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----- Forwarded by Brian Spector/Enron Communications on 01/03/01 08:58 AM=
=20 ----- =09Davis Thames =0912/28/00 10:26 PM =09=09=20 =09=09 To: Cynthia Harkness/Enron Communications@Enron Communications, Evan= =20 Betzer/Enron Communications@Enron Communications, Brian Spector/Enron=20 Communications@Enron Communications =09=09 cc:=20 =09=09 Subject: The Wall Street Journal Interactive Edition December 28, 2000 Review & Outlook California Messes Up What a lovely mess in California. Wholesale electricity prices are zooming,= =20 power reserve margins are shrinking, the state's two biggest utilities are = on=20 the verge of bankruptcy and its Governor has just gone, hat in hand, to vis= it=20 Alan Greenspan, as though he could somehow make all of this awfulness go=20 away. California has created an unusual problem for editorial writers. Too= =20 much blame! We are dizzy trying to decide how to allocate it. But here's ou= r=20 best guess: The stars. An unfortunate misalignment of the planets has zoomed prices=20 nationwide for an important raw material in electricity -- natural gas. And= =20 in California, which depends on natural gas, higher prices have been=20 aggravated by an inadequate supply of electricity generation (more on this= =20 later) and insatiable demand. Demand for electric power has been increasing= =20 at almost triple the national rate of increase of 2% to 3% a year. *** Unplugged=20 But the magic moment happened when the planets governing prices collided wi= th=20 the need to shut down 25% of generation capacity a few weeks ago. This past= =20 summer has been rough on electric power generation. Some of the plant=20 shut-downs were for maintenance and repair, some because plants had reached= =20 their air-pollution limits for the year. In the past, California would just= =20 gulp down some power from neighboring states in the Northwest. However, the= =20 planetary influences in the Northwest have not been auspicious either. A=20 drought has left hydropower plants with less generating capacity; and colde= r=20 weather, earlier than usual, has swelled demand. The regulators. Four years ago, California regulators took their first -- a= nd=20 so far, only -- step toward the deregulation of electric power. (Note: They= =20 did not deregulate electric power, they vaguely made a pass at it.) Hence,= =20 the wholesale price is relatively free to reflect market conditions in=20 generation, but the retail price to consumers remains frozen. That isn't=20 deregulation; it's California's popular Santa Claus theory of economics. Thus, when wholesale prices started to rise sharply in June, utilities were= =20 forced to buy higher priced power without being able to pass the increase= =20 along to consumers. The mismatch has resulted in a multibillion-dollar=20 shortfall that has Southern California Edison saying it cannot pay its powe= r=20 bills due January 4. "Consumer advocates" seem to think the utilities have= =20 stashed money somewhere. Nonetheless, credit-rating agencies, looking at th= e=20 current runaway debt situation for both Pacific Gas & Electric and Southern= =20 California Edison, have downgraded their ratings, making it more expensive= =20 for them to borrow. These very same regulators then made a muddle when they tried to rush to th= e=20 rescue. First, when the price of power rose, state regulators slashed the= =20 price cap on wholesale prices to $250 from $750 per megawatt-hour. This of= =20 course caused those who generate power to sell it to states without price= =20 caps. So the regulators dropped the cap completely only to watch prices sho= ot=20 up to an amazing $1,400 per megawatt-hour. Then the state regulators called= =20 in the Feds. The Federal Energy Regulatory Commission ordered more price ca= ps=20 and the Secretary of Energy, Bill Richardson, ordered 75 Western wholesaler= s=20 to continue selling to California utilities, despite the fact that they may= =20 not be able to pay their bills. The utilities. They not only agreed to the original, bogus deregulation=20 scheme, but they supported it. The scheme itself is a masterpiece of=20 short-term thinking. At the time, energy prices were low, so having a plump fixed rate must have= =20 looked mighty appealing. So the utilities cheerfully signed off on an=20 arrangement that provided them with fixed rates to consumers and mandated= =20 that they buy power -- whose price was not fixed -- from a central exchange= ;=20 moreover, the scheme dictated that they could buy no longer than one day=20 ahead of need. No longer-term or side contracts permitted. In other words,= =20 the utilities agreed to buy in a volatile commodity market without the tool= s=20 allowing them to hedge. Nor have the utilities shown much interest in investing in metering that=20 gives consumers a peek at what they are paying for electricity. Thus=20 consumers not only have no incentive to conserve, but have no idea of how= =20 much their own use of electricity costs. Consumers. Of course having no incentive to conserve -- (Why?! Our rates ar= e=20 fixed!) -- they haven't. Indeed, what happened in San Diego this summer=20 provides a scary look into the consumer mind-set. San Diego Gas & Electric,= =20 the state's third largest investor-owned utility, ended its rate freeze in= =20 mid-1999. Rates dropped and everything seemed hunky-dory until last summer= =20 when the price of power skyrocketed. As their electric bills went up,=20 consumers did, in fact, start conserving on their energy use. But they also= =20 went berserk and demanded rates be frozen again. The state's Santa Claus=20 legislature accommodated. The great state of California itself. If this were happening in any state= =20 other than California, we'd be covered in sympathy. California, however, is= =20 an advanced example of the peril of Nimby. It has the toughest environment= =20 regulations. It has some of the toughest plant siting and permitting=20 procedures. In fact, things are made so tough in California that no new=20 substantial power generation has been added in the state in almost 15 years= .=20 (Thus causing Nimby to be replaced by Banana -- build absolutely nothing=20 anywhere near anyone.) The great state of California, which now imports 20% of its power, has just= =20 assumed that states in the Northwest and Southwest would continue to supply= =20 its needs. Too bad if those neighboring states need that power for=20 themselves; California just gets the Feds to order them to keep sending pow= er=20 anyway. *** Although blame has many receivers, in this case there is only one lesson to= =20 be drawn: You can't have your cake and eat it, too. California ought to=20 recognize there are trade-offs. Either it deregulates electric power=20 completely and is prepared to take the occasional bad consequences of high= =20 prices with the more frequent good consequences of lower prices or it=20 continues to shield users from price volatility and suffers from inadequate= =20 supplies of power. Either it indulges its hyperaesthetic environmentalism o= r=20 it builds the necessary power generation. The coming weeks will be interesting. The federal order requiring Western= =20 wholesalers to sell to California will expire; the California Public Utilit= y=20 Commission will decide on whether to lift rates for consumers, the federal= =20 courts will decide whether to accept FERC's price caps, the bills for power= =20 for the two largest utilities will come due, and Standard & Poor's will=20 decide whether to lower the utilities' credit ratings into junk bond=20 territory. Optimists see the opportunity for some sort of resolution; we're= =20 betting on seeing a wider opportunity to assign blame. URL for this Article: http://interactive.wsj.com/archive/retrieve.cgi?id=3DSB977956529393612258.d= jm Copyright =01, 2000 Dow Jones & Company, Inc. All Rights Reserved.=20 Printing, distribution, and use of this material is governed by your=20 Subscription Agreement and copyright laws.=20 For information about subscribing, go to http://wsj.com=20
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