The continued risk of tight gas supplies and consequent price spikes over the long term are driving U.S. utilities and power generators to announce plans to build new coal and nuclear capacity, as discussed in Fitch Ratings' 'Wholesale Power Market Update.' Other factors supporting capacity additions include declining reserve margins at peak in many power regions and public policy incentives to attain greater fuel diversity.

Fitch notes that the Electric Reliability Council of Texas (ERCOT) has the potential for substantial new capacity to start operations by 2009. This is in contrast to most other regions where major base load capacity additions are unlikely to start operation before 2011. Fitch believes this would reduce power prices and spark spreads in the ERCOT region, a favorable development for consumers.

'A key credit concern is that the current environment of high power prices and easy access to funding could lead to overbuilding with more substantial declines in power prices for generators,' said Denise Furey, Senior Director, Fitch Global Power team.

'Recently we have seen an increase in announced additions of base load power plants, with the clear exception of New England and the mid-Atlantic PJM Interconnection region' added Ellen Lapson, Managing Director, Fitch Global Power team. 'However, companies may change their plans based on the reserve margins in regional wholesale power markets and especially the market outlook for the relative prices of natural gas and coal.'

Despite a significant decline in spot market prices due to a mild hurricane season and robust storage levels, the price of natural gas future contracts remains well above historical averages and Fitch's long-term constant dollar price forecast of approximately $4.50-$5.50 per mmBtu in the base case and $6-$7 in Fitch's high gas case.

'Fitch's long-term view of gradually declining natural gas prices reflects our outlook for macroeconomic conditions, softening industrial consumption demand and increased imports of liquefied natural gas,' said Bryan Caviness of Fitch's Global Power team.

The near-term price environment for coal remains softer compared to 2004-2005, but Fitch anticipates continuing upward price pressure on multiyear coal supply contracts. Fitch also expects power generators and utilities to face rising costs on extensions of coal transportation contracts.

Fitch's 'Wholesale Power Market Update' is published semi-annually and contains discussion of key industry trends affecting credit on a national perspective with analysis specific to each major power market region. Other topics addressed in this report include an update on valuations of electric generation assets in recent divestitures and acquisitions and regional power market developments, including the Regional Greenhouse Gas Initiative (RGGI) in the eastern U.S., plans to add advanced coal-fired power generation in the Midwest, and the progress of plans in several regional power markets to implement payments for power capacity.