Message-ID: <19015845.1075857454389.JavaMail.evans@thyme> Date: Mon, 15 Jan 2001 02:22:00 -0800 (PST) From: james.steffes@enron.com To: laura.luce@enron.com, hunter.shively@enron.com Subject: Crain's - January 15, 2001 Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: James D Steffes X-To: Laura Luce, Hunter S Shively X-cc: X-bcc: X-Folder: \Hunter_Shively_Jun2001\Notes Folders\All documents X-Origin: Shively-H X-FileName: hshivel.nsf FYI. Some interesting articles on Chicago natural gas issues. Laura - I am in the office on Tuesday. Would you like to talk about these matters? Jim ----- Forwarded by James D Steffes/NA/Enron on 01/15/2001 10:19 AM ----- Susan M Landwehr 01/14/2001 10:52 AM To: James D Steffes/NA/Enron@Enron cc: Harry Kingerski/NA/Enron@Enron, Janine Migden/NA/Enron@Enron, Roy Boston/HOU/EES@EES Subject: Crain's - January 15, 2001 Jim--please take a look at these articles that will come out in the Crains magazine tomorrow. You'll see that there are both opportunities and potholes for us on this issue. It is very likely that we will get sucked into this debate----the ENA/ Peoples deal which has generally floated under the regulatory radar in the past is inevitably going to become more prominent. (Evidence even before these articles is that I received a call from the ICC staff late last week asking if we could participate in an ICC meeting on natural gas issue on Jan 23). The articles (and the gossip that I have heard in the past few weeks) point out that Peoples is in hot water politically--I would hate to see us dragged into that sesspool. On the other hand, if ENA sees significant business opportunities that could be opened up to them in Illinois by a change in the regulatory climate, this could be the time to make the play....while the issue is hot and there may be pressure on the ICC to take some steps that they normally would not. I'd appreciate it if we could plan a call to talk about strategy on Illinois. I am going to have to give a response to ICC on Tuesday and we will need to determine who would particpate in the meeting at the ICC. Roy and I had put in a call to Laura Luce last Thursday to discuss the request from the ICC...I have not heard back from her, but Roy may have. Are you available on Tuesday for a conference call? ----- Forwarded by Susan M Landwehr/NA/Enron on 01/14/2001 10:32 AM ----- "Fein, David I. - CHI" <david.fein@piperrudnick.com> 01/13/2001 06:03 PM To: "'Susan_M_Landwehr@enron.com'" <Susan_M_Landwehr@enron.com>, "'rboston@enron.com'" <rboston@enron.com> cc: "Townsend, Christopher J. - CHI" <chris.townsend@piperrudnick.com> Subject: Crain's - January 15, 2001 Sue & Roy -- We thought that you would find the attached articles regarding the high natural gas prices in Illinois to be of interest. To solve gas bill crisis, turn heat up on Peoples Crain's Editorial - January 15, 2001 Considering the finger-pointing that's going on between politicians, regulators and Peoples Energy Corp. executives, one thing is becoming obvious: Fixing blame for the recent astronomical rise in natural gas prices is much simpler than fixing the problem. Nonetheless, all of these factions bear some responsibility for this winter's monthly home heating bills, which, for many residents, are soaring by hundreds of dollars over last winter's tabs. Each of these groups should be held accountable for working to devise systems and strategies designed to blunt future price spikes. Make no mistake about it, this crisis will not melt away with the spring thaw. Limited natural gas supplies and increased demand will continue to pump up bills, rattle price stability and, along with other climbing energy rates, become the economy's unwelcome "X" factor. The weight of dealing with these pressures rests with the utilities, especially Peoples Energy, the city's natural gas provider. To start with, the utility's management must protect customers by anticipating escalating demand, hedging risk and locking in gas prices when it can. These are common business practices, used by corporations and even some conservative utilities. In Michigan, for example, gas providers charge fixed rates to customers and hedge their risk by purchasing gas years in advance under long-term supply contracts. Right now, Michigan pays 29 cents per therm, compared with the Chicago area's whopping 98 cents. Peoples argues that it tried to lock in prices but was shot down when it could not reach an agreement with the Illinois Commerce Commission (ICC), which regulates the utility, on what the fixed rate should be. In walking away from the deal, Peoples left customers with the current rate system and dumped the burden of price fluctuations onto them. In essence, instead of managing risk, it put its customer base at risk. Considering that decision and the subsequent fallout, critics are asking whether Peoples, a regulated monopoly designed to profit from the public's needs, is acting in the best interest of its customers. Those paying heating bills - which in some cases are as much as 300% higher than last winter's - are right to say no, as is Mayor Richard Daley, who's outraged at Peoples. More troubling are concerns that Peoples management may not be up to the challenge of resolving this crisis, especially if its recent handling of the political fallout is an indication. The company acts as if the public has no right to question its tactics or motivations. And when the Chicago City Council held a public hearing about the heating bills issue last week, Peoples Energy Chairman Richard Terry didn't show up. At these prices, it's not asking too much for the chairman of the gas utility to explain his company's position. That's not a job meant for a public relations executive or a consultant, who were among the Peoples advocates who actually did attend the council hearing. The ICC shoulders its share of the blame, too. It should have more zealously monitored the gas supply situation and the utility's plans. Now, the commission is playing catch-up by holding an investigation into what Peoples knew about the soaring gas prices and when it knew it. Let's get an answer to that important question and find out once and for all if there is price-gouging going on. Just as critical, however, is the need to foster a statewide regulatory environment that encourages gas utilities to use more hedging, storing and price-control strategies. If there is any ambiguity in state law about the utility's ability to do this, then the General Assembly should change the rules and open up the process. Peoples management, regulators and politicians must get beyond the blame game and find a way to better insulate the public from surprise spikes in energy prices. Otherwise, we're all just burning money. Gas flare-up gives city hot idea: Become a utility But co-ops mean high risks, mild rewards Utility man: William Abolt, head of Chicago's Department of the Environment, is examining ways to cut residents' natural gas bills. One option: opening a city-owned buying co-op. Photo: Steve Leonard January 15, 2001 By Steve Daniels <mailto:sdaniels@crain.com> It's easier said than done. That's something an angry and frustrated Mayor Richard Daley is about to learn as his staff begins investigating plans to take on some gas-purchasing duties on behalf of city residents. Mr. Daley is livid over what he contends is Peoples Energy Corp.'s failure to anticipate the rising cost of natural gas, to mitigate a huge run-up in residents' monthly heating bills this winter. He thinks the city can aid bill-payers, and punish Peoples, by developing a system that will funnel lower-cost gas to ratepayers. But the track record of other municipal gas utilities, or buying cooperatives, shows that such a system isn't likely to achieve more than modest rate savings unless the city is willing to take on significant financial risks. To protect against the kind of price spikes that have hit customers this winter, the city would have to buy futures, or long-term contracts, that could leave it exposed if prices were to decline substantially. In addition, the city would have to contend with thorny issues such as the collection of overdue bills and potential cutoffs of service to non-paying customers - activities for which municipalities are ill-suited. Despite the risks, utility critics contend that city intervention is appropriate. "It's a creative approach, and we need those," says Martin R. Cohen, executive director of the Citizens Utility Board, a consumer watchdog group. "These are extreme times, and innovative approaches are called for." Most municipalities that have gotten into the gas-buying business have been unwilling to enter into long-term, fixed-price contracts that can shield consumers against the sort of price spikes that have sent this year's home-heating bills soaring nearly 300% compared with last year's. That's because such arrangements can boomerang on customers, locking them into higher-than-market gas costs if prices fall. New York experience "We wrestled with this: Should government really be in this business?" says David Fountaine, village administrator in Hamburg, N.Y., a suburb of Buffalo that formed a buying group for its residents in April 1999. "In our case, by being in it, we've helped our residents." Hamburg and nearby Sloan, N.Y., together hired a unit of Texaco Inc. to supply gas to residents who signed up for the communities' program. New York opened its natural gas market to competition five years ago, so residents can choose either to remain with their gas utility or select an outside marketer. About one-third of Hamburg's 3,300 households buy gas from the village. Those residents' gas bills last winter were 8% lower than the bills of households that stayed with Buffalo gas utility National Fuel Gas Co. Last month, when gas prices shot up, the village's price was 15% lower than the utility's. But Mr. Fountaine says the village takes no outsized risks, making no long-term bets on the direction of gas prices. Rather, it simply relies on its contractor to manage gas supplies as efficiently as possible. Chicago officials are looking at programs like the one in the Buffalo area, but also may be willing to take bigger risks to achieve greater savings. "We know there are a lot of relatively new risk-management techniques being used by large (natural gas) consumers," says William Abolt, commissioner of the city's Department of Environment. "We want to know, what does the industry do to manage (price) risk? That's what the reasonable company does, but that's not what the local gas company does." City officials need look no further than Downstate, where the Illinois Municipal Gas Agency buys natural gas on behalf of 20 communities that provide monopoly gas service to their residents. Last September, the agency locked in prices for 50% to 75% of their customers' winter gas needs, rolling with the market for the remainder. That strategy is serving the agency's customers well. They're paying around 70 cents per therm - the measurement the gas industry uses for billing - this month, compared with the 98 cents per therm that Peoples is charging Chicago-area customers. "There's no reason why investor-owned utilities couldn't do the same thing," says John Bell, the Municipal Gas Agency's general manager. "I think (a city program) is a viable alternative if they don't like what they've got." For its part, Peoples supports the city's desire to become involved in the market. The move poses no threat to the utility because it doesn't profit on gas purchases and still would make money on the delivery of the gas to customers. Meanwhile, the city is just beginning to consider alternatives. Although Mr. Abolt says no system will be developed in time to help Chicagoans during this trying season, a program most likely will be launched next winter. Weighing the risks The city's top priority will be to help low-income residents most vulnerable to escalating heating bills, but all Chicago residents might be able to choose between the city's program or remaining with Peoples. And one possibility being considered would enable residents to choose either a fixed price for gas before winter starts or rates that rise and fall with the market. While a fixed-price approach certainly looks good in hindsight right now, it can have a downside if not managed properly. In the Buffalo area, the two major private gas marketers offering fixed prices to households recently dropped out of the residential market, forcing some 23,000 customers to scramble back to the local utility for gas service. To meet the unanticipated demand, the utility was forced to purchase gas on the sky-high spot market. It just such risks that Chicago officials are weighing. Says Mr. Abolt: "This is not an overnight thing. You don't just snap your fingers and it happens." David I. Fein Piper Marbury Rudnick & Wolfe 203 N. 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