SPAIN AND CALIFORNIA

Please, note that the regulator (CNE, advisory body) has recently declared 
that "the California situation cannot happen in Spain, although it is likely 
that some isolated blackouts may happen in the East coast this summer".


Physical crisis in Spain

To me, it is not necessary to have a total blackout to admit that load 
margins in the Spanish power market have been recently decreasing, and that 
more generation capacity is needed! In fact, REE (Red Electrica de Espana, 
the transmission company and TSO) is relatively worried about shortages of 
capacity if demand keeps growing as in the recent years (6-8 percent). In 
Spain, no major power plants have been built in the last 20 years. The 
avalanche of new generation projects that have been announced (including 
Enron's Arcos CCGT 1200MW) since 1998 (outset of liberalisation) could cope 
with the need of new generation if firm access to gas transportation, 
regasification and transportation infrastructures is guaranteed.

Authorisation procedures for the construction of new power plants is not that 
bad, and so it is connection to the electricity grid. However, access to gas 
pipelines still remains  as the big issue to ensure the gas arrives to these 
new gas fired power plants, but mostly, that some of the CCGTs projects (as 
Enron's) get financed (find attached the memo about the Enron's Arcos power 
plant). Pipelines are owned are managed by Enagas, which is 100 percent owned 
by Gas Natural, who controls more than 95% of gas supplies in Spain. 

MESSAGES (they are not confrontational to anybody)
1. Prompt and adequated development of the gas system to make sure new gas 
fired plants are built.
2. For these new CCGTs to get financed, it is necessary that firm and 
continuous access is ensured by Enagas.  


Financial crisis in Spain

The regulator has also said that given the "vertically integrated structure 
of the Spanish power utilities, it is impossible that the California's 
financial crisis happen". This is only partially true because the CTCs buffer 
(stranded costs payments) have mitigated the financial stress of the 
utilities when they have faced increasing fuel costs. In reality, what will 
prevent a financial crisis in Spain will be the Government, by increasing 
tariffs if things go nasty.

However, from the Enron perspective, the existence of CTCs is distorting the 
market, both for retailing activities and the development of power projects, 
since market prices are not driven by demand and supply fundamentals.


MESSAGES (they are not confrontational to anybody)
1. Applaud the speed of liberalisation of the power market and the attempts 
of the Spanish goverment to make the transitional period as short as 
possible. (By 2003, all customers will be eligible).
2. It is necessary to go deeper into the separation of regulated 
(distribution) and non-regulated activities (generation and supply), 
facilitating the introduction of more competitors on the generation market, 
and reducing the market share of incumbents.


ITALY AND CALIFORNIA

Similar messages regarding the development of the gas system in Italy as 
those in Spain are equally valid. In addition, please note.

MESSAGES (they are not confrontational to anybody)
1. Applaud the recent efforts by the goverment to make simpler and more 
expedite the authorisation processes for building new power plants.
2. It is imperative that the Italian TSO facilitates the localisation of new 
power plants by providing accurate and prompt information about the 
transmission system capacity and expansion plans. The TSO must be there to 
help new developers (actually, the Italian TSO is very aware of this and has 
publicly declared to wish to go in this direction).
3. The Italian Power Pool was due for Jan 2001, but its start has being 
delayed, and it is uncertain when it will happen. For new entrants, to have 
the Pool live and running is of special interest to a) increase the 
understanding of the supply and demand fundamentals in the Italian market and 
b) to increase liquidity. Also, make sure you mention that the Pool should 
help entry by providing as much as detailed information as possible to all 
participants, mostly on its inception phase.  


Please, find attached a short summary of the Arcos situation. The main issue 
here is that Enagas (gas transco monopoly) is trying to grant access to 
transportation and regasfication infrastructures CONDITIONAL to the 
construction of a number of new infrastructures, which are also subject to 
obtaining permits issued by the authorities. Instead, the regulator (CNE) has 
basically imposed Enagas an obligation to build and grant access to Enron on 
a firm and continuous basis, that is, no conditional. The regulator's 
decision is binding but not normative.


 




 -----Original Message-----
From:  Shapiro, Richard  
Sent: martes, 29 de mayo de 2001 16:15
To: Styles, Peter; Huertas, Alfredo
Subject: Kean's speech

Also, anything explaining Spanish regulator's decision re: Arcos would be 
helpful if you could forward. Thanks.
---------------------- Forwarded by Richard Shapiro/NA/Enron on 05/29/2001 
09:13 AM ---------------------------


Richard Shapiro
05/29/2001 09:13 AM
To: Peter Styles/LON/ECT@ECT
cc:  

Subject: Kean's speech

Could you please forward to me the briefing materials you prepared for 
Steve's speech in Madrid? Thanks.