RE: New Report on Lessons from California -----Original Message----- From: 	Steffes, James D.   Sent:	Tuesday, August 07, 2001 9:53 AM To:	Barnes, Lynnette Subject:	FW: New Report on Lessons from California Can you please get a hard copy for me? Jim  -----Original Message----- From: 	"Samantha Slater"  Sent:	Wednesday, August 01, 2001 11:22 AM To:	bhueter@enron.com; Linnell, Elizabeth; Kingerski, Harry; jmigden@enron.com; jsteffe@enron.com; Robinson, Marchris; Petrochko, Mona L.; Kaufman, Paul; rboston@enron.com; rshapiro@enron.com; snord@enron.com; steve.montovan@enron.com; Landwehr, Susan M.; Chapman, Tom Subject:	Fwd: New Report on Lessons from California FYI. Samantha M. Slater Manager of State & Regional Affairs Electric Power Supply Association 1401 New York Avenue, N.W. 11th Floor Washington, D.C.  20005 Phone: 202-628-8200 Fax: 202-628-8260 E-mail: sslater@epsa.org Received: from femail27.sdc1.sfba.home.com	by mail.epsa.org; Wed, 01 Aug 2001 08:18:30 -0400 Received: from cc470486-a ([65.8.222.90]) by femail27.sdc1.sfba.home.com          (InterMail vM.4.01.03.20 201-229-121-120-20010223) with ESMTP          id <20010801121806.MXGF553.femail27.sdc1.sfba.home.com@cc470486-a>;          Wed, 1 Aug 2001 05:18:06 -0700 Message-Id: <4.2.0.58.20010801081608.00ca48a0@mail> X-Sender: hirstea@mail X-Mailer: QUALCOMM Windows Eudora Pro Version 4.2.0.58 Date: Wed, 01 Aug 2001 08:16:55 -0400 To: Eric@EHirst.com From: Eric Hirst  Subject: New Report on Lessons from California Mime-Version: 1.0 Content-Type: multipart/alternative;	boundary="=====================_640249==_.ALT" Dear Colleague, The Edison Electric Institute just published a paper, The California Electricity Crisis: Lessons for Other States, which I wrote. The paper is available on the Publications page of my website, www.EHirst.com << File: http://www.ehirst.com/ >> . Please let me know if you have any comments on the paper. Here is a summary of the paper:         California was supposed to show the rest of the nation a brighter electricity future. That future, as outlined by the California Public Utilities Commission in 1994, envisioned an electricity industry featuring competitive markets. Such markets were intended to produce lower costs and more choices for consumers, while ensuring profits for efficient energy suppliers and encouraging the retirement of old, inefficient power plants.         Although the first two years of restructuring (beginning in April 1998) seemed to bear out these promises, the last year has been a disaster for California's electricity consumers, taxpayers, and electric utilities. Part of the fallout from California's electricity crisis is considerable concern-even opposition-in other states to restructuring the electricity industry.          Although a few states have decided, based on the California experience, not to restructure, I believe that is the wrong outcome. Instead, the primary lessons other states should learn from California are that competitive markets can work; competition is not to blame for California's problems; and basic economic principles of supply, demand, and prices affect market outcomes.         Section 2 of this paper briefly reviews the history of electricity regulation and restructuring in California and the problems that occurred beginning in May 2000. Section 3, the heart of this paper, offers guidance to other states on the key ingredients of a competitive electricity industry. This section makes several points:   Maintain a favorable investment and regulatory climate for new generation to ensure that enough generation capacity is online and planned to meet growing loads.   Ensure that enough infrastructure (transmission capacity and natural gas pipeline capacity) is in place and planned to meet growing loads, maintain reliability, connect new generators to the grid, support large regional markets, and provide fuel to power plants.   Encourage retail customers to participate in dynamic-pricing and voluntary-load-reduction programs (i.e., couple retail and wholesale markets).   Create honest retail competition: avoid standard-offer rates with artificial discounts and create conditions that encourage many companies to offer retail services without favoring individual competitors.   Encourage electricity suppliers to manage and diversify their supply and price risks.   Create efficient and integrated wholesale markets for energy, ancillary services, and transmission congestion.   Monitor and minimize horizontal market power (generation) and vertical market power (combined ownership and operation of generation and transmission).           Ultimately, competitive markets for electricity will lower costs and prices, better align consumer prices with producer costs, improve producer efficiency in both investment and operation, maintain or improve reliability, and yield greater innovation in customer services and pricing options.          But, this transition from one industry structure to another is turning out to be long and complicated. It is complicated because electricity is so important to our modern, high-tech society; electricity is our most flexible fuel, providing light, heat, motive power, and the energy to operate all our electronic equipment. Also, electricity truly is a real-time product for which production and consumption must occur at the same time.          Although the problems that have occurred in California are substantial and worrisome, regulators and legislators in other states should focus on the long-term benefits of competitive electricity markets and accept the possible short-term problems that may occur. They also need to recognize that wholesale markets are regional in scope and extend far beyond the boundaries of any single state. Finally, competition in retail and wholesale markets must be coordinated; in particular, it is not possible to have competitive wholesale markets unless at least some retail load faces time varying prices.          If states restructure properly to create competitive markets for wholesale energy and retail services, we should all benefit. Consumers will enjoy lower prices, they will have many more choices of energy services and price-risk tradeoffs, reliability will be improved because most reliability services will be obtained through markets instead of by engineering edict, and the financial risks associated with building and operating power plants will be assigned properly to investors rather than consumers.  Eric ---------------------------------------------- Eric Hirst  Consulting in Electric-Industry Restructuring 106 Capital Circle Oak Ridge, TN 37830 (865-482-5470 (phone & fax)    :Eric@EHirst.comhttp://www.EHirst.com << File: http://www.ehirst.com/ >>