I agree with David- we should work these issues into our discussion w/ Luntz 
on Friday. I think Haug captured the issues we have to grapple with better 
than we've been able to thus far.
---------------------- Forwarded by Richard Shapiro/HOU/EES on 08/16/2000 
02:22 AM ---------------------------


David Haug@ENRON_DEVELOPMENT
08/14/2000 10:23 PM
To: Steven J Kean/HOU/EES@EES
cc: Executive Committee@EES, Gavin 
Dillingham/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Joseph P 
Hirl/AP/ENRON@ENRON@EES, Jeannie Mandelker/HOU/ECT@ECT@EES, Nicholas 
O'Day/AP/Enron@Enron@EES, Mark Schroeder/LON/ECT@ECT@EES, Richard 
Shapiro/HOU/EES@EES, James D Steffes/HOU/EES@EES 
Subject: Re: Talking Points re "reregulation" in California  

Steve, thanks for the helpful materials. However, if the experience in 
overseas deregulating electricity markets where price increases and spikes 
have occurred is any precedent, we will need to have some more down-to-earth 
responses to a some of the potentially inflammatory issues facing the 
politicians:
    1. When the prices spike, who reaps the windfall? Who sells that most 
expensive 1% of the kwh? Is it a careful planner or a lucky speculator or 
market manipulator? Someone is making a bunch of money off the screwed up 
system. Who is it, and why is that OK?
    2. We do not allow people to inflate water prices to consumers in times 
of drought, or food prices in times of hurricanes or floods. Even gasoline 
price increases in periods of high demand are within 20%-30% of the base, not 
2,5,10 or 100 times the average like spot electric prices. The issue isn't 
whether the system is broken or not or how bad partial regulation is or how 
much demand has increased versus supply. Thes will be seen as "ivory tower" 
discussions. The populist political issue is, until the problem is fixed, why 
should some shrewd big electric company or middleman be allowed to profit off 
the misfortune of consumers who did not cause the problem? Why should anyone 
be allowed to profiteer by selling at multiples above their generation cost?
    3. The hedges, fixed price contracts and other de facto insurance against 
volatility that Enron or others offer could be seen as a symptom of the 
problem rather than the solution.  Enron could be seen as at best a band aid 
and at worst an opportunist made possible only by a broken system - - -sort 
of like the guys who ran the old style protection rackets, or Colombian 
"security consultants" who "guard " pipelines from the threats their guerilla 
afiliates create, or  political risk insurance that you shouldn't really need 
if the host country wasn't so screwed up. Don't worry about high crime in 
your neighborhood -  - - just hire an off-duty policeman.   Who needed these 
new electricity risk management products in the old days before deregulation? 

    We have to be able to answer these types of questions at the level of the 
ordinary citizen, not merely have the correct long-term competitive market 
solution, or the forces of ignorance and re-regulation will gain momentum. 
Are we sure we shouldn't back a temporary peak hour price cap  until the 
regulatory problems we're all familiar with are worked out, to avoid a much 
worse long term rollback?. - - -DLH



Steven J Kean@EES
08/14/2000 05:42 PM
Sent by: Maureen McVicker@EES
To: Executive Committee
cc: Gavin Dillingham/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Joseph P 
Hirl/AP/ENRON@ENRON, Jeannie Mandelker/HOU/ECT@ECT, Nicholas 
O'Day/AP/Enron@Enron, Mark Schroeder/LON/ECT@ECT, Richard 
Shapiro/HOU/EES@EES, James D Steffes/HOU/EES@EES 

Subject: Talking Points re "reregulation" in California

As I promised this morning at the executive committee meeting, below are some 
talking points for your use.

Overall message:  the market is working, regulation is not.

In California, peak demand rose by 10% over the last 4 years while new 
capacity grew by only 2%.  But, as you would expect, the market responded by 
proposing 8,000MW of new generation - - more than enough to offset the peak 
demand growth.  The regulatory process, at both the state and local level, 
has failed to site this new generation.  The problem is regulation, not 
deregulation.

When San Diego customers began experiencing the effects of higher prices, 
Enron responded with a fixed price which would have shielded San Diego 
customers from price volatility and provided prices below their current 
summer levels (Enron's price was about $55/MWH).  After publication of 
Enron's offer, nine other companies made offers.  Again, the market responded 
where regulation failed.  San Diego has not accepted any of these offers 
because of regulatory/legislative restrictions on its ability to buy outside 
of the PX (i.e. the spot market).

In markets where siting is easier, suppliers have moved to build additional 
generation.  Enron built 3 plants in response to the 1998 price spikes.  
Those plants were planned, sited and built in less that 12 months - - in time 
for the summer of 1999.  Where regulatory hurdles are lower, the market 
responds.

The solution to current pricing and reliability issues is more competition 
not reregulation.  Policy makers should:

Open the transmission grid so that power can get from where it is to where it 
is needed.

Expedite interconnection of new generation.

Expedite siting of new facilities.

Give customers a choice, so that they have better access to demand side 
solutions.


Also attached is a more detailed discussion of California, prepared by Jeff 
Dasovich of our San Francisco office.