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These talking points are to help you address questions about the Front Line
program that took place last night. gngr 713-853-7751 ----- Forwarded by Ginger Dernehl/NA/Enron on 06/06/2001 11:30 AM ----- Mark Palmer 06/06/2001 11:27 AM To: Ginger Dernehl/NA/Enron@Enron cc: Subject: talking points ----- Forwarded by Mark Palmer/Corp/Enron on 06/06/2001 11:27 AM ----- Mark Palmer 06/06/2001 10:14 AM To: Linda Robertson/NA/Enron@ENRON cc: Subject: talking points Beyond the two excellent editorials in today's WSJ (attached) the following should be the key messages: 1. The show was an aimless wander through the well-worn territory of blame-game politics, with a healthy dose of fear mongering thrown in. 2. It should not surprise anyone that two Berkley-based journalists, working in conjunction with the New York Times, would ignore Econ 101 and suggest that the solution for California's energy crisis is to subject the entire nation to Roosevelt era New Deal regulations. Such pinings have been abandoned over the past 65 years, but if the New York Times wants to stake out that position ... fine. It will probably help sharpen the debate and set up a clear victory for the market when supply comes onstream and prices moderate. (Much sooner than the decades of legal wrangling to return to New Deal regulations.) 3. The show completely ignored the failings of California's political and regulatory leadership to moderate or even eliminate the crisis when they had a chance. 4. Of the electricity consumed in California, less than 15 percent is generated by companies headquartered in Texas. More than 50 percent of the electricity in California is generated by municipal entities that have been charging the same high prices as the Texas "pirates." These good pirates include the Bonneville Power Administration, the Los Angeles Department of Water and Power, the Government of British Columbia, and the Sacramento Municipal Utility District. Business World: California's Ship of Fools By Holman W. Jenkins Jr. 06/06/2001 The Wall Street Journal A27 (Copyright © 2001, Dow Jones & Company, Inc.) Lamenting the politician's lot in "Profiles in Courage," John F. Kennedy wrote that "In no other occupation is it expected that a man will sacrifice honors, prestige and his chosen career on a single issue." Of course, no politician would last long if he didn't blow with the wind nine times out of 10. But on the tenth occasion even California has the right to expect some courage. We don't know what happens when an advanced economy like California's suffers day after day of blackouts. We may be about to find out. Modern office architecture becomes uninhabitable without air-conditioning and elevators. Old people and asthmatics may die in the heat. So may drivers at unlit traffic crossings. Steps could still be taken to lessen the blackouts, but voters wouldn't know the difference, and it's so much easier to cast blame. Gov. Gray Davis prates about a "war with Texas." And who knows what secret failures as a human being led Bill Lockyer, the attorney general, to threaten Enron's Ken Lay with homosexual rape in the California prison system. California has found itself singularly lacking in heroes in its hour of crisis. Mr. Lockyer and Mr. Davis harp on price, but the true problem is the unavailability of power at any price to meet the demand that exists under the current structure of retail rates. Both must know the solution they noisily advocate, federal price controls slapped across Western electricity markets, wouldn't bring power into existence to close the gap. Their proposal would simply saddle the feds with the dirty job of apportioning blackouts from California's mistakes across half a dozen other states. In California itself, municipal utilities in Santa Clara, Palo Alto and other towns have already announced they won't participate in rolling blackouts. The Los Angeles Department of Water and Power certainly isn't volunteering. Why should voters in other states? Why not just cut the lines and let California monopolize the darkness? A state review board in Washington has already vetoed a proposed plant rather than suffer local pollution for power destined for California. Mr. Davis knows this; he knows price controls would create a new problem without solving the shortages. Meanwhile, the specter nobody wants to talk about is the state of California itself headed for bankruptcy if it continues to be willing to pay any price to satisfy the demand of consumers shielded from the true cost of power. Mr. Davis's version of the Big Lie is that Texas is to blame. Texas companies account for just 12% of California's supply, having bought 7,000 of the 20,000 megawatts that local utilities were forced to sell under "deregulation." Being in the right place at the right time has always been profitable, but any windfall has been spread widely among suppliers of gas, pipeline capacity, storage and ancillary services. Take Enron: Its revenues quadrupled in the past year, but so did its costs, and profits are up only 31%. A leaked California memo names as two of the biggest "gougers" BC Hydro, owned by Canadian taxpayers, and the U.S. Bonneville Power Administration. Their sin was letting their reservoirs fill up overnight while meeting local needs with spot-market power, so they could sell their own production for higher prices to California during the day. These are precisely efforts that might stop if price controls were imposed across the West, making the shortages worse, probably much worse. Northwestern smelters might be better off reclaiming the cheap hydro they've been passing on to California -- 3,000 megawatts, enough for two million homes. Farmers could resume irrigating. Seattle, Tacoma, Boise and other neighbors have all done what California has failed yet to do, hiking rates to curb demand. Rather than emulate them, Gov. Davis's peacock of an energy czar, David Freeman, babbles about "public power," the answer to a question nobody asked, the solution to a nonexistent problem. Prices of electricity and natural gas for future delivery are already falling as investors race to build new plants and pipelines to meet the state's future needs. Markets foresee the crisis ending without Mr. Freeman's antique New Deal schemes. What's been missing while folks like him ride their hobby horses, though, is the courage to take steps necessary to minimize the suffering this summer. One large source of untapped power is California's own small generators, known as qualifying facilities. Their fee scale is set by the state, but California couldn't even summon the political competence to keep them in business, so 3,000 megawatts sit idle. People have tried to attach all kinds of ideological baggage to the California mess, but we wouldn't be here if water flows in the Columbia River system weren't down 54% from normal. Last summer, California's fossil-fuel generators increased their output by a whopping 62% to make up the shortfall, mostly by running existing plants harder. Yes, there have been flaky prices, partly because, mysteriously, California continues to use a discredited computer program to book a large chunk of its power one hour in advance. But the flaky prices also represent a system pulling out all stops to save California from itself. We said back in December there's only one solution: Jack up rates to stop consumers trying to burn more power than the state can beg, borrow or steal. The only question was when Gov. Davis would find the courage. Hard to believe, but the price hikes his regulators approved in March are still on the drawing board and busily being watered down. Someone should point out to Gov. Davis that the author of "Profiles in Courage" wasn't endorsing career suicide but suggesting that politicians must husband their leadership for times when it really counts. Not a few people in public life understand this. Al Gore openly yearned for the day when he could justify the compromises and trimming he's done in his life. But Mr. Davis is perhaps too lost in the dark to understand he is blowing the whole reason to have a political career. What borders on the stupefying, though, is the failure of any other Californian of prominence to step forward and speak truth about the power crisis. By all rights Gov. Davis should be a political leper, yet he actually stands a microscopic chance of being re-elected because of the sheer poverty, in a state of 34 million people, of the Republican opposition. Arnold Schwarzenegger is looking better all the time. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. REVIEW & OUTLOOK (Editorial) California Squeaks By 06/06/2001 The Wall Street Journal A26 (Copyright © 2001, Dow Jones & Company, Inc.) The California energy crisis is now more than a year old and Governor Gray Davis has done nothing but squeak at it. At first, he attacked out-of-state power generators for being pirates and marauders. But lately he has focused on FERC and President Bush, demanding that the federal government place price caps on the sale of wholesale power. He's even rustled up 10 economists -- including the dad of deregulation, Alfred Kahn -- to support him. Well, as most everybody knows -- including the economists who have come out in favor of them -- price caps don't work. If caps are set too low, (as politics often dictate), existing supply will shrink and demand will grow, making the situation worse. Even "correctly" set price caps will discourage additional supply and do nothing to moderate demand. The usual result is an aggravation of shortages and rationing. Indeed, the history of price caps, particularly during the energy crisis in the early 1970s -- when oil prices were capped and lines at gasoline stations were long -- bears this out. The pro-price-caps argument however is a clever one. It rests on the notion that there is no "effective competition" in the California energy market. According to one of the 10 pro-price-cap economists, Paul Joskow at MIT, the energy market in California is characterized by inelastic demand and very, very tight supplies, which conspire to produce, at certain times, prices above those that would have obtained under competitive conditions. Mr. Joskow examined the California energy market during the summer of 2000, looking at market fundamentals (the broad forces determining supply and demand); he found that 25% to 30% of the wholesale prices of electricity during June, July and August cannot be explained by market fundamentals and should be attributed to market imperfections. As an argument for price caps, this is hardly overwhelming. Especially since there are several perfectly respectable and compelling reasons to look no further than market fundamentals. Such as the fact that the price of the most important input for almost half the electricity generated in California, natural gas, has been rising over the past year. Such as the fact that natural gas pipelines are filled to capacity, thus bidding up the price to transmit. Such as the fact that the worst drought in the Northwest in 60 years has reduced the amount of hydroelectric power in the market, putting even more demands on natural gas generation. Such as the fact that imports into the state, which were running 20% and up to 25% during peak usage, have declined. And the fact that the price of tradable permits for NOx emissions -- which must be held by plants generating electricity -- has skyrocketed. Not least the fact that demand in California during the past several years, unfettered by rate increases, has zoomed dramatically. At any rate, electric power is increasingly expensive all over the country; indeed, California's neighbors, the states of Washington, Idaho, Wyoming, Arizona, Nevada, Oregon, Utah and Montana, have had to bump up utility rates 30% to 50%. So where is the tablet of stone saying that California, with its especially restrictive environmental regulations, should be any different? The bad news for California is that, poor dears, it can't be different. Market fundamentals, like supply and demand, rule. But that's also the good news. High wholesale prices (and necessary profits) have done their job; they have brought forth a number of suppliers, in the form of more than a dozen plans for significant new generating plants; in fact, plans have even been announced to build more natural gas transmission pipelines. Too, demand has started to abate; peak demand on a monthly basis has fallen 4% to 9% from last year, doubtless a response to a "temporary" 10% rate hike in January and the California Public Utilities Commission's decision in March to finally really, really raise rates by as much as 50% on average. (The details of that plan were announced in May and rate increases will show up on this month's bills.) So California's blame-shifting pols can point fingers til the state freezes over. The market is working, and imposing price caps would not only interrupt that process, but would be unnecessary. Of course, there is a painful lag between the market signals of high prices due to shortages and the market remedies of increased supply and lower demand. And California will probably feel lots of that pain this summer in the form of continued high prices and blackouts. But, in the long run, the market will be successful in creating new supply and lower prices. Unfortunately California's energy glut will probably come too late to avoid a siege of political spinning and demagoguery. Ultimately we have to hope Californians will understand it is their politics that has served them poorly. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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