Upcoming Advisory Council Meeting

I'm looking forward to your discussion regarding the "reregulation threat" at
the next meeting. Below are some of my observations:

While it's premature to say we have an energy crisis, we are witnessing the
triple threat of high summer gasoline prices, spiking electricity prices, and
high natural gas prices for the upcoming heating season (I'll send along some
of the data).
There is at least the potential for this to become a prominent national
political issue: Gore has focussed relentlessly on Bush's ties to "big oil"
(which includes us by the way, though we produce nary a drop); and
Congressional republicans have blamed the current administration for failing
to have a coherent energy policy (though, at least so far, the dominant
characteristic of the administration's policy has been a republicanesque
reliance on the market).
Notwithstanding the issue's potential to become political fodder and its
prominence in the popular press, many Americans seem blissfully ignorant, at
least on the electricity issue. We did some focus group testing recently in
Southern California -- a mere 15 minutes from the epicenter of the San Diego
price quakes -- and most people knew nothing about it. So, while the issue
has the potential for political traction, it may not have caught on yet
(except in places like San Diego and New York city.
The reaction in California has been to call for government intervention in
electricity markets. Investigations of out of state "price gougers and
profiteers" have been undertaken and wholesale and retail price caps have
been put in place. They have not worked -- at least in wholesale markets.
Suppliers are deciding to site plants elsewhere and when prices are high
elsewhere in the West, power flows out of California to those other markets.
Ironically, though I can't explain it in classical economic terms, the
setting of rate caps in wholesale markets has had the effect of pulling
prices up to the capped levels in offpeak times when there is more than
enough supply. For the most part, though, the caps and the other political
reactions have been somewhat muted: policy makers have been reluctant to
throw the deregulation plan out and start over, and the retail price caps
have been relatively narrow ... so far.
Outside of California, the authors of other states' deregulation plans have
distinguished their proposals from California's. Regulators and legislators
from such diverse places as Connecticut, Texas and Alberta have gone out of
their way to defend their plans and explain why "California won't happen
here." For the most part, then, the reaction to California has been positive
from Enron's perspective in states that have already deregulated. There does
remain some threat that aspects of the state plans (e.g. utility plant
divestiture) may be postponed or cancelled. The story is a bit more grim in
states that were considering deregulation but have not gone forward with
their plans: I think it's off the agenda in most places. The fact that most
of the major markets (about 70% of total electric revenue) are already
deregulated/deregulating is a blessing in that regard.
At the federal level there has been a combination of the "burn the village in
order to save it" approach -- allow some price caps to remove the pressure
to reverse the whole deregulation program -- and a more positive call for
comprehensive reform.
All in all, I believe we're OK so far and we need to look at this as an
opportunity: business is booming; we sell protection from price volatility
and the need for such protection is now plastered over the front pages of
major newspapers. On the public policy front we need to convert the
controversy into productive action. Our target has been FERC -- they are
somewhat removed from the white hot rhetoric in California and they are a
single commissioner's vote away from taking action to further open the
market.
Enron's response: Initially we hoped to feed information into industry
groups and let them carry the message; our concern was that Enron -- a
company which was in and out of the residential market in Cal. -- would not
make the most attractive champion for the open market message. We hoped that
the new generators in Cal would take up the mantle. It's fair to say that
they fumbled the ball: they are now locked in a pitched battle with the
utilities over price caps and fall all to easily into the out of state
profiteer label .... standing between Aunt Millie and rate relief. They were
also extremely slow out of the blocks with a more productive message. We are
now working the issue directly. We are working the issue on a number of
levels: 1) PR - we have good contacts in the press and have talked to
numerous reporters and editorial writers. As time goes on, the information
and reporting has gotten somewhat better. 2) Govt relations - we have been
pushing for power plant siting legislation in California (the market wants to
build capacity but the government won't let it). This may be the best
environment we'll ever see for streamlining the permitting process. Also, in
typical Enron fashion, we put a deal on the table. We offered to sell power
to the local utility at a price which would enable them to lock in stable
rates for their customers at below current rates. Our offer was followed by
nine others and we tried to make something of the fact that the market was
offering better solutions than California politicians. SDG&E dropped the
ball, unfortunately. Instead of seizing the opportunity, they ended up going
along with a government granted rate discount which will cause them to accrue
a massive deferral account. At the federal level we are contacting members,
the DOE and FERC. Here we are making a push for FERC action to finish
"leveling the playing field" in wholesale markets so power can get from where
it is to where its needed. Additionally, we are developing a prepackaged
system (including software) for nondiscriminatory open access (to take away
any lingering excuses or delays). 3) Overall messaging -- we have been
working with a well known political pollster to check our messages for their
resonance at the grassroots level. As we hone these messages we will be
using them in the fora we are currently working.
Overall, we have more opportunity than risk in the current environment, but
capitalizing on those opportunities continues to be a long shot.
An intersting rhetorical challenge for us is this: much of the problem in
power markets is blamed on high upstream fuel prices, particularly natural
gas. The gas market is open and structured pretty much the way we are
advocating for electricity, so how can we maintain that the problem in power
markets is an absence of open markets when the most open commodity market on
the planet (natural gas) is producing such outsized prices? The answer is
somewhat complicated and therefore a bit unsatisfactory in the current
debate: gas prices are still lower in real terms than they were
pre-deregulation; long term prices are also lower than historical levels (
the curve is "backwardated" (sp?) meaning that prices in later years are
lower than today so you can buy gas for 3 years at a price lower than current
spot prices); and the economy is booming and driving up demand for basic
inputs (this begs the question: why didn't the market react sooner and avoid
the spike?). When all else fails, a big part of the problem can be blamed on
OPEC. We haven't had this thrown at us yet, but we are trying to anticipate
it and have answers at the ready.

This is just the tip of the iceberg. The issue is a great example of the
intersection of our business interests with public policy debates and should
promote a lively discussion when we get together. Let me know if there is
anything else you need.