Cuts at power companies raise red flags about reliability

Utilities are aggressively cutting spending on new power plants and wires, raising concerns about higher prices or electricity shortages when demand rebounds in a year or two.

Utilities and independent power suppliers plan to shave capital budgets 10% in 2009 and 2010, according to Edison Electric Institute, the industry trade group. The 2009 cuts could total 20% by year's end, says Larry Makovich of Cambridge Energy Research Associates.

"When the economy rebounds, electric power is likely to rebound at the same time and quite strongly," he says. "We have a legitimate concern there's going to be a price to pay."

At the extreme, Makovich says, power shortages could trigger brownouts or blackouts in some areas in three to five years, though utilities downplay such concerns.

Before the recession, utilities were poised for a big construction wave to meet rising demand. Beset by lower revenue, particularly from large industrial customers, utilities now have less cash and limited access to capital and face high interest rates.

"This is just not the time to be plowing big capital investments on your system," says Mike Morris, CEO of American Electric Power aep, one of the largest utilities.

AEP trimmed this year's capital budget by $750 million, or 22%, to $2.6 billion, including delaying construction of a large natural gas plant. Instead, AEP will draw from aging, less-efficient coal plants, Morris says. That means consumers in seven Midwestern states will pay about 70 cents extra a month. Morris says the cutbacks won't affect the reliability of AEP's vast network, but "I'm not sure (other utilities)" will be as fortunate. Other cuts:

•Power plants. Duke Energy duk is postponing two planned natural gas plants in North Carolina as it reduces capital spending 8% this year to $4.7 billion. Dominion Virginia Power and Pennsylvania Power & Light are deferring engineering or planning on proposed nuclear reactors. All say the projects can be accelerated when the economy recovers.

•Transmission lines. Arizona Public Service is pruning capital spending by $520 million, or 17%, the next three years. The utility is putting off new high-voltage lines as population growth slows to 1% from 5%.

•Renewable energy. FPL Group in Florida is shelving $1 billion in new wind power as it chops its capital budget 24%.

David Owens of the Edison Institute says the cuts won't "put (grid) reliability in jeopardy," and some projects will likely be restored with money from the economic stimulus package. The North American Electric Reliability Corp., which monitors the grid, says reliability won't be significantly affected. But Makovich says it can take years to complete power plants and high-voltage lines, while demand could rebound abruptly.

Contributing: Traci Watson