Amidst all the lamentation over the sorry state of the US power market, the numbers tell a different story. The 2002 US calendar shows $18 billion in projects still going forward ? significantly more than the $14 billion for all of last year.

In the US power market, residential demand is flat and industrial market demand is down 9% ? partially as a function of the downturned economy. But commercial market demand is up 3% ? with shopping malls and retail outlets picking up some of the slack from a paralysed manufacturing sector.

But even those numbers do not take into consideration demographic shifts. For example, California's population increased by 600,000 last year and the trend is expected to continue. To accommodate the power needs of 600,000 more residents, an additional 600 MW will need to be brought on-line. From permitting to completion, the process takes several years. So while add-on capacity may look like a gamble for power providers, the additional capacity is really a calculated move based on a statistical model.

Again, using the California power market as an example of vagaries at the regional level, the market is approximately in equilibrium because of allowed increases at the retail level, a mild winter, conservation, and lower use and demand.

However, a recent report from the Federal Energy Regulatory Commission (FERC) maintains that conservation efforts and a slowing economy in California ? and not a $92 per megawatt hour cap on spot market prices imposed by federal regulators ? caused electricity prices to ease last summer.

The US power finance market divides into three distinct structures: non-recourse project finance; synthetic lease or structured corporate deal; and revolving credit and traditional corporate financing.

Said one New York banker: ?Sure, there are less deals to finance. But it takes three to five years to develop a power project. Those deals in the intermediate and final stages of development will not be stopped. The ones you read about as being stopped are early stage or at most intermediate stage.

?The project finance market will be healthy for 2002. However, if power prices are kept low, the market in 2003 will be in trouble.? A cap on energy prices was a main cause of the California crisis. Retailers paid more for power than was being collected under current rates. By the end of last year, the cost of power exceeded the amount collected from customers by billions of dollars.

West Coast power providers borrowed billions of dollars to cover the shortfall from rates but exhausted their collective borrowing limit. Banks and other lending sources would not lend any more to make further purchases of power unless and until they got some concrete evidence that companies would be able to recover costs in rates.

?The synthetic lease market for turbines will slow down due to reduced demand. In addition ? in light of the Enron debacle ? banks may look with suspicion at off-balance sheet loans. Consequently, getting synthetics for turbines ? or other assets ? may run into problems internally.?

The banker noted that there should be normal activity in the revolving credit and corporate lending sector except some borrowers may look to upsize facilities in the current market. That has been borne out by Calpine's recent move to upsize a $400 million corporate revolver to $1.4 billion.

Calpine intends to complete 27 power projects currently under construction as scheduled. Construction of an additional 34 projects will be placed on hold pending further review, reducing previously forecasted 2002 capital spending by as much as $2 billion.

Calpine will use its additional borrowing capacity under the revolver to backstop a zero coupon bond issue launched last April. Calpine placed $1 billion in zeros convertible into Calpine common shares at a price of $75.35. Proceeds from the offering were used to retire project finance debt and for working capital and general corporate purposes. But Calpine shares have been trading under $13 per share, and the company may have to use some of its liquidity to pay the expected deluge of investors who opt to not convert.

However Calpine has lost some of its lustre. Calpine's anticipated cash sources add up to about $4.38 billion against requirements of about $4.36 billion. Calpine noted in its recent 4Q 2001 earnings report that funds available in 2002 included approximately $1.8 billion of cash resources, approximately $875 million of borrowing capacity under working capital and construction revolvers, estimated annual operating cash flow of $1.2 billion, and approximately $500 million of projected proceeds from a planned sale and leaseback of peaking facilities. These will be used in part to repay $819 million of zero coupon convertible debentures and $330 million of cash lease payments.

That may not be so easy. With the company's credit rating under pressure, the $500 million from sale and leaseback may be too ambitious. Calpine also owes Enron $160 million. And if cash flow falls short as power prices go down, the company may be in for trouble. Michael Schaal, senior analyst at Arlington, Virginia-based Energy Ventures Analysis, noted that the impetus for cancelling power projects actually began to pick up during November 2001, but began to accelerate in the wake of the Enron collapse, and the resulting reluctance of banks to invest in the sector.

Cancellations and withdrawals of projects have been moving along at a 9,000 MW per month rate throughout 2001, but the gross level of announcements more than kept pace until the November 2001 peak. With the stock prices sliding there was no more fuel for the companies to entertain further projects, and certainly saturation levels and power prices also helped deflate the growth of announced capacity.

However, in spite of changed market conditions many of the planned projects already are online, under construction, or past the point where the company controlling the project could economically cancel it.

?Projects in the early stage of development are most at risk for delay or cancellation. Yet the impact of new capacity additions will not kick in until 2003 ? with the greatest effect occurring during 2004. In the meantime, construction of new power plants will continue at, or above, the pace set in 2001 for the next two years,? according to Schaal.

?The fourth quarter of 2001 heralded the first downturn in the boom of new gas-fired power plants since 1998, as for the first time cancellations and deferrals outpaced announced new projects. The decline will, and has, accelerated during the first quarter of this year, as companies continue to announce deferrals and cancellations of projects.?

Schaal said the boom of gas-fired projects peaked at 381,000 MW. The remainder ? consists of over 100,000 MW that has not yet entered construction and is split between projects that are in the late and early stages of development, Schaal said.

This 100,000 MW still to be developed eliminates some 68,000 MW of capacity that developers still were pursuing as of mid-January ? and down by 83,000 MW from the November 2001 peak. ?It is expected that the timing of this developmental stage capacity will be stretched out by one or two years owing to the current-day limitations on raising capital,? Schaal said.

Attributing to banks the holding up of developing additional capacity is partially true, said John Veech, head of project finance at Lehman Brothers. The lending community is a lot more conservative than it was a few months ago and fallout from the Enron bankruptcy has spooked a lot of people, Veech added

Banks may look to the forward power curve as a barometer. ?Everyone's view of future power prices is that they will be lower than forecast a few years ago. Five to seven years from now all the on-line capacity will get used. But lenders are concerned about the short term,? Veech said.

While lenders are not rushing to finance the volume of deals that previously marked the power sector, deals are being completed. ?If they are financing, banks are looking for more equity and higher priced debt. Some power projects that companies had on their drawing boards now can't get past their internal investment models. A year ago, merchant wholesale companies had virtually unlimited capital and their biggest challenge was where to deploy the funds. Now the reduced price to earnings multiples makes the equity more expensive, as well as debt.

?But the investment world is more volatile and mood swings are more drastic. Investors now react more quickly and harshly to changes in the market. On top of that, the power sector is oversold. Investors have already pulled back. We see them coming back in a 12 to 24 month horizon.?

There also was a huge flow of greenfield development that has been curtailed for a number of reasons. For instance, Arizona regulators scuttled plans for the $1 billion Toltec Power Station, saying that its electricity was not needed and that the plant would harm the environment of central Arizona's Santa Cruz River Valley.

And in New York City, the New York State Board on Electric Generation Siting and the Environment will hold public hearings on February 11 to allow the public a chance to comment on Orion Power Holdings' proposed expansion of its Astoria power plant in New York City. Energy supplies in New York City have become tight over the last few years, according to state energy officials, because few plants have been built.

Veech said the companies performing at expectation are merchant power companies associated with utilities such as AEP, PSEG, Duke, Dominion, and Excelon. ?These types of companies are doing fine.?

The numbers show that Veech is right.

AEP reported 2001 ongoing earnings of $3.38 per share, a 26% increase from 2000. Revenue increased 67% to $61.3 billion. A full year of operation of assets acquired in 2001 ? Houston Pipe Line, Quaker Coal, the MEMCO barge line and two power plants in the United Kingdom ? also are expected to contribute to growth in 2002 earnings.

Public Service Enterprise Group (PSEG) announced that consolidated earnings for the year 2001 were $770 million or $3.70 per share of common stock, based on 208 million average shares outstanding. PSEG's business plan calls for a 7% compound annual growth rate in earnings per share over a five-year period, off a 2001 base of $3.70. The company is relying on a satisfactory outcome of New Jersey's basic generation service (BGS) auction, in which two of its businesses, PSE&G and PSEG Power, have an interest. In addition, solid results for the year would also depend in part on PSEG Global's ability to minimise the effects of the economic crisis in Argentina on its investments there. The company also expects continued strong growth in its asset-based trading business

?We also think the shortfall in construction will be offset by increased banking activity in asset sales and issuing equity. Well-capitalised utilities will be able to buy assets at good prices. Big oil companies may go into integrated power sector, and there may be a move by private equity into the power sector. In addition, there will be significant consolidation activity in which some of the smaller players will get swallowed up,? according to Veech.

Veech said problems associated with financing turbines may be overestimated. ?There was a feeding frenzy to get a slot in the turbine production process even up until last year. Now they are giving them back to turbine suppliers. Right now, you can buy a turbine cheap. And the structuring of turbine lease deals allows for those deals to be unwound without much trouble.?