Message-ID: <2419450.1075840042358.JavaMail.evans@thyme> Date: Fri, 11 May 2001 15:26:17 -0700 (PDT) From: mike.swerzbin@enron.com To: m..driscoll@enron.com Subject: Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Swerzbin, Mike X-To: Driscoll, Michael M. X-cc: X-bcc: X-Folder: \ExMerge - Swerzbin, Mike\Sent Items X-Origin: SWERZBIN-M X-FileName: BY MARK GOLDEN A DOW JONES NEWSWIRES COLUMN NEW YORK (DOW JONES)--THE CALIFORNIA SENATE IN SACRAMENTO PASSED A WINDFALL-PROFITS TAX ON SALES OF ELECTRICITY INTO THE STATE'S WHOLESALE ELECTRICITY MARKET MONDAY AFTERNOON AT 4:50 P.M. PDT. AT ALMOST EXACTLY THE SAME TIME, CALIFORNIA INDEPENDENT SYSTEM OPERATOR INITIATED ROLLING BLACKOUTS FOR THE FIRST TIME SINCE MARCH. COINCIDENCE? PROBABLY, BUT THE CONNECTION SHOULDN'T BE IGNORED. "THE POLICY DECISIONS THAT HAVE BEEN ADOPTED IN CALIFORNIA TO DATE HAVE ACCELERATED AN ALREADY SERIOUS MARKET COLLAPSE," SAID A HARVARD UNIVERSITY STUDY OF CALIFORNIA'S ENERGY CRISIS LATE LAST MONTH. THIS WEEK'S WINDFALL-PROFITS TAX BILL IS THE LATEST BLUNT INSTRUMENT WIELDED WITH POTENTIALLY DISASTROUS RESULTS. GOV. GRAY DAVIS WANTED IT AS A STICK WHEN (CONT) MEETING WITH EXECUTIVES FROM THE STATE'S MERCHANT POWER COMPANIES WEDNESDAY. THE MANEUVER WAS LESS THAN ADROIT, AND THE GENERATORS WEREN'T IMPRESSED. AFTER THE MEETING WITH DAVIS, RELIANT ENERGY'S (REI) JOHN STOUT SAID THAT IF THE TAX WERE IMPLEMENTED IN CALIFORNIA, IT WOULD "INSTANTLY BLACK OUT ALL THE GENERATION IN THE STATE." THE STATE'S LEADERS MIGHT KEEP IN MIND WHO WIELDS THE BIGGER STICK AT THIS POINT. CALIFORNIA SET UP A MARKET IN WHICH SELLERS HAVE BEEN ABLE TO CHARGE VERY HIGH PRICES FOR ELECTRICITY SINCE SUPPLIES STARTED GETTING TIGHT A YEAR AGO. SELLERS SAY THEY HAVE PLAYED BY THE RULES THEY WERE GIVEN, AND NOBODY HAS PROVED OTHERWISE WITH THE ONE EXCEPTION OF A FINE PAID BY WILLIAMS COMPANIES (WMB) FOR ONE PARTICULAR INSTANCE OF VIOLATING A CONTRACT. "IT'S LIKE SOMEBODY INVENTED A NEW GAME, INVITED YOU OVER TO PLAY AND THEN CHANGED THE RULES A COUPLE OF TIMES IN THE MIDDLE OF THE GAME. THEN, AFTER YOU BEAT THEM, THEY INSIST YOU CHEATED," SAID ONE WESTERN ENERGY TRADER. ALMOST EVERY ATTEMPT BY THE BUY SIDE - THE UTILITIES, THE ISO AND NOW THE (CONT) STATE TREASURY - TO LOWER PRICES HAS RESULTED IN HIGHER PRICES OR BLACKOUTS OR BOTH. THE WINDFALL-PROFITS TAX IDEA IS THE MOST RECENT EXAMPLE, BUT THOSE WHO INSIST ON PRICE CAPS SHOULD KEEP THIS IN MIND: THE ISO HAS HAD PRICE CAPS SINCE IT BEGAN OPERATION MORE THAN THREE YEARS AGO. OBVIOUSLY, PRICE CAPS HAVEN'T WORKED, JUST AS THEY HAVE NEVER WORKED EXCEPT DURING WARTIME. IN FACT, PRICE CAPS HAVE BEEN A QUESTIONABLE MEDICINE PRESCRIBED FOR THE WRONG DISEASE. AT BEST, PRICE CAPS MIGHT RESTRICT PRICE SPIKES. CALIFORNIA'S PROBLEM IS PERPETUAL HIGH PRICES. IT CAN'T AFFORD THE GOING RATE AT NIGHTTIME, LET ALONE THE HIGHER MARKET PRICES DURING THE AFTERNOONS IN A HEATWAVE. CALIFORNIA MUST FIGURE OUT HOW TO PLAY BETTER THE GAME IT INVENTED. THE INSANELY COMPLICATED COMPUTER-BASED PURCHASING OF POWER ENDED A FEW MONTHS AGO, AFTER THE CALIFORNIA POWER EXCHANGE WAS CLOSED DOWN BY FEDERAL REGULATORS AND THE ISO LOST ITS FINANCIAL ABILITY TO BUY POWER. THE MATCH BETWEEN THE PROGRAMS AND THE ENERGY TRADERS WASN'T EXACTLY IBM'S "BIG BLUE" VERSUS GARRY KASPAROV. ALMOST EVERYONE IN THE MARKET AGREES THAT THE UTILITIES' HUMAN TRADERS COULD (CONT) HAVE BOUGHT NEEDED POWER FOR BILLIONS OF DOLLARS LESS THAN THE PROGRAMS THAT THE UTILITIES WERE REQUIRED TO USE BY STATE LAW. SINCE THE DEMISE OF PROGRAMMED PURCHASING, THE COMPUTERS HAVE BEEN REPLACED BY HUMANS, BUT WITHOUT MUCH BETTER RESULTS. THE TEAM ASSEMBLED TO BUY TENS OF MILLIONS OF DOLLARS WORTH OF SPOT POWER EVERY DAY CONSISTS MOSTLY OF FORMER EMPLOYEES OF THE POWER EXCHANGE AND ISO, AS WELL AS EXPENSIVE CONSULTANTS WITH NO ENERGY TRADING EXPERIENCE. ONE OF THE LEADERS OF THE TRADING TEAM, FOR EXAMPLE, IS A FORMER PUBLIC RELATIONS DIRECTOR FOR THE POWER EXCHANGE WITH NO TRADING EXPERIENCE PRIOR TO THE CURRENT JOB. AS ONE ISO EMPLOYEE WAS WONT TO SAY: "IT'S LIKE WATCHING A FOOTBALL GAME BETWEEN NOTRE DAME AND ST. MARY'S SCHOOL FOR UNWED MOTHERS." AND THE SIGNING OF TENS OF BILLIONS OF DOLLARS OF FIVE- AND 10-YEAR CONTRACTS IS BEING EXECUTED MAINLY BY FORMER EXECUTIVES OF SOUTHERN CALIFORNIA EDISON - PEOPLE THAT LEFT THE UTILITY YEARS AGO TO BECOME CONSULTANTS AND ALSO DON'T HAVE TRADING EXPERIENCE. GOOD IDEAS, MEANWHILE, HAVE LANGUISHED. (CONT) "WE ARE GOING TO INSTALL METERS IN EVERY MAJOR COMMERCIAL CONCERN IN THE STATE THIS SUMMER AND GO TO REAL-TIME PRICING," DAVIS TOLD WALL STREET ANALYSTS ON FEB. 28. THAT PROPOSAL WAS GREETED BY MANY OBSERVERS AS THE MOST CONSTRUCTIVE IDEA FROM THE GOVERNOR'S OFFICE TO DATE. WHAT HAS HAPPENED TO REAL-TIME PRICING FOR CALIFORNIA'S BIG BUSINESSES SINCE THEN? NOTHING. "THE PROBLEM IS THAT EVERYBODY IN CALIFORNIA IS 'SPECIAL'," SAID STANFORD ECONOMIST AND CALIFORNIA ISO CONSULTANT FRANK WOLAK. EVERY INDUSTRY FROM OIL REFINERS TO INTERNET SERVER FARMS HAS HAD LOBBYISTS IN SACRAMENTO SUCCESSFULLY SECURING EXCEPTIONS TO THE RULE. "MY POINT HAS BEEN THAT IF WHAT THEY DO IS SO VALUABLE, THEN THEY SHOULD BE ABLE TO HANDLE THE HIGHER PRICES. BUSINESSES WITH ABOUT 10,000 MEGAWATTS OF LOAD HAVE REAL-TIME METERS. EVERY ONE OF THEM SHOULD BE GETTING MARKET PRICES," SAID WOLAK. (CONT) ONE OF THE GREATEST ADVANTAGES THAT SELLERS OF ELECTRICITY TO CALIFORNIA HAVE HAD IS THAT CONSUMERS HAVE FIXED PRICES, SO DEMAND IS INFLEXIBLE. SELLERS KNOW EXACTLY HOW MUCH ELECTRICITY THE UTILITIES MUST BUY BASED ON TEMPERATURES AND THE TIME OF DAY, WOLAK SAYS, AND THEY SIMPLY SUPPLY THE MARKET JUST ENOUGH POWER AT HIGH MARGINAL PRICES. REDUCING OVERALL CONSUMPTION THROUGH HIGHER RATES WILL HELP THE STATE SOME, BUT MAKING 25% OF DEMAND FLEXIBLE BASED ON PRICE WOULD GIVE THE STATE A FIGHTING CHANCE IN THE MARKET, ACCORDING TO WOLAK. BUT THAT, APPARENTLY, IS TOO COMPLICATED OR POLITICALLY DIFFICULT. PRICE CAPS, A WINDFALL-PROFITS TAX AND POLITICAL PATRONAGE JOBS FOR BUYING BILLIONS OF DOLLARS OF POWER MAY NOT SAVE THE STATE FROM BANKRUPTCY, BUT THEY ARE EASIER TO SELL - OR SLIP THROUGH - IN SACRAMENTO. -BY MARK GOLDEN, DOW JONES NEWSWIRES; 201-938-4604; MARK.GOLDEN@DOWJONES.COM