by Nancy Spring, Managing Editor
Meet Jack Fusco, Calpine’s new president and CEO. At the helm of the independent power producer since August, Mr. Fusco brings 25 years of experience in the industry to a company that’s ready for action. After going through one of the largest and most complex reorganizations in corporate history, Calpine can finally put the hard times behind it. “Our near-term challenge is to shift our perspective from that of a company in bankruptcy to a company poised for noteworthy achievements,” he told us. What else has he got planned for Calpine? Read on.
How does Calpine fit into the U.S. electric power industry’s goal of providing reliable, affordable electric power?
Simply put, Calpine is the leader. We are the largest independent power producer in terms of output, according to Energy Velocity, 2007. We have 77 plants with nearly 24,000 MW of capacity that provide electricity for customers in more than 16 states, primarily in the largest U.S. markets. Importantly, we are doing this with the youngest, most efficient and cleanest generation fleet in the industry.
We’re modern–our plants are, on average, less than 10 years old, while the average age of our competitors’ plants is nearly four times that. Our plants feature current technology that is not only efficient, but requires less near-term reinvestment or renovation.
We’re clean–the bulk of our fleet operates on natural gas, making us one of the lowest emitters of greenhouse gases. The clean nature of our fleet not only has environmental benefits, it also limits our exposure to costly environmental compliance expenditures that ultimately add to the cost of producing electricity. We also operate an even more environmentally friendly facility, The Geysers, the single largest geothermal field in the world.
We’re efficient because our plants are modern and our operating expertise is unparalleled. We are widely regarded as industry leaders; for example, our centralized turbine maintenance group yields a low fleet-wide heat rate compared to our competitors.
Where does Calpine see the most attractive opportunities for expansion?
In general, we see opportunities for growth in areas that need additional generation as evidenced by increasing demand and/or tightening reserve margins. We currently operate in four regions of the U.S. that are experiencing tight or tightening reserve margins over the next few years. In particular, our two largest markets, California and Texas, present the best opportunity for us to grow the business.
Our growth in these regions will come from expanding our existing operations, many of which were originally built with growth capabilities in mind. Given the rapidly escalating costs of building greenfield generation, we think being able to invest in new capacity at existing sites will be a cost-effective and competitive means of achieving growth.
We also see long-term potential for our Southeast region, where we have a sizable presence and have already seen recent improvements in our ability to execute power purchase agreements, such as the one we announced with TVA in August. We believe this contract demonstrates the long-term potential of the market.
Are you exploring international markets?
This year we will add an operating plant in Canada. Our Greenfield Energy Centre in Ontario is scheduled to commence operation during the fourth quarter of this year. It will be one of only two plants in our fleet that operate in Canada.
Beyond Canada, international development or acquisitions are not a priority for Calpine. Instead, we will focus on our existing plants, most of which are in the U.S., to realize growth through operational efficiencies and embedded opportunities for capa-city expansion.
Our strength lies in focusing on our core markets, where we have already demonstrated our ability to succeed, rather than risk spreading ourselves too thin. I see sufficient near-term growth opportunity for Calpine domestically, without the need for us to look at international markets beyond Canada at this time.
Why is natural gas a good fuel for generating electricity?
Natural gas presents several advantages as a source of power generation, particularly when compared to other fossil fuels. Most notably, natural gas has the lowest overall emissions of CO2, SO2, NOx and mercury of all the fossil fuels, making it one of the least polluting forms of power generation. In addition, the U.S. has an abundant supply of domestic natural gas, particularly given the recent advances in shale extraction. That’s been covered quite extensively in the media.
Gas also is an affordable alternative to other fuels that are either more expensive, more susceptible to international supply and demand restrictions, or both. Furthermore, gas-fired facilities can cost-effectively operate as baseload, intermediate or peaking resources due to their quick start-up times and inherent operation-al flexibility.
Lastly, it takes considerably less time to build new natural gas generation capacity than, for example, coal or nuclear capacity. That makes natural gas plants ideal for addressing capacity needs in a faster, more timely manner.
Please tell us about your geothermal power plants.
The Geysers, located in northeast California, is one of the most unique power generation assets in the country. It’s the world’s single largest renewable geothermal resource.
Geothermal power plants can generate electricity around the clock, making The Geysers an important source of baseload generation. The Geysers have an availability record of 97 percent, while other renewable resources, such as wind and solar, can only produce power when the wind blows or the sun shines, making them less reliable. The Geysers also produces virtually no emissions–a rarity for baseload generation.
What concerns you most about the U.S. electric power industry right now?
Domestic demand for power has continued to rise year after year, and although there was a spurt of new capacity in the early 2000s, we have seen very few recent additions of supply. Adding capacity is important as a solution for meeting increased demand and for reducing the country’s current reliance on high-emissions assets as baseload generators. We are not yet seeing these older, less efficient and more harmful emissions-intensive plants being retired and replaced by clean, efficient and reliable alternatives. Calpine is well-positioned to respond to this challenge, given the nature of our modern, clean and efficient fleet and the opportunities we have for growth.
My other concern is the unwarranted attack on competitive markets. Fortunately, FERC and some states have held strong in support of competitive markets, but others are considering or implementing changes that undermine competition. For example, utilities sometimes self-build even when existing independent generation is available or can be built, inhibiting competition and potentially harming ratepayers. We are very active in educating lawmakers and regulators on the pitfalls of tinkering with competitive markets in a way that fails to align incentives.
How does the global economy impact Calpine?
Power production is an infrastructure business subject to macro-economic trends. For example, we have seen significant increases over the past several years in costs associated with new generation construction. This is due in part to global demand for commodities, equipment and labor. Calpine is well-positioned to handle the impact of a global economy on North American power generation. The young age of our fleet means Calpine will not, in the near-term, need to invest in costly large replacement or reconstruction projects. In addition, there are opportunities for expanding within our existing portfolio that are less capital intensive than new greenfield development.
How did your experience prepare you for this position?
I have spent the past 25 years in various sectors of the power generation industry. I have been a utility power plant operator, a utility manager, an independent power developer in the U.S. and abroad, a power trader and the co-founder and CEO of, and investor in, an IPP start-up that later became a publicly traded company.
I also have served as the CEO of, and investor in, an IPP that took over all the generation assets of a utility, requiring substantial cultural and organizational change. I have experience in the California, Texas, Northeast and Midwest power markets. And I have experience with virtually every meaningful fuel technology, including natural gas, coal, nuclear, hydro and oil. I think this experience gives me a broad perspective for my role at Calpine.
In addition, we are fortunate to have two new members of the senior management team whose experience and deep understanding of the power generation business will also help guide Calpine. Thad Hill has joined us as our chief commercial officer, with responsibility for power operations and commercial business. Thad was president of NRG Texas, and before that we worked together at Texas Genco. Before joining Texas Genco, Thad headed Boston Consulting Group’s North American energy practice. Thad Miller, with whom I worked at Goldman Sachs, Orion Power and Texas Genco, has joined us as chief legal officer. He has more than 30 years of experience in energy and related sectors.
What kind of corporate culture does Calpine need to be successful?
My goal is to make Calpine the premier independent power producer. We want to be the best, which means setting high standards for our people and processes.
Calpine has spent the past two-plus years going through the most challenging phase in the company’s history. It was a period of change marked by uncertainty for the employees, who are to be commended for maintaining focus on our business. The outcome is that we now have an organization that is better aligned internally, better positioned financially and better prepared to move forward successfully. Yet it also is an organization hungry for a vision and strategic direction for the future.
We are now focusing on taking the company to the next level, which will require a culture of shared vision, aligned interests with our shareholders, assumed responsibilities and, importantly, discipline around our processes. At the same time, we will maintain our organizational commitment to the communities where we operate and the customers to whom we deliver clean, reliable and efficient power every day.
A complex reorganization after bankruptcy, an unsolicited takeover bid–what exciting challenges do you see next for Calpine?
I am very excited about the future of this organization and the opportunities ahead. Our near-term challenge is to shift our perspective from that of a company in bankruptcy to a company poised for noteworthy achievements: harnessing efficiencies within the organization, making incremental investments to enhance the capabilities of our existing portfolio, and applying prudent decision-making to the development opportunities imbedded in our existing relationships and assets.