Message-ID: <7528329.1075846380004.JavaMail.evans@thyme>
Date: Tue, 29 Aug 2000 04:38:00 -0700 (PDT)
From: steven.kean@enron.com
To: robert_zoellick@gmfus.org, stelzer@aol.com
Subject: Upcoming Advisory Council Meeting
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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.