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Enron Mail |
Cc: steven.kean@enron.com, richard.shapiro@enron.com, linda.robertson@enron.com,
james.steffes@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable Bcc: steven.kean@enron.com, richard.shapiro@enron.com, linda.robertson@enron.com, james.steffes@enron.com X-From: Ray Alvarez X-To: Steve Walton, Susan J Mara, Alan Comnes, Leslie Lawner, Rebecca W Cantrell, Donna Fulton, Jeff Dasovich, Christi L Nicolay, jalexander@gibbs-bruns.com X-cc: Steven J Kean, Richard Shapiro, Linda Robertson, James D Steffes X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf All: Attached for the reading pleasure of the CA team is the Andersen repo= rt=20 - "Energy Crisis in the Western U.S." Reproduced below is a related article= ,=20 and that is followed by the text of the Andersen press release on the=20 report. Ray =09NGI's Daily Gas Price Index=20 published : April 25, 2001 =09Andersen Warns Of Increased State/Federal Tensions=20 =09The likelihood of friction between state and federal regulators increasi= ng=20 over deregulation plans if states slow or walk away from retail competition= =20 is just one of several important implications resulting from the ongoing=20 shockwave that has rolled through the Western energy markets, according to = a=20 new report issued Tuesday by Andersen.=20 =09The report, "Energy Crisis in the Western United States: Lessons for=20 Navigating Regulatory and Market Minefields," was unveiled by Andersen's=20 North American Energy Consulting Practice at a Washington, D.C., briefing.= =20 =09David Jermain, principal with Andersen's North American Energy Consultin= g=20 Practice, noted that the report identifies eight overriding implications=20 emanating from the Western energy crisis. "These aspects of the California= =20 virus will shape the longer-term operations of the Western grid, the region= al=20 and national economy, domestic energy policy and the industry's evolution,"= =20 he added.=20 =09The eight implications singled out in the Andersen report are:=20 =09Increased deregulation uncertainty and risk=20 =09Reduced investor confidence=20 =09Contributing factor in economic softening=20 =09Increased pressure on the Western grid=20 =09Unbundling failures that push companies back to portfolio strategies=20 =09Ineffectiveness in changing siting and development restrictions=20 =09Procurement management that alters user-utility negotiating leverage; an= d=20 =09Increased emphasis on distributed generation and new technologies=20 =09"Tensions and differences between state and federal regulators raise the= =20 specter of repeating the regulatory and political conundrum California's=20 investor-owned utilities have been facing," Jermain said. If federal=20 initiatives open wholesale markets while retail markets remain regulated, a= =20 crucial question emerges, namely whether state regulators will pass-through= =20 higher wholesale costs if they should occur. "Tensions between state and=20 federal regulators over policies on deregulation will grow if states delay = or=20 abandon retail competition," Jermain stated.=20 =09As to the California situation creating increased pressure on the Wester= n=20 grid, Jermain noted that "Even as capacity increases and demand reductions= =20 work to resolve the California crisis, these solutions have long-term=20 implications for the Western grid." Such implications include a realistic= =20 chance that California could become an "energy island" as a result of=20 near-term reduction in available regional resources for export to Californi= a,=20 according to the Andersen report. Also, there could be increased emphasis o= n=20 security control to protect against overall Western grid failure as=20 sub-regions have difficulties.=20 =09Along with yesterday's report, Andersen also issued the results of an=20 Andersen survey of senior executives from 16 non-California utilities=20 detailing their views of the implications of the California power crisis fo= r=20 their companies and the industry. The survey was conducted between February= =20 19, 2001, and March 2, 2001, by Knowledge Systems & Research Inc. of=20 Syracuse.=20 =09On the deregulation front, nearly all the executives surveyed said they= =20 believe recent California events will slow the pace of deregulation over th= e=20 next five years for states that have not begun or finished writing=20 restructuring legislation. None believe that it will result in advanced=20 states deciding to re-regulate markets, although many states will review=20 their legislation to assess the risk of duplicating California's current=20 situation and make any changes necessary to avoid it.=20 =09As to legislation at the federal level, the survey found that few execut= ives=20 suggest that the California situation will spark national energy=20 policy/legislation. Other executives believe that it will be a continuing= =20 issue but, because of state-to-state variances, Congress will be unable to= =20 pass any comprehensive measures or force states to a restructuring timeline= .=20 =09Turning to company strategies, most of the executives surveyed do not se= e any=20 changes to their business models or strategies for generation, distribution= =20 or supply procurement as a response to the situation in California. However= ,=20 many have, among other things, expanded their risk management programs,=20 reduced spot market purchases and started emphasizing long-term supply=20 contracts. Those executives facing price caps are rethinking their stance o= n=20 them, according to the Andersen survey.=20 =09The full Andersen report on the Western energy crisis can be downloaded = at=20 www.andersen.com.=20 =09 ower companies and regulators must take steps to avoid spread of California= =20 Power virus: Andersen analysis WASHINGTON, D.C., April 24, 2001 =01* A =01&new virus spawned in California= =018 poses=20 formidable challenges requiring new strategies on the part of power=20 companies, regulators and policymakers to contain and reverse its damage,= =20 according to Energy Crisis in the Western United States: Lessons for=20 Navigating Regulatory and Market Minefields, a new Andersen report released= =20 today.=20 =01&The implications for the development of competitive energy markets go f= ar=20 beyond the Western United States,=018 Andersen=01,s national utility practi= ce head=20 Matthew D. Smith told a Washington briefing. =01&Unfortunately, California = has=20 taught the nation that regulatory and political barriers can create and=20 sustain an energy crisis.=018 =01&California has demonstrated that the risks in the electricity industry,= if=20 not properly acknowledged and managed, can simultaneously and profoundly=20 impact all market participants. To be effectively managed, these risks need= =20 to be exposed, assumed or shared, measured and monitored. When they are=20 hidden or ignored, all parties can potentially suffer. A shared, integrated= =20 view of these risks, and a strategy for their assumption and management, is= =20 critical to avoiding rapid value destruction within the energy market,=018 = Smith=20 said. An Andersen survey of senior utility executives outside California, also=20 released at the briefing, indicates most utility companies believe they=20 inoculated themselves against the California virus so that it is unlikely t= o=20 affect their operations beyond slowing the pace of deregulation and=20 increasing investor scrutiny. However, based on the potential implications = it=20 sees of the California situation, Andersen believes a series of booster sho= ts=20 are advisable for power companies and regulators. =01&To deliver reliable= =20 service at a predictable cost in today=01,s environment, companies must foc= us on=20 market integration by developing new and innovative relationships between= =20 suppliers, customers, employees and investors =01) while working with gover= nment=20 officials and regulators to chart a smoother transition to a deregulated=20 power market,=018 according to Smith. Eight Implications The Andersen report identified eight overriding implications emanating from= =20 the Western energy crisis that are shaping the longer-term operations of th= e=20 Western grid, the regional and national economy, domestic energy policy and= =20 the industry=01,s evolution: 1. Increased deregulation uncertainty and risk =01) Tension and differences= =20 between state and federal regulators raise the specter of repeating the=20 regulatory and political conundrum California=01,s investor-owned utilities= have=20 faced. If federal initiatives open wholesale markets while retail markets= =20 remain regulated, a crucial question is raised: Will state regulators=20 pass-through higher wholesale costs if they should materialize? Tensions=20 between state and federal regulators over policies on deregulation will gro= w=20 if states delay or abandon retail competition.=20 As wholesale markets are deregulated and RTOs begin operating, the prudence= =20 principles that state regulators have used for many years may have to be=20 changed. For example, if FERC and RTO monitors determine that deregulated= =20 wholesale markets operate fairly, prices derived from those markets must be= =20 considered reasonable. If so, these costs should be allowed into=20 state-regulated retail rates without regard to the prudence principles stat= e=20 regulators have used for years. Therefore, utilities=01, traditional burden= of=20 proving costs are or are not justifiable shifts to regulators. 2. Reduced investor confidence =01) Prior to deregulation, stringent pruden= ce=20 review and disallowance of generation costs in the rate base made regulator= y=20 risk largely uncontrollable, killing IOU interests in most new investment. = A=20 major purpose of deregulation was to create an environment in which risk=20 could be managed, but California=01,s political and regulatory environment= =20 provides only a limited ability to manage risks. The confidence and=20 perceptions needed to support investment decision-making will be slow to=20 return given the approach of the state to remedy the crisis. 3. Contributing factor in economic softening =01) Uncertain energy reliabil= ity=20 and higher costs can drive-out marginal businesses, cause healthy companies= =20 to constrain expansion, and lead new entrants to question whether to make n= ew=20 investments. As such, an extended energy crisis contributes to inflation=20 pressures and may slow economic growth. 4. Increased pressure on the Western grid =01) Even as capacity increases a= nd=20 demand reductions work to resolve the California crisis, these solutions ha= ve=20 long-term implications for the Western Grid. These include a realistic=20 possibility of California becoming an =01&energy island=018 as a result of= =20 near-term reduction in available regional resources for export to Californi= a;=20 increased emphasis on security control to protect against overall Western= =20 grid failure as sub-regions have problems; RTO requirements to strengthen= =20 locally available supplies to bolster overall system reliability; longer-te= rm=20 development of new plants using plentiful coal resources and clean coal=20 technology will alter the pattern of imports into California; and the=20 emergence of Mexico as a major supplier to southern California and Arizona,= =20 contributing to a bifurcation of the Western Grid into northern and souther= n=20 markets 5. Unbundling failures that push companies back to portfolio strategies =01= ) For=20 California investor-owned utilities, unbundling has achieved neither the=20 least-cost solution sought by regulators nor value maximization targeted by= =20 investors. This necessitates a reevaluation of portfolio management=20 strategies potentially involving generation, transmission, power trading an= d=20 marketing, and retail businesses in multiple geographies serving multiple= =20 markets. 6. Ineffectiveness in changing siting and development restrictions =01)=20 California=01,s retail price caps and multiple explanations for the crisis = have=20 left accelerated siting processes and environmental standards changes open = to=20 challenge by various interests. In addition, limiting application of new=20 siting orders only to small generators contributes to uncertainty and=20 investor hesitancy. 7. Procurement management that alters user-utility negotiating leverage =01= )=20 Competitive markets compel participants =01) suppliers, marketers, large=20 industrial buyers, etc. =01) to strategically manage procurement as a criti= cal=20 value-driver. Because risk is explicitly shared and always has the potentia= l=20 of shifting advantage to either seller or buyer, the sophistication of=20 negotiations and contracts increases as competitive markets evolve. 8. Increased emphasis on distributed generation and new technologies =01)= =20 California=01,s reliability and price challenges have triggered a re-emerge= nce=20 of energy crisis measures from the 1970s. End-users are investing in=20 solutions they control, and the distributed generation market is being=20 aggressively developed among large retailers, industrial users and=20 residential customers. This makes possible the development of microgrids=20 connecting consumers in local areas and related changes in traditional grid= =20 systems, from modifications in interconnection agreements to changing=20 definitions of reserve margins and system reliability. Industry Executives=01, Response Senior executives from sixteen non-California utilities with a combined=20 market capitalization over $120 billion and $145 billion in revenues=20 responded to an Andersen survey with their views of the implications of the= =20 California power crisis for their companies and for the industry. The surve= y,=20 conducted between February 19, 2001 and March 2, 2001 by Knowledge Systems = &=20 Research, Inc. of Syracuse, found that the companies are observing the=20 California situation carefully, expect a slowing =01) but not a turnaround = -- of=20 deregulation, and believe their internal plans and preparations are on-targ= et=20 for the changing environment: Deregulation - Nearly all executives believe recent California events will= =20 slow the pace of deregulation over the next five years for states that have= =20 not begun or finished writing restructuring legislation. None believe that = it=20 will cause advanced states to re-regulate markets, although many states wil= l=20 review their legislation to assess their risk of duplicating California=01,= s=20 current situation and make any changes necessary to avoid it.=20 National legislation - Few executives suggest the situation will initiate= =20 national energy policy/legislation; others believe it will be a continuing= =20 issue but, because of state-to-state variances, Congress will be unable to= =20 pass any comprehensive measures or force states to a restructuring timeline= .=20 Some expect additional state-level legislation.=20 Company strategies - Most do not see any changes to their business models o= r=20 strategies for generation, distribution or supply procurement as a response= =20 to the situation in California. However, many have expanded their risk=20 management programs, reduced spot market purchases, begun emphasizing=20 long-term supply contracts, planning new power generation capacity, and=20 started hedging with futures trades. Those facing price caps are rethinking= =20 their stance on them=20 Investor scrutiny =01) Many executives indicate their shareholders are awar= e of=20 the situation and investors -- particularly institutional investors -- are= =20 more heavily scrutinizing their actions. Many say news coverage has prompte= d=20 retail, commercial and industrial customer skepticism of industry=20 restructuring.=20 Transmission deregulation - Many executives agree the California situation= =20 will increase interest in FERC=01,s regional transmission organizations (RT= O)=20 deregulation effort. Utility Company Action Items Both to guard against a sudden California cascade and as a potentially=20 powerful competitive thrust, forward-thinking utilities should bolster thei= r=20 basic preparedness with a variety of tactics -- or inoculations --=20 specifically aimed to combat a potential California power virus, according = to=20 Andersen partner Mark Moskovitz: Improve procurement management and risk management capabilities - To manage= =20 exposure to volatile supply and demand shifts, organizations must be sure= =20 that comprehensive and clear supply procedures, controls, decision points,= =20 risk limits and communications are in place.=20 Plan and design innovative rate and pricing structures =01) Companies and= =20 regulators must focus on communicating price signals that create value for= =20 both the customer and the provider. Innovative rate and pricing structures= =20 that more closely tie the customer=01,s price to the real cost of supply wi= ll=20 better signal the value of the service as well as providing more accurate= =20 information upon which both end user and supplier can make decisions.=20 Increase emphasis on demand side management (DSM) strategies =01) In additi= on to=20 new pricing strategies to help achieve and maintain supply-demand=20 equilibrium, companies must now focus on employing more extensive and=20 innovative demand side management programs. These programs may offer=20 significant benefits with limited risk to both the customer and energy=20 supplier.=20 Assess the supply and generation dynamics in adjacent jurisdictions =01)=20 Companies must take a broader view =01) beyond typical geographic market=20 definitions -- of the economics of generation and related business decision= s=20 in an increasingly volatile market in which supply will follow the best=20 prices.=20 Develop contingency plans for the continued deferral of new generation=20 capacity =01) In the face of potential ongoing generation capacity shortage= s,=20 companies and regulators must be prepared to move with a portfolio of=20 strategies to meet demand, including for example DSM, flexible pricing and= =20 distributed generation. In addition, they should explore efficiency-improvi= ng=20 upgrades to existing facilities and seize any opportunity to accelerate=20 near-term construction plans.=20 Proactively address potential organizational disruption =01) As regulatory = and=20 economic changes continue to churn the industry waters and companies adjust= =20 and/or restructure, they must be highly cogniscent of, sensitive to, and=20 directly address employees=01, concerns with information about the company= =01,s=20 future and theirs=01,. Industry/Regulatory Lessons There are also a number of broad primary lessons the electric power industr= y=20 -- nationally and internationally -- should take away from its first major= =20 domestic test case in deregulation and restructuring, according to Andersen= =20 principal David O. Jermain: Simplify market design.=20 Build a continuing role for regulators.=20 Maintain communications with multiple constituent interests.=20 Prepare contingency plans for extreme stress conditions.=20 Couple real-time retail pricing with transparently priced wholesale=20 competition.=20 Provide special incentives for RTO investment, formation and development.= =20 Break down regulatory and political barriers to market signals and response= s. Copies of the Energy Crisis in the Western United States: Lessons for=20 Navigating Regulatory and Market Minefields report can be obtained at=20 www.andersen.com/energyandutilities.=20
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