California

=09Richard Shapiro
=0902/21/2001 04:51 PM
=09=09=20
=09=09 To: Ginger Dernehl/NA/Enron@Enron
=09=09 cc:=20
=09=09 Subject: California

Please forward to entire group- these are recent talking points re:=20
California.
---------------------- Forwarded by Richard Shapiro/NA/Enron on 02/21/2001=
=20
04:50 PM ---------------------------
From: Jeff Dasovich on 02/21/2001 01:31 AM
Sent by: Jeff Dasovich
To: Richard Shapiro/NA/Enron@Enron, skean@enron.com, Paul=20
Kaufman/PDX/ECT@ECT, Susan J Mara/NA/Enron@ENRON, Sandra=20
McCubbin/NA/Enron@Enron, Harry Kingerski/NA/Enron@Enron, Leslie=20
Lawner/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, mpalmer@enron.com,=
=20
Karen Denne/Corp/Enron@ENRON, Linda Robertson/NA/Enron@ENRON, Joe=20
Hartsoe/Corp/Enron@ENRON
cc: =20

Subject: DRAFT Message Points for Hertzberg Conversationq

Here are some draft message points. Please review. Apologies in advance i=
s=20
they're a little rough, but these guys are getting bothersome at this point=
.

Best,
Jeff

Recent legislative proposals designed to 1) give the State the role of=20
developing, owning and operating power plants in California (SB6X--Burton)=
=20
and 2) buy PG&E and Edison's electric transmission assets (SB33X--Burton) a=
re=20
taking California in the wrong direction and won't solve the State's=20
electricity crisis.
Two other recently introduced new bills are equally disturbing and=20
counter-productive: AB60X (Hertzerg) would make plant certification=20
contingent upon the developer agreeing to sell the power to the state at=20
"just and reasonable, cost based rates." SB39X (Spier) would classify powe=
r=20
plant as public utilities and would dictate plant operations to a very=20
significant degree.
The proposals are significantly outside the mainstream and offer a politica=
l,=20
as opposed to an economic, commercial, financial, or technical solution. =
=20
Around the rest of the world, governments are privatizing these industries,=
=20
relying on efficient capital markets to provide both the infrastructure an=
d=20
the products and services that derive from that infrastructure.
Astonishingly, California is moving in the opposite direction, toward a=20
state-owned and operated, centrally-planned industry.
The notion that a state takeover of the industry is the only choice that=20
California has left is false, will lead to a seriously flawed economic=20
policy, and will result in consumers paying higher prices for lower quality=
=20
services for years to come.
As a political solution, these bills will not increase supply, decrease=20
demand, or get the utilities back on their financial feet.
In fact, they are likely to do just the opposite:
They will result in a significant expansion of the state bureaucracy and=20
create additional burdens on the state budget. =20
The transmission buyout contemplated in SB33X is extremely complex, requiri=
ng=20
buy-in from state and federal authorities, bondholders, creditors and=20
others. =20
California will be forced to spend an enormous amount of time and resources=
=20
trying to achieve the deal, with no certainty of success, particularly in=
=20
view of PG&E's public opposition. =20
There is no evidence that the State has any expertise in overseeing a TX=20
system as large and complex as the ones possessed by PG&E and Edison, even =
if=20
it did manage to complete the transaction.
Nor have any estimates been made regarding how much additional capital=20
California will be required to invest in what is generally viewed as a=20
transmission network in desperate need of repair and upgrading.
In the meantime, summer approaches, and the gap between supply and demand=
=20
remains staggering. =20
This complex, costly and litigious alternative will in no way reduce the=20
serious threat of blackouts that California faces this summer.
When those blackouts arrive=01*and they will unless bold action is taken sw=
iftly=01*
consumer will wonder why policy makers spent their time negotiating the pri=
ce=20
of utility transmission assets.
As important, it is extremely difficult to see how the transmission buy-out=
=20
offers creditors a better alternative to bankruptcy court. =20
Indeed, when viewed against the uncertainty of achieving the transmission=
=20
buy-out, particularly in light of the politically charged atmosphere in whi=
ch=20
the debate is taking place, creditors seem increasingly inclined to opt for=
=20
the relative certainty that comes with a bankruptcy court.=20
If that happens, the State loses a significant amount of influence over the=
=20
situation.
Moreover, SB6X squarely inserts the State into the power plant business,=20
despite the face that there is abundant private capital ready and willing t=
o=20
invest in California=01*IF California provides the investment environment t=
o=20
attract that capital.=20
Unfortunately, these bills create an environment that is hostile toward=20
investment capital.
Distressingly, the state could finance, develop, own and/or operate power=
=20
plants, at the same time that it controls the monopoly transmission system.=
=20
In addition, any company that uses the newly-created =01&Power Authority=01=
,s=018=20
financing authority would have the price that it can charge for power set b=
y=20
the =01&Authority,=018 or, if the developer is a utility, by the California=
PUC.
In sum, the biggest player in the power business=01*the State=01*will contr=
ol the=20
network that power suppliers must use to get their power to market.
The state will control the price to use the network, and in many cases it=
=20
will also control the prices power suppliers charge for power services.
This scenario makes the old vertically-integrated monopoly structure look=
=20
inviting.
Capital markets will run from this =01&solution=018 and put capital to more=
=20
productive uses outside of California.
Under this proposed =01&solution=018 only IOUs and municipal utilities will=
build=20
plants, and the state will be forced to finance them. =20
That=01,s the same recipe for inefficiency and waste that got California to=
=20
electricity prices that were 50% higher than the national average. =20
We=01,ve been down that route; it=01,s been given chance after chance to su=
cceed,=20
and it=01,s failed. State-ownership and intrusive regulation haven=01,t wo=
rked in=20
the past, and they won=01,t work today.
This package of bills will increase the risk of blackouts this summer;=20
increase the time it takes to close the gap between supply and demand in=20
California; increase the likelihood of bankruptcy; and force businesses to=
=20
look elsewhere to locate and/or expand operations, all of which put=20
California=01,s economy at risk.
The real solution is to succeed in doing what California failed to do the=
=20
first time=01*lay the groundwork for truly competitive retail and wholesale=
=20
markets and foster an environment designed to foster investment, invest,=20
rather than chase it away.=20
---------------------- Forwarded by Richard Shapiro/NA/Enron on 02/21/2001=
=20
04:50 PM ---------------------------

Susan J Mara
02/21/2001 04:22 PM
To: Mark Palmer/Corp/Enron@ENRON
cc: Steven J Kean/NA/Enron@Enron, Richard Shapiro/NA/Enron@Enron, James D=
=20
Steffes/NA/Enron@Enron, Sandra McCubbin/NA/Enron@Enron, Harry=20
Kingerski/NA/Enron@Enron, Jeff Dasovich/NA/Enron@Enron=20

Subject: Message Points

Mark,

I have passed the following message points out to some colleagues to help=
=20
them respond to reporters calls. I put it together by smushing together=20
jeff's and my points. It addresses all four bills of concern.

Sue Mara
Enron Corp.
Tel: (415) 782-7802
Fax:(415) 782-7854