fyi: this is rather out of the ordinary for S&P
 -----Original Message-----
From:  Conwell, Wendy  
Sent: Sunday, April 01, 2001 10:08 AM
To: Bradford, William S.; Ngo, Tracy; Tribolet, Michael
Subject: S&P News on California



   Research: Return to Regular Format  California Power Crisis: Bring In the 
Feds        Publication Date: 30-Mar-2001 Analyst: Todd A Shipman, CFA, New 
York (1) 212-438-7676   



		     In one of the Sherlock Holmes stories, the key clue in solving the 
mystery was a dog that did not bark. In a similar vein, as analysts analyze 
and experts pontificate on the electricity crisis in California, as well as 
its causes and solutions, there seems to be an obvious point that few, if 
any, are mentioning. That is, that the problem is not really confined to 
California, but is at the very least a regional issue and, in reality, is 
tied to a national industry.    As such, the whole question of the current 
and future direction of electricity deregulation is a federal matter with 
important economic, environmental, and even national security implications, 
and therefore Standard & Poor's believes it ought to be addressed at the 
federal level. Instead, just like the dog that did not bark, no one in 
Washington, D.C. seems to be willing to step in and take the lead in 
resolving the California crisis, or the bigger issue of electric 
restructuring.    This state versus federal jurisdictional issue did arise in 
early discussions of electric deregulation, and there were some calls for a 
larger role by the federal government. But the states were able to protect 
their long-standing place as the primary regulators of the electric industry, 
and so Congress and the FERC backed off, and let the states take the lead in 
directing the restructuring of the electric utility industry, even though 
they started the whole deregulation ball rolling with the Energy Policy Act 
of 1992. The establishment of the act contrasted greatly with the 
introduction of more competition into utility industries overseas, and the 
natural gas industry here in the U.S., where a more centralized approach was 
taken.    After some sporadic attempts by Congress to address some electric 
utility issues, they seemed to have given up trying to fashion a 
comprehensive solution to deregulation of the electric utility industry. 
Their inaction is echoed nicely by the desultory and curiously laissez-faire 
attitude displayed by the FERC, where even something as important and clearly 
jurisdictional as the transmission grid has been handled with all the speed 
and dispatch of a tortoise race.    Why should the administration or Congress 
(both, ironically, in the hands of Republicans) presume to step in and usurp 
the states? As the situation in California has revealed, the electric 
industry is very much connected, both figuratively and literally, and the 
actions of one state can and most likely will affect its neighbors. In other 
words, California sneezed and the rest of the western grid caught the cold. 
And it is not just the initial design of the restructuring scheme that can 
lead to lower credit quality and other problems. In California, we were 
treated to the spectacle of that state steadfastly refusing to timely deal 
with its problems (the Public Utilities Commission only last week belatedly 
raised retail rates) while the rest of its neighbors were forced to pass 
through significant rate hikes to keep their own utilities whole to deal with 
price spikes caused partly by California. Despite the increases, the 
situation has had negative implications for the credit ratings of several of 
those utilities.    The precedent for a strong federal role, and a good 
analogy as well, is securities regulation. The prominent, and almost 
exclusive role of the federal SEC in monitoring and regulating the securities 
industry came about in the 1930s, after the severe economic downturn that was 
preceded by the Crash of 1929. It was recognized that despite the presence of 
state regulators, the nature of the industry and the need for uniformity 
across the nation meant that Washington had to get involved and take the 
lead. The banking industry is another example of where the economic stakes 
are high, and a nationwide perspective is needed to protect the common 
good.    We are faced with the same type of situation with electric 
utilities. The California crisis has shown us that strong and active 
oversight is needed, a comprehensive approach to both the restructuring and 
the subsequent degree of regulation must be taken, and that the states are 
not willing or capable of organizing their activities to achieve the 
necessary coordination. The initiative should now come from either the Bush 
administration or Congress to take control of the process, and develop a 
thorough plan for industry restructuring.             Copyright , 1994-2001 
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