Industry publication, December 2001

NYC 9/11 Public Portal Document

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ECONOMICS PETER RIGBY ERGOT region had a reserve part of a stimulus package de­ margin of nearly 35%. signed to head off recession. Generation Credit Weakens WASHINGTON WAYS. The Bush administration and Indeed, few dispute the need for increased spending on na- > s the U.S. recovers from has seen a significant decline Congress face a unique chai- tional security needs and a ^the Sept. 11 terrorist at- in credit quality in the U.S. lenge—simultaneously fight- war effort. Unfortunately, the tacks and faces the threat of industrial sector, including ing a first-of-its-kind war on Keynesian approach probably recession, the electricity in- Bethlehem Steel’s October global terrorism and a loom- will do little to stimulate or dustry is still wrestling with de- Chapter 11 filing and Stan- ing recession. What emerges support GNP growth and, with I regulation and competition. dard & Poor’s lowering of from various fiscal and mone- it, electricity demand. In fact, How the nation's new focus credit ratings for Ford Motor tary policies will direcdy affect the opposite could happen. on security and ter- Co. and General Mot- power generation. Some poll- More government projects, rorism will affect the ors Corp. But if confi- cies should favor credit, but particularly against the back- economy and elec­ dence in the economy others may do the opposite. drop of the disappearing bud- tricity demand is an rebuilds, particularly The Federal Reserve has cut get surplus, will likely result in open question, while if investors perceive the federal funds rate to 2.5%, increased government bor- Washington, waging solid long-term eco- from 6.5%, this year. If rate rowing. According to econo- the most unconven­ . J. nomic fundamentals and the country’s abil- cuts continue, borrowing costs should fall for power genera- mist Milton Friedman, that will give individuals and industry tional of wars, hopes to stimulate the econ- ity to manage the costs tors. If lower interest rates helpless money to spend; when omy with a mixture of fiscal of terrorism, the economy stimulate the economy, that governmentgrowsandspend- and monetary efforts that may could rebound with little or no should support electricity de- ing increases, less productive produce little—or unintend- effect on credit for power gen- mand. In theory, a larger mon- government projects replace ed—results. What can Indus- eration. Still, a prolonged re- ey supply should ease consum- those of the more productive try observers anticipate? cession would affect electricity er worries and rebuild confi- private sector. Such a scenario GLOBALIZATION. Over the demand. deuce. However, power gener- does not bode well for elec­ past 10 years, economic glob- Regardless of whether the ators that choose to take tricity demand. alization has created many economy enters recession, it advantage of lower interest CREDIT. The explosive growth diverse and strong trade and seems certain that U.S. indus- iGp of new generation capacity in financial links among the trial electricity demand cou 1 fers insight into world’s economies, industrial- soon drop significantly, redit quality for ized and emerging. Because eroding credit in the .dustry. The com­ the links are integrated, a U.S. power sector. Industrial ation of record- dovmturn will echo abroad, demand accounts for igh electricity As U.S. imports decline, ex- about one-third of prices and sky­ porting countries will suffer utility retail sales. rocketing de­ and will then cut their im- In October, the . ‘ mand that fol­ ports from the U.S. and other U.S. Federal Re­ lowed the countries. That, in turn, will serve announced country’s cause the U.S. to cut imports, that the 12- impressive creating a demand-reducing month consecu- * ... H GNP growth of spiral. In such a scenario, five fall in U.S. K late spurred a electricity consumption would industrial output j Ip record boom have to decline. was the longest ,, in new plant Much of the U.S. boom in since 1945. The construction. the past decade resulted from actual decline of Forecasts of an extraordinary confidence 5.8% since Septem- power shortages in the economy that support- ber 2000 was the - have encouraged ty' even more invest­ o ed a tremendous investment largest in nearly two in production capacity, in- decades. In addition, in­ ment. X

cluding electricity generation. dustry capacity utilization Debt—lots of it—has fi­ so Low interest rates encouraged has fallen about 7%, to 75.5%, nanced much of the new gen­ o 5 I debt financing in lieu of more since September 2000. rates ' .;' eration in this country, as well s CE II expensive equity. If the U.S. For the competitive gener- by refinancing—and increas- as acquisitions of existing gen­ 5 economy goes into recession, ation business, such numbers ing their leverage—-may find eration that have come with g the combination of excess in- indicate shrinking demand that the resulting higher fixed industry restructuring. Opti- dustrial capacity and high for power and drops in power costs in the face of declining mistic forecasts and scenarios X § debt may require some time to prices and credit quality. The power prices and falling asset of success have pushed lever­ 3 work out. Lower interest rates recent surge in U.S. power- values will undermine their age levels higher than current c and low inflation may not help plant construction may exac­ credit. or near-term forecast power m

restore the economy as much erbate a near-term supply- Some Washington circles prices can support. Indeed, I as time will. demand imbalance. Before are proposing major govern- syndicated bank loans in the cn Standard & Poor’s already Sept. 11, for example, Texas’ ment spending increases as past three years or so have pro-

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