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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \JQUENET (Non-Privileged)\Quenet, Joe\Inbox X-Origin: Quenet-J X-FileName: JQUENET (Non-Privileged).pst =09=09[IMAGE]=09 [IMAGE]=09 [IMAGE] [IMAGE] [IMAGE] [IMAGE] [IMAGE] [IMAGE] =09=09 [IMAGE]=09[IMAGE] =09 [IMAGE]=09[IMAGE]=09 =09[IMAGE] [IMAGE] [IMAGE] [IMAGE][IMAGE] [IMAGE][IMAGE] [IMAGE][IMAGE] = [IMAGE] [IMAGE] [IMAGE] November 13, 2001 Updates on Enron / Dynegy Mer= ger, SCE Rescue Plan and Muni Vote in San Francisco By Will McNamara Direc= tor, Electric Industry Analysis [Today's column includes analysis on three= separate news items.] EnronOnline and Dynegydirect to Merge [News item= from Energy Info Source] Online energy trading EnronOnline will merge with= smaller rival Dynegydirect after its parent company Enron Corp. agreed to = a $9-billion takeover by Dynegy Inc. The integration of the two platforms w= ill take about six to nine months, Dynegy said. In the meantime, the two wi= ll continue to operate separately. On both EnronOnline and Dynegydirect, tr= aders can only deal with Enron and Dynegy, respectively. Analysis: This= is the first step in what may ultimately be a challenging integration of t= he various businesses between Dynegy and Enron. Although the merger makes s= ense for both companies, especially considering Enron's financial instabili= ty and its limited options at this juncture, it must be acknowledged that t= he two companies have very different corporate cultures, and the process of= conjoining those different cultures may be a major task. The companies hav= e developed two distinct approaches to online trading, as illustrated by th= eir independent electronic exchanges. Although it will be interesting to se= e how the separate exchanges become conjoined and assimilate their two sepa= rate customer accounts, one thing that EnronOnline and Dynegydirect have i= n common is that they rely on principal-based transactions. It is importa= nt to note that Enron gained the first-strike advantage when it developed E= nronOnline, the first electronic-trading exchange, well ahead of its compet= itors. Dynegy later followed this trend and created Dynegydirect about a ye= ar later. The latest available information indicates that EnronOnline has r= ecorded transactions that exceed $590 billion in notional value. Since its = inception in November 2000, Dynegydirect has recorded $33 billion in notion= al transactions. Enron trades various commodities on EnronOnline, led by el= ectricity and natural gas, but also including bandwidth and paper. EnronOnl= ine is a proprietary trading exchange. In other words, in every transaction= that takes place on EnronOnline, Enron participates as either a buyer or a= seller. Dynegydirect was launched in October 2000, a year after EnronOnl= ine became operational. Dynegydirect is much smaller than EnronOnline, alth= ough it is growing. The exchange recorded nearly $10 billion in transaction= s in the third quarter. Like EnronOnline, Dynegydirect is also principal-ba= sed. In other words, Dynegy is a participant in all of the transactions, ei= ther as a buyer or a seller. Unlike EnronOnline, which is completely online= , Dynegydirect allows customers to conduct their transactions with Dynegy o= ver the telephone. It is important to note that Dynegy strategically became= involved in two different kinds of online trading. The first is the propri= etary, one-to-many format on Dynegydirect, in which Dynegy participates in = all transactions as either a buyer or a seller. The second venue is an anon= ymous, many-to-many format in which Dynegy participates along with multiple= buyers and sellers. This operation takes place on TradeSpark. Dynegy had p= reviously invested $25 million in eSpeed, the trading systems developer tha= t created the infrastructure on which TradeSpark operates. As a whole, th= e online trading market appears to be riding the wave of a major growth spu= rt. A study conducted by AMR Research showed that 600 energy-trading exchan= ges existed in April 2000. This number grew to 1,500 by September 2001. A s= eparate report conducted by Forrester Research indicates that online tradin= g in wholesale markets increased 750 percent from 1999 to 2000. The same re= port projects that online trading volume will continue to grow, leaping fro= m a $400-billion market in 2000 to a $3.6-trillion market in 2005. Without = question, the combined force of Enron and Dynegy will gain a market edge in= many sectors of the energy industry, including the online trading market. = SCE Allowed to Proceed with Rescue Plan [News item from Energy Info So= urce] A federal judge on Nov. 9 refused to delay a settlement between South= ern California Edison (SCE) and state regulators designed to allow the util= ity to recover $3.3 billion of its debts and to keep it from bankruptcy. U.= S. District Judge Ronald Lew said delaying the deal, as requested by a cons= umer group, would risk harming the state's second-largest utility, its cred= itors and the public. Judge Lew, who approved the settlement on Oct. 5, cal= led the arguments for a stay advanced by consumer group The Utility Reform = Network (TURN) "repetitive" and "without merit." Analysis: This is a vict= ory for SCE in the painstaking process of establishing a rescue plan for th= e utility with the state of California. Two weeks ago, a federal appeals co= urt had temporarily blocked a settlement between SCE and state power regula= tors that would keep electric rates at record highs for the next two years.= The 9th U.S. Circuit Court of Appeals granted TURN two weeks to argue agai= nst the settlement. The settlement would help SCE, the state's second-large= st utility, pay more than half of its estimated $6-billion debt by continui= ng to charge Edison customers higher rates imposed last May. The judge's de= cision now has blocked any additional counter claims by TURN, at least on t= he current judicial level, and it appears that SCE is free to move forward = with its CPUC-endorsed rescue plan. It is important to note that the ori= ginal settlement deal between SCE and the state of California emerged out o= f negotiations that had taken place between SCE and the CPUC in an effort t= o resolve previous litigation. SCE had sued state regulators at the CPUC af= ter they refused to allow the utility to raise rates and recover billions o= f dollars it had spent buying power on behalf of customers at soaring price= s in the wholesale market. SCE's lawsuit argued that the regulators broke f= ederal law and unconstitutionally took its property by not letting it bill = customers for the full cost of their electricity. At the present time, SCE'= s total debt is marked at about $6.35 billion in power procurement-related = liabilities due to state law that prohibited it from recovering the high co= sts of wholesale electricity through retail electric rates. Under the agree= ment reached between SCE and the CPUC, SCE would be allowed to pay down abo= ut $3 billion of its back debt of $6.35 billion. In exchange for being pr= otected from bankruptcy proceedings, SCE agreed to a rate freeze and a prom= ise by utility executives to not pay shareholders a dividend until the debt= is paid off. SCE's rates were raised by approximately 42 percent in 2001 a= nd will remain frozen through 2003 unless the utility pays off its debts so= oner. In exchange, SCE agreed it would use cash on hand and any revenue bey= ond what it needs to cover operating expenses to pay off its old debts; pay= no dividends on its common stock through 2003 or until its back debts are = fully paid; and drop a lawsuit against state regulators claiming the CPUC h= ad violated federal law by failing to raise retail rates to reflect the und= erlying cost of wholesale power. From its perspective, officials at Edison = International (the parent company of SCE) expressed confidence that the set= tlement deal would allow the utility to accumulate enough cash and gain fin= ancing by the middle of the first fiscal quarter of 2002 to pay its debt to= banks, bondholders and power generators. Tally of Absentee Ballots Chan= ges San Francisco Municipalization Vote [News item from Reuters] Two ball= ot measures aimed at establishing a public power system in San Francisco an= d unplugging utility Pacific Gas & Electric Co. have gone down in defeat, o= fficials said on Nov. 12. Analysis: The tally of absentee ballots in the = Nov. 6 municipalization vote in San Francisco changed at least part of the = outcome in this election. As noted in a previous IssueAlert, Proposition I,= which sought to set up a Municipal Utility District in San Francisco and n= eighboring Brisbane, was defeated. However, originally it was believed that= the separate measure known as Proposition F, which would have established = a Municipal Water and Power Agency in San Francisco alone, had passed by a = slim margin. Upon counting the absentee ballots, the San Francisco Departme= nt of Elections announced that this measure was defeated by a scant 533 vot= es. Obviously, Pacific Gas & Electric Co. is quite pleased with the rev= ised outcome of this election. In response to the finalized vote, represent= atives from the utility said, "This outcome affirms that there is no strong= sentiment in favor of the takeover of PG&E's distribution system in San Fr= ancisco." There may be some validity to this statement, considering that on= e could argue that with the bankruptcy of Pacific Gas & Electric and the re= cent California energy crisis, conditions could have favored a pro-municipa= lization vote, and yet the measure still failed. However, let's not forget = that it was defeated by only 533 votes, which indicates that the issue rega= rding the establishment of a public power system in the area is far from ov= er. The defeat of the municipalization issue in San Francisco can be att= ributed to several factors. First, it must be acknowledged that PG?Corp., t= he parent company of bankrupt Pacific Gas & Electric, spent about $1 millio= n on advertising to defeat the measure. However, arguably voters responded = to claims by Pacific Gas & Electric Co. that the municipalization plan was = unrealistic. The utility claimed that a (MUD) Municipal Utility would be il= l-equipped to handle the complex electricity infrastructure that Pacific Ga= s & Electric has managed for years, and that a city-run bureaucracy would n= ot be able to compete with big league energy players. In addition, the new = MUD would have to purchase Pacific Gas & Electric's transmission assets and= also buy wholesale power without the benefit of long-term contracts, which= represent two hefty investments that would end up costing consumers in the= long run. An archive list of previous IssueAlert articles is available = at www.scientech.com We encourage our readers to contact us with their c= omments. We look forward to hearing from you. Nancy Spring Reach thousa= nds of utility analysts and decision makers every day. Your company can sch= edule a sponsorship of IssueAlert by contacting Jane Pelz at 505.244.7650.= Advertising opportunities are also available on our Website. Our staff= is comprised of leading energy experts with diverse backgrounds in utility= generation, transmission and distribution, retail markets, new technologie= s, I/T, renewable energy, regulatory affairs, community relations and inter= national issues. Contact consulting@scientech.com or call Nancy Spring at= 505.244.7613. SCIENTECH is pleased to provide you with your free, daily= IssueAlert. Let us know if we can help you with in-depth analyses or any o= ther SCIENTECH information products. If you would like to refer colleagues = to receive our free, daily IssueAlert articles, please register directly o= n our site at secure.scientech.com/issuealert . If you no longer wish to = receive this daily e-mail, and you are currently a registered subscriber to= IssueAlert via SCIENTECH's website, please visit http://secure.scientech.= com/account/ to unsubscribe. Otherwise, please send an e-mail to to Issu= eAlert , with "Delete IA Subscription" in the subject line. SCIENTECH's = IssueAlert(SM) articles are compiled based on the independent analysis of S= CIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are= not intended to predict financial performance of companies discussed, or = to be the basis for investment decisions of any kind. SCIENTECH's sole purp= ose in publishing its IssueAlert articles is to offer an independent perspe= ctive regarding the key events occurring in the energy industry, based on = its long-standing reputation as an expert on energy issues. Copyright 2= 001. SCIENTECH, Inc. All rights reserved.=09 [IMAGE]
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