---------------------- Forwarded by Richard Shapiro/NA/Enron on 01/03/2001 
03:38 PM ---------------------------
   
	
	
	From:  Ann M Schmidt                           01/03/2001 03:31 PM
	

To: Karen Denne/Corp/Enron@ENRON, Vance Meyer/NA/Enron@ENRON, Meredith 
Philipp/Corp/Enron@ENRON, Steven J Kean/NA/Enron@Enron, Eric 
Thode/Corp/Enron@ENRON, James D Steffes/NA/Enron@Enron, Richard 
Shapiro/NA/Enron@Enron, Damon Harvey/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Gia 
Maisashvili/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, John 
Neslage/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT
cc:  

Subject: USA Today Opinion - Electricity Prices


http://www.usatoday.com/news/comment/debate.htm

		
		
	01/03/01- Updated 02:37 AM ET	
		
		
		
		
		
		
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		Prices spike as Calif. bungles deregulation 
		When Californians bought into the idea of deregulated electricity in 1996, 
they did so on the promise they'd get reliable power at cheap prices. 
Instead, they're facing power shortages and whopping bills.
		The state's public utilities commission is scheduled to decide Thursday 
whether to let two big utilities raise rates by up to 30%, ending a price 
freeze that was supposed to last until 2002. Financially strapped utilities, 
meanwhile, are threatening blackouts. 
		With electricity deregulation underway in 23 other states, households 
nationwide should be wondering whether they'll be next to face 
California-style chaos. It is a red flag that electricity deregulation, which 
continues to hold promise for lower rates, must be approached cautiously and 
gradually.
		California made a series of remarkably large blunders, many encouraged by 
utilities, that set the state on a dangerous path to deregulation without the 
competition needed to hold down prices. Unless the state corrects those 
errors, matters will get worse when full deregulation comes in two years. 
Much of the state could be served by power monopolies free to hike prices. 
		The good news is that other deregulating states have planned better, though 
the process in those states is less advanced than in California.
		Among California's failings: 
		Utilities were barred from raising rates to consumers but had to cope with 
market prices from power plants. When deregulation began, the utilities 
heartily backed the arrangement, because the frozen prices were far higher 
than the market prices they paid. Now, with a national energy shortage 
pushing prices higher, they're worried about bankruptcy, threatening 
blackouts and pleading for relief. Some seek re-regulation to protect 
themselves from their own ineptitude.
		The state failed to bring enough new supply online before deregulating. No 
major plants were built in the previous decade, contributing to a supply 
crunch in a state where electricity demand has been growing 4%-6% per year. 
By contrast, Texas, which is rolling out its deregulation more slowly, has 
since 1996 built 23 new plants that have added 15% more power-generation.
		California tried to manipulate prices and blew it. The state required 
utilities to buy all of their power from a "power exchange" in short-term 
blocks. This prevented utilities from entering long-term contracts or 
adopting hedging strategies that could keep prices stable. After prices 
spiked, the government worsened the situation by trying to cap prices 
utilities could pay for power. Not surprisingly, power suppliers then sold 
their electricity to other states without price caps, where they could get a 
better return. Result: power shortages rectified only by an emergency federal 
order that some out-of-state plants in the West sell California electricity. 
Price controls were lifted. 
		Other states have avoided this problem. New York, for instance, encouraged 
its utilities to enter into "transition contracts" under which plants have an 
obligation to sell them power. Similarly, Texas has long-term contracts, 
under which the utilities buy power for long periods at set prices, allowing 
them to hedge against short-term changes in price.
		The price of all this bungling will be huge for Californians, but households 
outside California may pay as well. The Western plants that the federal 
government has forced to supply California's thirst could in time have 
difficulty supplying their traditional customers, driving up their prices. In 
the extreme, the financial instability of California utilities Pacific Gas 
and Electric and Southern California Edison could roil markets and add to 
recession pressures.
		At a minimum, most Californians will soon face significant financial pain * 
unwarranted on their part * to pay for the botched deregulation either 
through taxes or higher rates. If this bailout isn't accompanied by new 
rules, the 2002 ending of price caps may bring the worst of all worlds: 
monopoly markets without price controls.
		Long term, the best hope for controlling prices is competition, but 
California has yet to come up with a convincing plan to make sure that 
exists. In fact, in the San Diego area, where controls were briefly lifted 
without significant new competition, prices more than doubled. 
		Some advocacy groups and politicians are calling for more radical solutions, 
such as a state buyout of the utilities or simple refusal to pay the 
utilities on the grounds they must be hiding money somewhere. The utilities, 
having tasted their own medicine, now say they'd support re-regulation.
		But none of these fixes would save California's consumers from the dim-bulb 
management that has put the state at risk of power outages and financial 
catastrophe.
		California Gov. Gray Davis' said recently that "if deregulation fails in 
California, it is dead in America." To the contrary, as California does its 
repair work, the rest of the county will be taking notes on how not to 
deregulate as carelessly as California did.
		



			
			
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	01/03/01- Updated 02:38 AM ET	
		
		
		
		
		
		
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		Learn from California mistake 
		By Harvey Rosenfield and Douglas Heller 
		The myth of electricity deregulation has met reality in California, and the 
result is a $40 billion debacle.
		Awash in energy-industry campaign contributions, California lawmakers freed 
the state's utility companies of price controls in 1996. Consumers were 
ordered to pay off the utilities' debts, after which competition was supposed 
to kick in, guaranteeing a 20% rate cut by 2002. 
		Deregulation proved a bonanza for the utilities. They sold some of their 
power plants and collected $19 billion in ratepayer subsidies. They used the 
money to purchase plants in other countries, reward their executives with 
huge pay raises, buy back stock and increase dividends. Profits reached 
record levels this year.
		Envious, the handful of unregulated companies that control nearly half of the 
state's electricity generation decided to cash in, too. This cartel began to 
withhold power, causing shortages that boosted the wholesale price of 
electricity that utility companies must buy by 3,900%. But, ironically, 
because of the way they wrote the deregulation law, the utilities are 
forbidden to pass the higher costs on to most consumers until 2002. 
		Now the companies want to rewrite the law. When public officials resisted the 
utilities' demands for immediate rate hikes, the utilities threatened 
blackouts and bankruptcy. When that economic extortion failed, Wall Street 
issued an ultimatum: Order a 20% rate hike within 48 hours, as a first 
installment of an $11 billion ratepayer bailout, or Wall Street would itself 
force the utilities into bankruptcy. 
		California has learned the hard way that electricity is too vital to be left 
in the hands of unregulated corporations whose sole interest is maximizing 
profits. Facing a ratepayer revolt, state officials have re-imposed 
regulation. To make electricity reliable and affordable once more, they are 
considering establishing a non-profit, publicly owned power system for the 
state. But, in the meantime, the deregulation disaster could end up costing 
each Californian $12,500.
		Meanwhile, elsewhere in the nation, corporate-funded ideologues and academics 
continue to promote electricity deregulation, much as they promoted loosening 
controls on savings and loans in the 1980s. 
		Whenever you hear the word "deregulation," hold onto your wallets: Some 
industry is about to pick your pocket.
		Harvey Rosenfield and Douglas Heller are consumer advocates with the 
Foundation for Taxpayer and Consumer Rights. Its Web site: 
www.consumerwatchdog.org.