Message-ID: <18277857.1075846352100.JavaMail.evans@thyme> Date: Fri, 18 Aug 2000 06:01:00 -0700 (PDT) From: jeff.dasovich@enron.com To: steve.kean@enron.com Subject: O'Connor Op-Ed Piece - California Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Jeff Dasovich X-To: Steve Kean X-cc: X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Heat wave X-Origin: KEAN-S X-FileName: skean.nsf FYI. ---------------------- Forwarded by Jeff Dasovich/SFO/EES on 08/18/2000 11:01 AM --------------------------- Susan M Landwehr 08/17/2000 11:36 AM To: Richard Shapiro/HOU/EES@EES, Harry Kingerski/HOU/EES@EES, Jeff Dasovich/SFO/EES@EES cc: Roy Boston/HOU/EES@EES, James D Steffes/HOU/EES@EES, Janine Migden/DUB/EES@EES Subject: O'Connor Op-Ed Piece - California a little opinion piece from our friend at New Energy, Phil O'COnnor ---------------------- Forwarded by Susan M Landwehr/HOU/EES on 08/17/2000 01:22 PM --------------------------- "Fein, David I. - CHI" on 08/17/2000 11:20:48 AM To: "'Susan_M_Landwehr@enron.com'" , "'rboston@enron.com'" cc: "Townsend, Christopher J. - CHI" , "Skey, Christopher N. - CHI" , "Way, Karen S. - CHI" Subject: O'Connor Op-Ed Piece - California We thought that you would find the attached Op-Ed piece that appeared in the Chicago Tribune today of interest. PLEASE DON'T SHOOT THE MESSENGER DEREGULATION NOT THE PROBLEM By Philip R. O'Connor. Philip R. O'Connor is president of Chicago-based NewEnergy Midwest, the leading provid-er of... August 17, 2000 The firestorm raging in the San Diego area that devours homes and likely will be followed in the spring by mudslides that will carry homes into ravines isn't what Midwesterners are used to. But there's no blaming Bad Ol' El Nino this time. The firestorm that has everyone pointing fingers has to do with electric power shortages, rolling blackout warnings and summer utility bills that have soared two and threefold over last summer's. To avoid "wearing the jacket," (in our Chicago patois), California's voter-shy public officials and utility executives are blaming Bad Ol' Deregulation. Understandably, but regrettably, the media have tended to follow the story line that electricity deregulation is to blame. Such stories could well create worry that deregulation in Illinois and elsewhere in the Midwest will lead to San Diego-style problems. If anything, deregulation in the Midwest is avoiding the fundamental errors California made, not only during the two years of deregulation but during the decade preceding deregulation. In the summer of 1998 the Midwest had some close calls of its own when triple-digit temperatures drove wholesale electric prices for certain midday hours to as much as 100 times the normal price. The reigning theories in the California panic today are much like the myths that emerged in the Midwest back then. There were allegations of price gouging by power producers and warnings that we were moving too fast toward deregulation--even though there was no retail deregulation and competition in the Midwest at that time. In fact, it was the lack of retail, customer-level competition that allowed the wholesale market to fly completely out of control. Since 1998, the Midwest has begun to get its act together. In California, the initial reactions are to put the toothpaste back in the tube and to burn the witch. But my native state still will need to face up to its legacy of thinking, "I'll do that tomorrow," while at the same time trying to regulate free markets as if there were no tomorrow. Deregulation, which started in California in the spring of 1998, is but a messenger of painful truths. The truth is that the chickens are coming home to roost and that any attempt to retreat into the past will produce more power shortages and higher prices. There are some big differences between Illinois, the first state in the Midwest to open up the electric network for customer choice, and California, the first state in the nation to open up the network for competition. In spite of a booming California economy spurring massive increases in electrical demand, not one new power plant came on line during the 1990s--and none since. California thought it could rely on power plants in other western states, but those plants are now serving growing loads in their own areas. In Illinois and elsewhere in the Midwest, new clean natural gas-fired plants are able to serve during periods of peak demand. Gov. Ryan has convened a committee to review state and local government handling of proposed "peaker" plants. It seems likely to keep strict environmental standards in place while helping to identify ways to reduce uncertainties, speed up approvals--or disapprovals--and thereby reduce costs and improve power reliability. While the Midwest is realizing the benefit of newly constructed transmission lines that allow access by Chicago and other areas to competitive power supplies, many areas in California, remain too dependent on just a few local power plants. In California, once a utility finishes collecting "stranded-cost" charges to pay off investments in nuclear plants and high-cost power contracts, price caps for plain, old utility service based on rates in place prior to deregulation are lifted. That's why San Diego Gas & Electric, the first utility to finish collecting stranded costs, merely had the job of acquiring power in the wholesale market and passing along the cost to customers who had not switched to new competitive suppliers. In Illinois and Ohio, by contrast, utility rates are capped at reduced levels for at least five more years for customers who do not switch. Illinois and the Midwest have stayed away from such Rube Goldberg contraptions as the California Power Exchange that was supposed to serve as a sort of mandatory clearing house for wholesale power transactions but instead became a sort of private regulator that regulated no better than the government used to. The rules of the game in the Golden State could not have been more skewed against giving opportunities for customers to switch to new competitors or to take other precautions to avoid high summer power prices during an unexpected heat wave. My NewEnergy colleagues in California have faced an ever shifting set of increasingly inhospitable rules. In Illinois, utilities and new competitive suppliers, have had more flexibility to offer products that let customers choose between fixed prices that balance out the ups and downs of the market or prices that float with the seasons. Importantly, Illinois regulators have been reasonably quick to approve proposals that let utilities and new suppliers, such as my company, work out contracts with commercial and industrial customers to reduce their electrical demand during peak summer hours in return for payments. Such arrangements, less available in California, are key to avoiding blackouts and blunting big-price spikes. As chairman of the Illinois Commerce Commission from 1983 through 1985, I remember when the costs of new nuclear plants showed up in electric rates--today's stranded costs. I know what California utility commissioners must be going through as they seek solutions for problems with roots going back at least a decade. They'd better have thick skins and nimble minds. I'll never forget former Gov. Jim Thompson, whose 1982 campaign I co-managed and who appointed me to the ICC, saying, after several big rate increases, the political equivalent of "I've never seen this man before in my entire life." Having been yelled at on the bus by angry consumers a few times on the way to the office, I could only be happy that Thompson had the good political judgment to say, "I know not the man," on his own without my prompting. I felt proud, not betrayed. David I. Fein PIPER MARBURY RUDNICK & WOLFE 203 North LaSalle Street Suite 1800 Chicago, Illinois 60601 312-368-3462 (Fax) 312-630-7418 david.fein@piperrudnick.com ____________________________________________________________________________ The e-mail address and domain name of the sender changed on November 1, 1999. Please update your records. The information contained in this communication may be confidential, is intended only for the use of the recipient named above, and may be legally privileged. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication, or any of its contents, is strictly prohibited. If you have received this communication in error, please re-send this communication to the sender and delete the original message and any copy of it from your computer system. Thank you. 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