RE: LA Times story

----- Forwarded by Jeff Dasovich/NA/Enron on 02/08/2001 10:13 AM -----

Susan J Mara
02/08/2001 12:47 AM

To: Jeff Dasovich/NA/Enron@Enron, Sandra McCubbin/NA/Enron@Enron, Harry
Kingerski/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Richard
Shapiro/NA/Enron@Enron, Steven J Kean/NA/Enron@Enron, Karen
Denne/Corp/Enron@ENRON, Mark Palmer/Corp/Enron@ENRON, Paul
Kaufman/PDX/ECT@ECT
cc: Joseph Alamo/NA/Enron@Enron
Subject: RE: LA Times story

Good story on retail -- as a direct result of ARM's hiring of Edelman. Some
good Lay and Robert Michaels' quotes.
----- Forwarded by Susan J Mara/NA/Enron on 02/07/2001 10:42 PM -----

"Counihan, Rick" <rick.counihan@greenmountain.com<
02/07/2001 01:09 PM

To: "'Allen, Stevan'" <stevan.allen@edelman.com<, "Counihan, Rick"
<rick.counihan@greenmountain.com<, "Aaron Thomas (E-mail)"
<athomas@newenergy.com<, "'ARM List Serve'" <Arm@phaser.com<
cc: "Warner, Jami" <jami.warner@edelman.com<, "Beiser, Megan"
<Megan.Beiser@edelman.com<, "Fairchild, Tracy" <tracy.fairchild@edelman.com<
Subject: RE: LA Times story

This story is fantastic!! It is the best single piece I have seen on the
retail market in California and it is in the newspaper of record. I think
we should make copies and hand them out in our press packets and all
meetings we have. I think this is a concrete example of a payoff from
working with Edelman.

-----Original Message-----
From: Allen, Stevan [mailto:stevan.allen@edelman.com]
Sent: Wednesday, February 07, 2001 9:31 AM
To: 'Rick. Counihan (E-mail); Aaron Thomas (E-mail)
Cc: Warner, Jami; Beiser, Megan; Fairchild, Tracy
Subject: LA Times story

http://www.latimes.com/business/reports/power/lat_retail010207.htm

This piece ran front page of this morning's LA Times. It refers to provision
of AB1X we are concerned about. Also, Enron gets a lot of attention. I will
have this forwarded to the entire team later this morning. Thanks.

Stevan

PS - Bryson is having a news conference this morning in Sac. Will keep you
posted.

Deregulation Didn't Foster Competition

By NICHOLAS RICCARDI and STEVE BERRY, Times Staff Writers

The way people scrambled for a stake in California's power market three
years ago, you'd have thought it was the second coming of the Gold Rush.
Politicians and free marketers boasted that they were freeing millions of
customers from their monopolistic utilities so they could shop for cheaper
electricity. The state ordered an $87-million publicity campaign, promising
a brave new energy world bustling with competition.
But those dreams of capitalism unleashed never materialized, dashed by
provisions in the 1996 deregulation law that effectively undermined
competition and gave the utilities a substantial edge over newcomers. In the
end, only 1.7% of the utilities' residential users switched to other
providers, many opting to pay more for "green" energy.
Although the chaos swirling around California's electricity crisis has
chiefly focused on soaring wholesale prices, the virtual absence of
competition at the consumer level has played a key role in deregulation's
undoing.
Had competition among retailers flourished, garnering the millions of
customers deregulators expected, prices might never have reached today's
unprecedented peaks and the turmoil might have been tempered, economists and
retailers say.
Retail competition "would not have prevented a crisis, but it would have
toned it down," said Richard Counihan, spokesman for Green Mountain Energy,
which has returned most of its 50,000 customers to the utilities' ranks.
Now even the prospect of competition is gone. A measure enacted by the
Legislature last week, which made state government the biggest electricity
buyer in California, suspended further retail competition, preventing anyone
from underbidding the state.
"That buries us," said Tony Wayne, president of UtiliSource of Brea, which,
under the new law, can keep its relatively small number of customers but is
barred from entering into new contracts.
Few thought it would come to this.

High Hopes Collide With Reality
Almost 300 firms registered with the state to sell electricity to consumers.
Many of them, quick-buck hucksters or small-time operations, were scared off
by background checks, fingerprinting and the $25,000 deposit required to
enter the market.
But then there were the likes of giant Enron Corp., which predicted that the
new market would pull 700,000 customers from the utilities in the first few
weeks. Another firm deployed 400 salespeople, nabbing residential and
business prospects by the thousands.
They quickly discovered that the structure of California's landmark
deregulation effort erected protective barriers preventing most retailers
from beating the prices of the big three utilities--Southern California
Edison, Pacific Gas & Electric and San Diego Gas & Electric.
For example, deregulation law allowed the utilities to keep their 9 million
customers until each took the initiative to switch. Any ratepayer who used a
moderate amount of energy and wanted to change companies had to pay $600 for
a new meter--unless the retailer wanted to eat the cost itself.
In contrast, Pennsylvania, where deregulation has been more successful than
in California, requires most of its utilities to surrender some of their
customers. Last year, 300,000 customers of one utility were auctioned off to
the retailer who could promise them the most savings. All together, close to
1 million customers have switched from utilities to retailers, with savings
estimates ranging from a few dollars to $15 per month.
In California, the next barrier was expressly designed by deregulation
architects to keep new retailers at bay, at least temporarily.
Before throwing utilities into a free-for-all, lawmakers felt obligated to
give them time to pay off debts that would hurt their ability to offer
competitive prices. The Legislature froze customer prices at 1996 levels,
well above what the utilities were then paying for electricity. The
difference would be used to pay their debts.
The hitch for prospective retailers was that their customers--like those
remaining with utilities--would be charged the extra amount too. That
seriously hurt the retailers' ability to shave prices for their customers
without taking a hit themselves.
Utility executives say the so-called competition transition charge
accomplished its intent: providing some protection against new players until
the utilities could shed their debt and compete on an even field.
According to those executives, the plan went awry when wholesale electricity
prices soared before the special debt charge was lifted and competition had
a chance to flourish.
"We haven't had enough time for this market to work," said Denise Grant,
director of the Edison division that works with retailers. She said Edison
expected to lose 150,000 customers annually--a far cry from what has
happened.
Retailers say they faced other obstacles that seemed designed to help the
utilities keep as many of their customers as possible.
One of the biggest was a newly created energy marketplace called the Power
Exchange.
Under the exchange's rules, all buyers--little guys with a few hundred
customers and mammoth utilities with millions--paid the same price for
electricity. Once again, retailers were stymied in their search for ways to
cut their customers' bills.
Retailers had no place else to shop for energy because suppliers could make
more money selling in high volume to billion-dollar utilities on the Power
Exchange, rather than cutting small deals with upstart companies.
Wayne, the president of UtiliSource, learned the hard way. He was peddling
electricity in California in early 1997, before the state created the Power
Exchange. After arranging a good, but informal, deal with a Washington
generator, he sent out hundreds of salespeople, took to the road himself and
soon cornered 10,000 customers.
But the birth of the exchange caused the death of his deal, Wayne said. The
generators pulled out when they realized how much money they could make
selling on the open market.
"That was an oh-my-god. They said, 'Why should we give you a discount when
we can sell it to the Power Exchange ourselves?' " he said.
Retailers say the state protects the utilities in subtler but no less
damaging ways. That includes billing customers who switch companies for
certain overhead costs of their old utilities, such as weather forecasters
and accountants involved in procuring electricity.
In late 1999, a coalition of retailers filed a complaint with the Public
Utilities Commission arguing that their customers should not be forced to
pay costs for utilities they had decided to leave.
Earlier this month, the PUC finally reached a decision that favors the
retailers' argument but accepts the utilities' calculations of the expenses
borne by retailers, an amount critics say is far too low.
In dissenting, Commissioner Richard A. Bilas called the decision's paltry
award to retailers another strike against them.
"We cannot keep stymieing retail competition if we are seeking rational
markets," he said. "Energy service providers [retailers] have left the state
in droves. . . . They need all the encouragement we can give them."

Retailers Found Little Opportunity
Be they multinational giants or kitchen-table entrepreneurs, retailers are
dismayed by their experiences with deregulation.
Enron spent $5 million trying to sell electricity in 1997 and the spring of
1998. But, unable to offer enticing discounts, the firm picked up only
30,000 customers.
In a recent meeting with reporters and editors at The Times, Enron Chief
Executive Kenneth Lay suggested that the framers of deregulation kept market
forces pinned down in the retail sector. As a result, there was little money
to be made and little incentive to stick around.
"The more customers you signed up," Lay said, "the more [money] you lost."
Last week, Enron returned a number of its remaining electricity contracts to
PG&E. "In the end," Lay said, "we couldn't change the rules and we pulled
out."
On the other end of the spectrum, Paul Oshideri is now a one-man operation
since he laid off his seven employees during his unprofitable two years
trying to entice customers to Cucamonga Energy.
"You don't have that many options," said Oshideri, who is still holding on
to his 250 customers and vows not to quit. "What can you do? You can't do
anything right now."
Only when it came to businesses and big institutions such as universities
were retailers able to make a dent in the market. The small price reductions
they offered translated into huge savings for those large users of
electricity. The retailers also offered a variety of other services,
including aid to help businesses become more energy efficient.
Although fewer than 2% of all residential customers have switched to new
energy companies, 13% of industrial users have done so, according to the
Public Utilities Commission.
"If they'd structured this differently they would have had households able
to make big savings just like industrials," said Cal State Fullerton
economist Robert Michaels.
There is some dispute among deregulation critics over whether legislators
designed the law to protect the utilities from an onslaught of competition,
or it just turned out that way.
Jesse Knight, a former member of the Public Utilities Commission who
dissented on the panel's deregulation plan, said the law is biased against
retail competition.
"But I don't think it was the legislation's intent to protect the monopoly,"
Knight said.
There is general agreement, however, that not enough attention was paid to
the mechanics of the retail market.
Much of the deregulation legislation deals with generation, transmission and
wholesale prices of electricity. The only provisions on the retail end
simply allow consumers to shop for deals.
Lay, the Enron executive, recalled that the utilities fought hard to
maintain their customer base. The irony is that, with wholesale prices
skyrocketing over the last six months, buying electricity for all those
customers has driven the utilities to the brink of insolvency.
"With 20-20 hindsight, I expect they wish they'd agreed to more choice at
the customer level," Lay said. "Then maybe they wouldn't be in the
circumstances they're in."
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Copyright 2001 Los Angeles Times

STEVAN ALLEN
Vice President
Edelman Public Relations Worldwide
1215 K Street - Suite 970
Sacramento, CA 95814

916/442-2331 - phone
916/447-8509 - fax
stevan.allen@edelman.com
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