if coal is to be used, it should be “gasified” and burned in combustion turbines using a process that isolates, or sequesters, harmful gases such as carbon dioxide. This process relies on an expensive, less efficient, and as yet, not well proven technology.

Serving new loads and replacing aging generation with more environmentally friendly natural gasfired plants may not be the solution because it will further burden limited domestic supplies of gas fuel. Discoveries and development of new domestic gas resources simply is not keeping up with consumer demand, and increasing consumption will continue to drive prices higher and may lead to gas supply curtailments. Fuel supply curtailments, of course, also translate to reduced reliability of electric supply. Domestic natural gas supplies could be supplemented by increased imports of liquified natural gas (LNG), but that will require a significant expansion of LNG terminals with the inevitable environmental opposition. There also is the risk of relying on LNG supplies from regions of the world that are politically unstable.

Others look to renewables – such as wind generators – to fill the energy growth needs. Wind does have a role in a balanced power supply portfolio, but it cannot be counted on to generate electricity when consumer demand is the highest. On July 26, 2006, when the temperature soared to 104°F in Texas and electric loads peaked, only 13 of more than 700 wind turbines in West Texas were turning at all. No load support there!

There are other operational considerations that must be taken into account when managing wind resources. For example, on February 24, 2007 very strong winds were experienced throughout Central and West Texas. The wind velocity exceeded the operating capabilities of wind turbines in the area, causing them to shut down. In ERCOT wind generation dropped from 2,200 MW to 700 MW in a 90 minute period! Fortunately, adequate spinning reserves were available on conventional generating units to pick up the shortfall. High winds, as well as low or no winds, can curtail wind turbine output, and assuring reliability means that wind generation must be integrated with other generation resources.

The need to integrate wind with other generation resources limits the amount of wind generation that can be absorbed in any given area. However, the wind conditions favorable for generation are not always found in the vicinity of the loads and resources that can make use of the wind resources. For example, the Panhandle of Texas can support many thousands of megawatts of wind, but the load and generation resources in the area can only absorb a fraction of that potential energy.

Advocates of developing wind resources recognize this reality and are pushing for the development of new transmission projects that will allow wind energy to be exported from the Panhandle. Many such transmission projects are being considered as a part of the Competitive Renewable Energy Zone Docket No. 33692, before the Public Utility Commission of Texas. So many, in fact, that the total cost of all proposals offered exceeds the staggering sum of $6.5 billion. In anticipation that new transmission will in fact be built, wind developers are rapidly leasing land in the Panhandle area and planning to construct large projects.

Some proposals have synergies with other proposals. Others do not. In any event, the PUCT now has a substantial role in the transmission planning process – even before the real transmission planning organizations – ERCOT and the Southwest Power Pool – have had an opportunity to properly evaluate and coordinate on proposal concepts.

Growing concern about the environment is fueling the environmental and consumer group efforts to limit, delay or eliminate the issuance of air permits for large new coal-fired power resources. The sheer size of these large units makes them attractive targets. But delaying or eliminating needed electric power resources not only will jeopardize reliability and hurt electric consumers economically, it may have the unintended consequence of undermining development of other cleaner energy technologies. Plug-in electric vehicles, light rail, ethanol and biodiesel plants are just a few of the technologies that can contribute to emissions reductions but require reliable electric supplies to be successful. And while emissions from large central station power plants such as coal units do contribute to pollution, the level of those emissions can be greatly limited by state of the art pollution control 10 11 technologies. Over time, those emissions may be reduced even further as they are retrofitted with new environmental control technologies as they become available.

If modern, large and efficient central station electric generating units can not be constructed in time to meet the growing loads, the shortfall may be made up by even more environmentally unfriendly alternatives. Older generation and smaller units may be forced to operate, consuming more fuel per kWh generated and emitting higher levels of certain pollutants.

Unfortunately, the risks posed by the looming shortage of generating capacity is compounded by delays in constructing needed new transmission lines. Existing transmission lines are heavily loaded in many areas. Some already have reached the limits of their ability to deliver power to serve new connections. Others are nearing their max imum delivery capability. Increasingly, electric system operators must dispatch higher cost and environmentally less friendly generating units to work around transmission constraints and keep the lights on.

Golden Spread is doing its best to meet the challenge of assuring reliable electric supply to its members. The professionals in the Golden Spread organization have seen the storm warnings and are taking steps to plan for the future. Golden Spread has purchased and installed adequate generating resources to meet its members’ current needs. Additional generating resources are being planned to meet members’ future energy needs. We also are working with federal and state regulators, reliability organizations such as the SPP and ERCOT, and other participants in the electric industry to assure the timely development of needed transmission so our existing and new generation resources will be able to reliably serve our members’ loads.

The Andrea Gail and its crew were doomed the day it set sail because Billy Tyne could not foresee that in two weeks converging weather systems would give rise to the perfect storm. Utility planners have no such excuse. The storm warnings are clear for all to see and we do not have the choice of remaining in port. The only choice is for regulators and other participants in the electric utility industry to act quickly to build needed new transmission and generation resources. If they fail to do so, electric consumers may be doomed to experience turbulent times ahead.

Robert W. Bryant President