Despite Worries on Changes in Law : Cogeneration Firm Goes Ahead at Full Power
Robert Morris’ belief in cogeneration is so strong that, last week, he flew to Washington to testify on behalf of the industry before a U.S. Senate oversight committee.
Specifically, Morris, the chairman of San Diego-based Energy Factors, a cogeneration company, testified in support of the 1978 Public Utility Regulatory Power Act. The Act breathed new life into the cogeneration industry by giving cogenerators the ability to sell their excess electricity to utilities.
“PURPA has accomplished a great deal but that doesn’t mean we should do away with it,” Morris said during a recent interview. “Although the (Senate Energy & Natural Resources Committee) isn’t considering any immediate action, it is asking for views on which way we should go.”
Companies that use large amounts of electricity, steam and chilled water have increasingly turned to cogeneration because of growing concern over the availability and dependability of electric power--and how much that power will cost.
Cogeneration could account for as much as 20% of the nation’s electric generating capacity by 2000, according to an estimate by the U.S. Dept. of Energy.
Last year that growing wave of interest helped San Diego-based Energy Factors line up 10 new cogeneration projects worth $202 million that will generate a total of 198 megawatts of power.
“When it rains, it pours,” quipped Morris, who acknowledged that he “would have liked (the projects) to have come in over a longer period of time.
“When we got all those orders, it stretched us pretty thin because there’s been an awful lot of work,” Morris said. “We even had some of the marketing guys pressed into service” to arrange those contracts.
Energy Factors reinforced its management ranks last April with a $9-million acquisition of Cogeneration National Corp., a Concord-based cogeneration firm with offices in Los Angeles and Irvine.
In addition to picking up cogeneration and solar-energy projects valued at $187 million, Energy Factors added nearly 50 professionals, including Timothy E. Boyle, president of Cogeneration National Corp., who will move to San Diego as Energy Factors’ vice president of business development.
The new additions also will help Energy Factors develop the second generation of projects that will convince industry analysts that the company’s backlog will remain healthy into the 1990s.
Prior to last year’s flurry of new business, industry analysts had voiced concern over Energy Factors’ lack of contract announcements.
However, “Energy Factors has been conservative in announcing its projects,” suggested Keith Benjamin, an industry analyst with the New York brokerage firm of Silberberg & Rosenthal. “But in the long-run, given the kind of business they’re in, conservatism is probably a good thing.
“Everything that we wanted to have happen (to Energy Factors) has pretty much happened--and more,” according to Benjamin, who has watched Energy Factors’ per-share price rise to about $20 from $9 at its initial public offering in 1983.
“These guys know the cogeneration business as well as anyone,” Benjamin said. “They’re superb managers of projects and they know how to get a project up and running.”
There are, however, perhaps two dark clouds on Energy Factors’ horizon, according to Benjamin. The first is congressional debate on tax law changes, that could alter investment tax credits. The other is the possibility that utilities might force a change in the federally mandated formula that determines how much they must pay for electricity generated at cogeneration facilities.
Although Energy Factors might suffer some short-term disruption if investment tax credits are modified or abolished, Vice President Richard Kay suggested that although “investment tax credits are a nice sweetener and a benefit, our business is not tax-driven. We intend to own and operate our facilities for (as long as 30 years), so we’re not involved in tax shelters.”
However, Kay acknowledged that “uncertainty” over what Congress will do in the way of tax reform has forced the company to “plan on a worst-case basis.”
Although some industries have had trouble lining up financing, Kay pointed to Energy Factors’ recent successful sale of $80.5 million of 8.25% convertible debentures as proof that “there is no shortage of money.”
Still, Energy Factors is pushing to bolster business outside of its Southern California stronghold. “It’s psychologically important for us that the New York banks (view) us as a national company,” Kay said.
With the acquisition last October of a Michigan company that is developing wood-burning cogeneration facilities, the company also has expanded its scope beyond traditional gas-fired, electric cogeneration plants, Kay said.
Unfortunately for the nation’s electric utility customers, much of Energy Factors’ future growth will be spurred by what Morris has labeled “nuclear rate shock,” the rise in electric rates that will occur as utilities around the country finish construction of prohibitively expensive nuclear plants and seek to recover their costs through higher electric rates.
“All around the country you’ve got these utilities with a big block of expensive (nuclear-generated) power that they want to get into their system,” Morris said. “The problem is that they’re trying to sell electricity at 15 cents to 18 cents a kilowatt hour when they’ve been selling it at 7 cents.
“They don’t need that much new power that quickly and we’re telling (ratepayers) that we’ll sell power at 7.5 cents, including the cost of building the new capacity,” Morris said. “It gets embarrassing for them.”
In addition, with the nation’s utilities “abdicating their interest in building new generating plants,” corporations’ energy managers are worried about a future in which demand will outstrip supply, Morris said.
“If (a nuclear plant) suddenly has to shut down, a utility might find itself with no excess power,” Morris suggested. “We can build a plant in two years flat, compared to the dozen years it takes to build a utility power plant.”
