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" <david.fein@piperrudnick.com> on 08/17/2000 11:20:48 AM
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>, 
"Skey, Christopher N. - CHI" <christopher.skey@piperrudnick.com>, "Way, Karen 
S. - CHI" <karen.way@piperrudnick.com> 
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

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