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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Mark Koenig X-To: Steven J Kean X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf ---------------------- Forwarded by Mark Koenig/Corp/Enron on 10/27/2000 09:46 AM --------------------------- firstcall.notes@tfn.com on 10/27/2000 01:41:59 PM To: mark.koenig@enron.com cc: Subject: FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER ENERGY ... FIRST CALL RESEARCH NETWORK 09:56am EST 27-Oct-00 Prudential (C.COALE 713-650-4732) DYN DUK ENE CPN REI FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER ENERGY ... FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER ENERGY POLICY ISSUES AT HOUSTON LUNCHEON PRUDENTIAL SECURITIES October 27, 2000 SUBJECT: Electric Utilities ----- ANALYST(S) -------------------- -------- OPINION -------- M. Carol Coale 713.650-4732 Current:Accumulate David R. Tameron 713.650-4731 Risk:-- ----- HIGHLIGHTS--------------------------------------------------------- 1) On October 26, FERC Commissioner Curt Hebert spoke on "Competition & America's Energy Policy" to group of Houston industry executives, addressing the merits and problems with electricity deregulation. 2) Commissioner Hebert, the sole Republican, supports a comprehensive energy policy, renewable fuel use, improved pipeline certification, and flexibility, but opposes price controls and free market intervention. 3) Last week, the California ISO called on the FERC to rule on a "market stabilization plan" that would affectively cap the price electricity at $100/mWh unless 70% of the power generated is sold forward within the state. 4) FERC is expected to address this issue on 11/1, but we do not expect much involvement until after the presidential elections, particularly given that the FERC Commissioners are Presidential appointees. 5) While we believe FERC's role in the electricity market problems in California will be limited, any action taken is likely to be "bold, ambitious and strict", requiring results, but likely would not affect 2001. ----- DISCUSSION--------------------------------------------------------- Energy is one of the leading topics in the approaching general elections and congressional races, and spiking energy prices have been an area of contention. Regional shortages have resulted in spikes in the price of electricity, and this past summer, hot weather in the western U.S. sent electricity prices soaring. In California, where the rate payers served by PG&E and Edison International are protected under a rate freeze, the higher power costs cannot be passed on by the electric utilities to the consumer. In southern California, the situation is just the opposite. Having recovered its stranded investment costs from its ratepayers, Semipro Energy is charging market rates to consumers which are complaining of higher electric bills. While the government has intervened by approving price caps on ancillary electric service in the state and has capped the electric bills of low-income consumers in San Diego, the state regulators are calling for more government involvement. In California several proposals are on the table: 1) A consumer group has called for the "excessive" profits earned by generators and marketers this past summer to be retroactively refunded to ratepayers. . 2) U.S. Rep. Bob Finer, D-California, introduced a bill to the House that would create disincentives for power companies to earn profits, imposing a windfall profits tax on wholesale power sold in the western U.S. 3) As recently as last night, October 26, the California Independent System Operator (ISO) implemented an interim measure that imposes hourly price caps on generators based on forecasted load and arbitrary heat rates ranging between negative $100/MWh and positive $250/MWh. Effective on 11/3, the proposal essentially shuts down the peaking generation plants which would not be able to economically produce power within the state. 4) California ISO staff has also proposed to impose a "bid" cap on electricity of $100/mWh on power generators and marketers in the state that do not comply with the requirement of selling 70% of their load under forward contracts within the state of California. Compliance with this Market Stabilization Plan means that spot power will be sold under the existing $250/mWh price cap but violators would be subjected to the $100 bid cap. 5) California plans to require interruptible users of power to extend their contracts, preventing these end users from switching to firm contracts, thus ensuring that certain customers can be shut off in the event of a power shortage. While we doubt that any of these proposals will be passed in their current form, the government is likely to be involved. The Federal Energy Regulatory Commission (FERC) has been overseeing the deregulation of the wholesale energy markets, and has approved price caps in all of the regions that have opened to competition thus far except for in the Midwest. As a reminder, the FERC is made up of commissioners that are appointed by the reigning President, and currently the FERC is made up of three Democrats and one Republican (the other Republican commissioner resigned earlier this year). On Thursday, October 26, 2000, the sole Republican, Commissioner Curt Hebert, Jr., gave a presentation to members of the Greater Houston Partnership on the subject of "Competition and America's Energy Policy". While his opinions are not necessarily representative of the FERC as a whole, Hebert clearly supports regulatory flexibility and free markets but is also sensitive to environmental issues. He is also vehemently opposed to price controls such as electricity price caps in New England, New York and California. Hebert believes that the recent electricity price spikes in the West this past summer were great market indicators that electric generation is in short supply, particularly during periods of hot weather. In the summer of 1999, the Midwest experienced similar price spikes also related to summer heat. The difference between the two situations is that the Midwest allowed the market to decide, which responded with new generation projects, but California imposed price controls on electricity that have had the affect of discouraging new generation. Thus, the short supply situation in California may just get worse. The FERC has completed an investigation of the recent electricity price spikes in California but does not intend to release its findings to the general public. While we believe that the FERC will find a way to help resolve the situation in that state, any actions would not likely take affect until 2002. In the interim, the electric utilities are suffering under a growing burden of uncollected power purchase costs and are calling on the state regulators to provide emergency financial relief. Proposals include a refundable rate surplus, removal of frozen rates, and/or the deferral of stranded cost recovery. We are doubtful that the FERC will rule on any action prior to the elections because political considerations may influence their decisions. Commissioner Hebert indicated that this was an opportunity for the FERC to send to the electricity industry a signal on what may make the markets work, and believe that any plan should be "bold, ambitious and strict" in requiring results. Renewable fuels are also likely to be encouraged, although this is not necessarily good news for the natural gas industry, and old issues like the Fuel Use Act and the "Btu" tax may resurface. Ideally, the FERC would endorse market pricing and encourage the development of electricity generation and transmission infrastructure. However, by doing so, the FERC may be perceived as the "bad guy", which may not be ideal image in an election year. However, Hebert is hopeful that the FERC will move beyond politics and make the right regulatory decision for the long term. The benefits of price controls are short term, and those markets under price caps may be disadvantages as the rest of the U.S. opens to electric competition. Prudential Securities Incorporated (or one of its affiliates or subsidiaries) or its officers, directors, analysts, employees, agents, independent contractors, or consultants may have positions in securities or commodities referred to herein and may, as principal or agent, buy and sell such securities or commodities. Prudential Securities Incorporated and/or its affiliates or its subsidiaries have managed or comanaged a public offering of securities for DUK, ENE. First Call Corporation, a Thomson Financial company. All rights reserved. 888.558.2500 Note ID: 83675 ------------------------------------------------------------------------------ To update your order or to receive research on other companies, please call your Account Manager at (800) 262-6000. ------------------------------------------------------------------------------ Thomson Financial Investor Relations TEL: 800-262-6000 75 Wall Street, 18th Floor FAX: 212-363-3971 New York, NY 10005 EMAIL: firstcall.notes@tfn.com First Call is a registered trademark of the First Call Corporation
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