OKC-based Chesapeake CEO: Coal-fired plant too risky

Journal Record, The (Oklahoma City), Jul 31, 2007 by Janice Francis-Smith

Chesapeake Energy CEO Aubrey McClendon made a rare public appearance at the Oklahoma Corporation Commission on Monday, urging commissioners to reject the Red Rock power plant proposal.

It makes no sense to spend $1.8 billion to build a new 950- megawatt, coal-fired power plant in Oklahoma, when the state is home to Chesapeake, the nation's third-largest independent producer of natural gas, said McClendon.

Both the arguments in favor of building the facility and the arguments against are based on the companies' best guesses regarding future market conditions. Only time tell which assumptions were wrong - and mistakes will take the form of excessively high utility bills for Oklahoma's ratepayers.

Oklahoma City-based Oklahoma Gas and Electric Co. (OG&E) and Tulsa-based Public Service Company of Oklahoma (PSO) have joined forces on the proposal to build Red Rock.

"Natural gas is without a doubt a cleaner burning fuel, but it comes with price volatility," said Paul Renfro, vice president of public affairs for OG&E. "Coal is a very stable price fuel, but coal comes with environmental baggage."

The issue of price volatility regarding natural gas can be overcome somewhat easily, said McClendon.

"The fact is that these organizations, these companies, can go to Wall Street and very easily hedge their future gas requirements, and they can do so at what's an attractive price," said McClendon. "But what I've been told by them is that they are really not allowed to do so by you all (the commission), and so I think there needs to be some work done."

The idea of allowing utilities to hedge their natural gas purchases has been heavily debated at the commission over the last few years, as the price of natural gas has increased. But one problem with hedging is ratepayers could be left paying more than the market price for natural gas if utilities "lock in" before prices fall.

"Sounds a lot like the old take-or-pay contracts to me where yes, you can lock in the price, but you also lock in quantity when you lock in a certain amount that you have to take," said Renfro. "Then if you have a cool summer, you have to pay to take the gas whether you need it or not."

McClendon said the price of natural gas will likely stabilize over the next few years due to an increase in supply. Technological advances, including the ability to drill horizontal wells and get more gas out of certain types of shale, have provided Oklahoma and Texas with vast reserves they didn't know they had until recently.

Though the market price for coal is low, McClendon said there are hidden costs to burning coal. The cost of building and running a coal plant are higher than the costs associated with a natural gas plant, said McClendon. And the cost of building the plant could wind up being much higher than the estimated $1.8 billion.

"Coal is inexpensive compared to natural gas only because the external costs of burning coal have not yet been properly internalized," he said. "Right now, a lot of the cost associated with burning coal go up the smokestacks and fall downwind on all of us in the form of greater air pollution and poorer health. There will be a day when those costs are evened out, and when they do that will work to the benefit of natural gas and the state of Oklahoma. - And then you include a potential carbon tax and who knows what comes after that, we think there's no comparison."

Congress is currently debating a proposal to impose some kind of tax on carbon emissions, giving utilities a financial incentive to burn cleaner fuels. Such a program could be in place within five years - or two years if a Democrat is elected president in 2008, said McClendon.

Renfro agreed with McClendon in that right now, it's impossible to tell how much the proposed carbon tax would be or how it would impact the cost of burning coal.

"Aubrey is right in that there is an unknown there," said Renfro. "We don't know precisely how that will turn out. But one thing we do know is that natural gas prices are high." The utilities don't make any money on fuel. Fuel costs are passed through directly to the ratepayers, and the ratepayers will suffer most from a huge jump in fuel costs.

Chesapeake has also taken its battle against the Red Rock proposal to the Oklahoma Supreme Court. Chesapeake argues that the law that gave the Corporation Commission the ability to consider and approve a power plant before it is constructed was passed in an unlawful manner, since the state constitution was not updated to reflect the change.

McClendon said that though he expects Chesapeake will be successful in its legal challenge to the law, the company is prepared to appeal an unfavorable decision.

"We'll do what it takes to get our message out," he said. "We'll let the process run its course. We're confident the positions we've staked out are compelling issues, and we're confident that when the facts are out and the true economic conditions of the proposal are known, (OG&E and PSO) will be directed in the right way."