From: lipsen@cisco.com
To: jeff.dasovich@enron.com
Cc: skean@enron.com, karen.denne@enron.com
Date: 2001-02-14 17:58:00+00:00
Subject: Re: California Power Crisis

Jeff,

Thanks for this analysis. I think we would all agree that the solution to
put power
100% in the hand of the state is an extremely frightening proposition.
Unfortunately, it
falls in-line with what Gov. Davis likes to do, which is to control all of
the process himself.
I know John will not be able to digest all of this, but will brief him over
the phone on the
excellent arguments you make here against support for AB1X.

I will give you all feedback from the meetings tomorrow. Thanks for all
your help.

Laura

At 10:02 AM 2/14/2001 -0600, Jeff.Dasovich@enron.com wrote:

>Hi Laura:  I've attached three things, but first wanted to give you a bit
>of an update on events transpiring in Sacramento and at the Public
>Utilities Commission.
>
>Move to Prohibit Customer Choice
>As you may know, AB1X, the bill that the Legislature recently passed and
>the Governor signed, gives the California Department of Water Resources the
>authority to buy power on behalf of the utilities.  Included in that bill,
>however, is a provision that prohibits "Direct Access,"  California's term
>for customer choice.
>
>In sum, the bill, in its current form, prohibits businesses and consumers
>from chosing an alternative energy service provider, like Enron.  Our
>understanding is that the Department of Finance called for the prohibition.
>Their reasoning is that they need a "captive" customer base to pay for the
>bonds that the State will issue in order to finance DWR's power purchases.
>
>Customer choice was of course the foundation of California's restructuring
>law, AB 1890, and is arguably the only bright spot in an otherwise fatally
>flawed plan.  For example, the only businesses and consumers that were
>protected in San Diego when rates were deregulated last year were those
>businesses and consumers that had signed fixed price power deals with
>competitive service providers.  Ironically, the recently passed legislation
>takes choices away from consumers and diminishes their ability to manage
>their energy costs.  Before AB 1890, consumers and businesses had one
>choice--the monopoly  utility.  With the passage of AB 1X, they again will
>have one choice. But this time their only choice will be to buy from a
>government agency DWR.
>
>A broad coalition of consumer groups has expressed its opposition to the
>prohibition and Senator Debra Bowen (a key player on the Senate side), and
>Fred Keeley (a key player on the Assembly side), have promised to "fix" the
>prohibition in another bill "SB27X."  I'll forward in another email the
>language that the coalition has drafted and hopes Bowen and Keeley will
>carry.
>
>Unfortunately, we are now hearing rumors that the Governor intends to
>direct the California Public Utilities to immediately implement the
>provisions of AB1X prohibiting Direct Access, despite the fact that a large
>coalition of consumers and service providers are actively working with Bown
>and Keeley to amend the prohibition language.
>
>It would be extremely useful if the folks participating in the meeting on
>Thursday with the Governor let him know that taking choices away from
>businesses and customers is the wrong way to go and that he and the
>legislative leaders need to work with the coalition to fix it.  You'll note
>in the language developed by the coalition that the proposal strikes a
>reasonable balance between the Dept of Finance's concerns about recouping
>DWR's costs of buying power, and the need to give consumers and businesses
>maximum flexible in managing their energy costs.
>
>Move to Have the State Take Over the Electric Industry in California
>
>John Burton, the Democratic leader of the Senate, insists that, "if
>California is going to 'bail out' the utilities, the State needs to get
>something in return."  Burton wants the state to buy and operate PG&E's and
>Edison's transmission system and create a state power authority that would
>get in the business of (among other things) developing, financing,
>constructing and operating power plants and natural gas pipelines.  Burton
>got both of these bills designed to take over the industry passd out of his
>committee yesterday (SB6X and SB33X).  It is unclear how much support he
>has in the full Senate or in the Assembly, but the possibility of passage
>is certainly greater than zero at this juncture.
>
>Others experts are offering a better alternative.  When the federal
>government helped Chrysler out of its financial difficulties 20 years ago,
>the federal government received stock warrants in return.  Until recently,
>the Governor favored warrants, but more recently he has waivered in his
>statements regarding a state take over.  Burton appears to have negotiating
>leverage with the Governor and appears to be using it.
>
>Again, it would be extremely useful for folks to let the Govenor know in
>the meetings on Thursday that a State take over of the industry is an
>extreme move and bad public policy.  I will forward to you in a separate
>email letters that we sent to Burton expressing our opposition to his bills
>and the reasons for our opposition.  In brief, there is no shortage of
>private capital ready and willing to invest in California's energy
>infrastructure (i.e., power plants, electric transmission lines, gas
>pipelines).  All California needs to do is create the investment climate
>necessary to attract the capital.  In addition, history shows that the
>State is extremely ill-equipped to become California's mega-utility.
>
>Here are the attachments:
>
>    A demand buy-down proposal.  We made this proposal to the Governor (and
>    continue to propose it to policymakers in Sacramento, Washington D.C.
>    and just about everywhere else).  In short, the notion is that, if the
>    market is willing to pay power producers, say, 7 cents/kwh to "produce"
>    power, then the market ought to be willing to pay businesses and
>    consumers 7 cents/kwh to "reduce" power consumption.
>
>    This approach is critical for two reasons:  first, it provides
>    businesses and consumers the financial incentives necessary (and that
>    California currently lacks) to conserve energy and use energy more
>    efficiently.  Second, because California delayed identifying and
>    implementing a solution to California's energy crisis, its options for
>    addressing the severe shortages that are likely occur this summer are
>    very limited.  Reducing demand represents one of the few options that
>    can help to immediately reduce the gap between supply and demand.
>    Putting financial incentives in place now to reduce demand and "free up"
>    electrons is an investment with significant payback.
>
>    A "manifesto" recently released by a group of Berkeley and Stanford
>    economists and industry experts urging the Govenor to pursue a
>    "market-oriented" solution to California's energy crisis.
>
>    An editorial in yesterday's Wall Street Journal by Dan McFadden, a nobel
>    prize-winning economist from Berkeley echoing the proposal advanced in
>    the "manifesto."  McFadden was one of the manifesto's signatories.
>
>Finally, we are working on "model Legislation" proposing a market-based
>solution that we will share with you soon and that we hope the business
>community--and the Valley in particular--can embrace and advocate.
>
>I realize that this is a lot of information and I apologize for the length
>of this note, but I wanted to try to make sure that you're up-to-date.
>Please don't hesitate to give me a call if you'd like to discuss further.
>
>Best,
>Jeff
>
>
>(See attached file: Manifesto-final version.doc)(See attached file:
>McFadden Editorial in WSJ.doc)(See attached file: Demand buy-down
>proposal.doc)
>
>