SK - printed out & gave it to you.  mm

UK angle on California. For discussion. I will call.

---------------------- Forwarded by Peter Styles/LON/ECT on 08/06/2001 16:15 
---------------------------
From: Paul Dawson/Enron@EUEnronXGate on 05/06/2001 19:31
To: Peter Styles/LON/ECT@ECT, Richard Shapiro/NA/Enron@Enron
cc:  

Subject: Bullets for Kean Presentation


Here's an attempt at some key "lessons" from CA to the UK (or vice versa as 
the case may be).  Actually they are more themes/differences/comments coming 
out of the CA experience, which will need tailoring/trimming down to fit the 
context of the actual presentation.  As I've indicated, depending on the 
point being presented, there may be a need for some caution in using the 
examples in too simplistic a context.

? Barriers to generator entry.
? Apart from the moratorium, it has been relatively easy to gain consent to 
construct new generation in the UK.  This is clearly a good thing in itself, 
but there are some potential pitfalls in just asserting this.  The entry has 
been criticised as unecessary in a market with significant overcapacity 
(indeed this was one of the justifications for the moratorium) and had 
surprisingly little impact on price for at least the first 8 years of the 
Pool. Indeed prices only fell once NP/PG divested plant.  Hence it would be 
easy to retort that new capacity was not required in the UK, the entry that 
did occur was wasteful and that the CA analogy is bogus (although clearly the 
full story is more complex than this)
? Moratorium had a significant impact on investment and stalled competition.  
(True, but difficult to sustain given that divestment and pre-committed new 
entry ensured that prices fell significantly before the moratorium was 
lifted.)
? Danger that measures designed to meet the CHP and Renewables targets 
constrain future developments and lead to capacity shortages, ie, perfection 
should not be the enemy of the good.  This is not the case currently.  
However, new applications must demonstrate that CHP has been fully explored - 
if this hurdle acquires real teeth (or turns into something more formal) then 
we could see easy consents getting significantly more difficult.  This is, 
however, largely speculation at the current time.

? Retail caps
? Purchase costs could be passed through in UK (for at least the first 8 
years).  Although some purchase costs were pseudo-regulated (through the 
vesting contracts and their replacements),  the Public Electricity Suppliers 
also purchased power from CCGTs in which they also took equity at very high 
prices.  (Teesside was one of the first examples of this.) The cost of this 
was passed through to franchise customers.  This was widely criticised and 
although the regulator allowed this to happen (on the grounds of entry 
promoting competition), the fact that all the entry was baseload and NP/PG 
still controlled the marginal plant meant that wholesale market prices didn't 
change at all.
? Since 1998, prices caps have been instituted and have not been a problem.  
Although the caps squeezed the PES margins, they could contract forward to 
hedge the risk of wholesale price movements.  Morever, the price caps have 
actually reduce wholelsale prices - generator market power meant that the 
wholesale price was, in part, a net-back from the allowed retail tariff.
? Watch out for Independent Energy, a supplier who did go bankrupt.  This was 
due to a combination of being under-hedged when power prices rose and not 
having adequate infrastructure to bill customers and get the cash in.

? Competition
? Generator concentration meant excessive prices for the first 8-9 years of 
the Pool.  Restructuring and divestment was essential to realising the 
benefits of competition.
? Retail competition has been very successful and has been a key driver in 
increasing liquidity in the wholesale market


? Stranded Costs
? Stranded cost recovery largely didn't distort the market, eg, nuclear levy, 
vesting contracts did not affect marginal decisions.  (That said market power 
provided a very soft landing and the market was clearly stitched up to meet 
the needs of the miners for years.)

Hope these help.  Please let me know if you need anything further.

Cheers,

Paul