california energy crisis california  , s power crisis has generated heated debate over the last several
months . unfortunately , this debate has generated more heat than light . we
want you to know what the facts are and what we are doing about the crisis .
please spend a few minutes reading the following overview on the situation
and our position on california energy issues .
what happened in california
the source of california  , s current problem is as straightforward as supply
and demand . california  , s economy grew 29 percent since 1998 . this increased
the demand for electricity by 24 percent . at the same time , regulatory
restrictions prevented new generation from getting built in the state . so
demand grew but regulations prevented supplies from being added . the result ,
predictably , is a shortage . this summer , peak capacity will be about 10
percent shy of peak demand , leading to further blackouts in the state .
in addition to the supply and demand imbalance , there are two other related
factors that led to the current crisis . first , the state  , s regulations
forced all sales and purchases into the spot market . the spot market for
power is extraordinarily volatile . the way firms behave in a free market
when faced with such volatility is to construct a portfolio of purchases long
term , medium term and short term , to reduce exposure to this volatility . in
california , state regulation prevented this strategy . this would be the
equivalent of putting the entire state on an adjustable rate mortgage in the
most volatile interest rate environment imaginable . everything was fine
while the power surplus persisted , but when shortages ensued , every megawatt
was purchased at the sky rocketing spot price .
second , retail markets were not deregulated . regulated retail rates remained
in effect , and stranded cost recovery charges were structured to keep
competition out . this meant that utilities were forced to pay high wholesale
prices in the spot market but were only able to recover costs at the
regulated retail rate . they are now nearly bankrupt .
in short , california  , s problems were caused by regulation , not deregulation .
regulations prevented competitors from entering the market , prevented new
generation from being built , and prevented prudent hedging against volatile
spot prices .
at the time california was developing its restructuring plan , enron warned
the state  , s policy makers about these risks and proposed alternatives , which ,
if adopted , would have averted the current crisis .
enron  , s role
many political leaders in the state have elected to fix blame rather than fix
the problem . power sellers , including enron , have been vilified by the
politicians and the media . here are the facts :
? other than a small amount of wind power , enron is not a generator in the
state of california . every megawatt we sold in california we bought in the
same market available to other california purchasers . because we are a
market maker , not a generator , we are not biased toward high prices . we are
interested only in having a market that works so that we can package products
for our customers .
? as a seller to end - use markets in the state , we provided protection from
the problems the states  , utilities , and their customers , now face . we
protected , and still protect , our customers from price volatility .
you may have read that ees recently elected to have the utilities supply
power directly to its customers in california instead of procuring power on
the open market . early reports mischaracterized this as a  enron continues to sign up customers in the state ; and enron
continues to actively manage its risks and capture opportunities in western
power markets . enron  , s primary business is managing risk for our customers
with solutions customized to meet their needs . there has never been more
demand for our products and services .
the solution
the solution to california  , s crisis is also straightforward . in summary , the
state must increase supply , reduce demand , reduce reliance on the spot market
and shore up the financial stability of the state  , s utilities .
increasing supply
california  , s process for siting and permitting new generation is nothing
short of byzantine . enron has built plants elsewhere in the country in less
than a year . in california , it often takes 5 to 7 years . california simply
must streamline this process . ironically , while many of the regulations
generators must overcome are aimed at improving environmental quality , the
regulations are preventing new clean technology from coming online and
displacing current plants , which emit 40 times as much nox . california can
have abundant power and cleaner air by expediting the permitting of new
facilities .
reducing demand
customers in california today have no incentive to reduce or shift demand .
they pay the same rate no matter what the market price is . an open retail
market would trigger demand responses , which would balance supply and demand
at lower prices than today . california should fully open its retail market .
reducing reliance on the spot market
in a truly deregulated market , customers would protect themselves from
volatile spot prices by purchasing some of their requirements on a longer
term , fixed - price basis . the state has instead left procurement in the hands
of the utilities , which it has forced to buy exclusively in the spot market .
opening the market at the retail level will give customers control over their
price risk .
restoring the financial integrity of the state  , s institutions
the utilities in california are not paying their bills . this has led to
greater uncertainty in the market , higher costs , and reduced flexibility to
arrive at lasting solutions . california must permit its utilities to recover
their costs so they can pay their bills and invest in the transmission and
distribution assets necessary to get power from where it is to where it is
needed .
just as important as doing these things , the state must avoid policies that ,
while politically attractive , do not fix the problem or even make matters
worse . price caps have been proposed . they don  , t work ; have never worked ;
and they will not work here . price caps succeed only in creating shortages ,
which then have to be allocated among competing users . imagine how
ineffectively the government would be in determining , for example , whether it
is better to make its limited power supplies available to the imperial valley
or silicon valley . price caps are a surefire way to make the current
shortage worse .
the state has also proposed to take over generation and transmission in
california . there is no reason to believe , and every reason to doubt , that
the state will be more effective than free markets at investing in ,
constructing , operating and maintaining assets . this will also result in
california tax revenues being spent on power transmission and power
generation - - which the private sector can do - - instead of education , roads
and other public goods - - which the private sector cannot do .
as you are approached by people outside the company or are learning about the
crisis from the media , it  , s important for you to know this : we at enron will
continue to serve our customers and we will continue to propose real
solutions to the state .
california energy crisis
california  , s power crisis has generated heated debate over the last several
months . unfortunately , this debate has generated more heat than light . we
want you to know what the facts are and what we are doing about the crisis .
please spend a few minutes reading the following overview on the situation
and our position on california energy issues .
what happened in california
the source of california  , s current problem is as straightforward as supply
and demand . california  , s economy grew 29 percent since 1998 . this increased
the demand for electricity by 24 percent . at the same time , regulatory
restrictions prevented new generation from getting built in the state . so
demand grew but regulations prevented supplies from being added . the result ,
predictably , is a shortage . this summer , peak capacity will be about 10
percent shy of peak demand , leading to further blackouts in the state .
in addition to the supply and demand imbalance , there are two other related
factors that led to the current crisis . first , the state  , s regulations
forced all sales and purchases into the spot market . the spot market for
power is extraordinarily volatile . the way firms behave in a free market
when faced with such volatility is to construct a portfolio of purchases long
term , medium term and short term , to reduce exposure to this volatility . in
california , state regulation prevented this strategy . this would be the
equivalent of putting the entire state on an adjustable rate mortgage in the
most volatile interest rate environment imaginable . everything was fine
while the power surplus persisted , but when shortages ensued , every megawatt
was purchased at the sky rocketing spot price .
second , retail markets were not deregulated . regulated retail rates remained
in effect , and stranded cost recovery charges were structured to keep
competition out . this meant that utilities were forced to pay high wholesale
prices in the spot market but were only able to recover costs at the
regulated retail rate . they are now nearly bankrupt .
in short , california  , s problems were caused by regulation , not deregulation .
regulations prevented competitors from entering the market , prevented new
generation from being built , and prevented prudent hedging against volatile
spot prices .
at the time california was developing its restructuring plan , enron warned
the state  , s policy makers about these risks and proposed alternatives , which ,
if adopted , would have averted the current crisis .
enron  , s role
many political leaders in the state have elected to fix blame rather than fix
the problem . power sellers , including enron , have been vilified by the
politicians and the media . here are the facts :
? other than a small amount of wind power , enron is not a generator in the
state of california . every megawatt we sold in california we bought in the
same market available to other california purchasers . because we are a
market maker , not a generator , we are not biased toward high prices . we are
interested only in having a market that works so that we can package products
for our customers .
? as a seller to end - use markets in the state , we provided protection from
the problems the states  , utilities , and their customers , now face . we
protected , and still protect , our customers from price volatility .
you may have read that ees recently elected to have the utilities supply
power directly to its customers in california instead of procuring power on
the open market . early reports mischaracterized this as a  enron continues to sign up customers in the state ; and enron
continues to actively manage its risks and capture opportunities in western
power markets . enron  , s primary business is managing risk for our customers
with solutions customized to meet their needs . there has never been more
demand for our products and services .
the solution
the solution to california  , s crisis is also straightforward . in summary , the
state must increase supply , reduce demand , reduce reliance on the spot market
and shore up the financial stability of the state  , s utilities .
increasing supply
california  , s process for siting and permitting new generation is nothing
short of byzantine . enron has built plants elsewhere in the country in less
than a year . in california , it often takes 5 to 7 years . california simply
must streamline this process . ironically , while many of the regulations
generators must overcome are aimed at improving environmental quality , the
regulations are preventing new clean technology from coming online and
displacing current plants , which emit 40 times as much nox . california can
have abundant power and cleaner air by expediting the permitting of new
facilities .
reducing demand
customers in california today have no incentive to reduce or shift demand .
they pay the same rate no matter what the market price is . an open retail
market would trigger demand responses , which would balance supply and demand
at lower prices than today . california should fully open its retail market .
reducing reliance on the spot market
in a truly deregulated market , customers would protect themselves from
volatile spot prices by purchasing some of their requirements on a longer
term , fixed - price basis . the state has instead left procurement in the hands
of the utilities , which it has forced to buy exclusively in the spot market .
opening the market at the retail level will give customers control over their
price risk .
restoring the financial integrity of the state  , s institutions
the utilities in california are not paying their bills . this has led to
greater uncertainty in the market , higher costs , and reduced flexibility to
arrive at lasting solutions . california must permit its utilities to recover
their costs so they can pay their bills and invest in the transmission and
distribution assets necessary to get power from where it is to where it is
needed .
just as important as doing these things , the state must avoid policies that ,
while politically attractive , do not fix the problem or even make matters
worse . price caps have been proposed . they don  , t work ; have never worked ;
and they will not work here . price caps succeed only in creating shortages ,
which then have to be allocated among competing users . imagine how
ineffectively the government would be in determining , for example , whether it
is better to make its limited power supplies available to the imperial valley
or silicon valley . price caps are a surefire way to make the current
shortage worse .
the state has also proposed to take over generation and transmission in
california . there is no reason to believe , and every reason to doubt , that
the state will be more effective than free markets at investing in ,
constructing , operating and maintaining assets . this will also result in
california tax revenues being spent on power transmission and power
generation - - which the private sector can do - - instead of education , roads
and other public goods - - which the private sector cannot do .
as you are approached by people outside the company or are learning about the
crisis from the media , it  , s important for you to know this : we at enron will
continue to serve our customers and we will continue to propose real
solutions to the state .