I agree with Mark's points.  While we have advocated our merger with PGE 
(which did not concentrate market power) we have intervened in opposition to 
most others.  Moreover, there is some hope that the German government will 
take the opportunity to use the proposed utility merger to force greater open 
access.   We will likely encourage that action and may oppose the merger 
otherwise.   Most mergers in this industry are defensive, not procompetitive, 
and, in my view, deserve no credit for convergence, innovation, or 
liberlization.
---------------------- Forwarded by Steven J Kean/HOU/EES on 09/10/99 01:17 
PM ---------------------------


Mark Schroeder@ECT
09/10/99 05:26 AM
To: Margaret Carson/Corp/Enron@Enron
cc: Joan Wasylik/LON/ECT@ECT, Danny McCarty/LON/ECT@ECT, Steven J 
Kean/HOU/EES@EES 
Subject: Speech to the British Institute of Energy Economists

Margaret - apologies for the delay in getting comments to you on your 
speech.  Due to press of other matters I will be brief.

First, your speech caption, refernecing "mergers" is somewhat different than 
the topic shown in the agenda, i.e., "Industry Structure and Competitive 
Behaviour", but I trust you are wroking that out with the BIEE.  

Second, in your first paragraph, you note that developments in the energy 
sector over the last decade are due to the mergers of the last five years (a 
point I will retrun to later), but in any event, not entirely consistent in 
terms of timeframes.

Third, I am surprised that the Enron Corp. view is that gas and electricity 
markets grew as they did over the decade due to mergers.  In the past, things 
like unbundling and non-discriminatory third-party access have featured 
prominently in our advocacy.  Indeed, though it was not my role at Enron, I 
would have thought that in many of the recent electricity mergers pre-dating 
Order No. 888 we would have joined the chorus of voices arguing that these 
mergers concentrated market power, and that such market power could only be 
mitigated with the provision of non-discriminatory third-party access (an 
argument we will be repeating in, e.g., Germany, as noted below).  Finally, I 
would note that in the past, I thought we had questioned the value of mergers 
as an impediment to competitive markets, as I recall Ken Rice gave an 
infamous address/speech, in which he described "good" mergers and "bad" 
mergers, i.e., defensive mergers like Houston Industries and NorAm.  I 
actually borrowed heavily from that speech two years ago, in paris, but if we 
have changed our tune, that is good to know.  Even the "good" mergers 
identified in his/my speech, e.g., Enron/Portland, have had the "goods" 
thwarted, in part, by regulators, who would not let us do all we wanted to do 
that was pro-competitive.  Also, in the past, we have used as a good example 
of "convergence" the arbitrage we have done at Sithe's facility in NY, 
pointing out that we are in an "energy" or "BTU"market, not gas alone, or 
electricity alone.  Not clear to me that mergers in the US demonstrate this.  

Fourth, accepting that it is the Enron Corp. view that mergers are symbolic 
of the convergence of gas and electricity, and are what yield the many 
beneifts of competition that you dsicuss elsewhere in your speech (I do, of 
course, agree with all the platitueds that competition yilds more service 
offerings, innovation, etc.), you should be aware, coming over to this 
market, that a number of mergers are taking place that we have expressed 
concerns about in comments to the regulators, and will do so in the future.  
here are some you should be aware of:  Veical integration in the UK 
electricity industry (not clear yet that this will result in better/more 
service, but definitely loss of counter-parties, re-bundling of business 
before retail unbundling/competition has taken hold); Exxon/Mobil 
(consolidation in the upstream sector in Continental Europe, which is already 
concentrated), VEBA/VIAG in Germany (probalby okay, assuming thrid-party 
access is allowed/enhanced to the wires).  Just FYI, any objections we have 
are usually communicated confidentially. 

Fifth, if you are ging to emphasise mergers, as per your title and opening 
paragraph, I question the inclusion of all the discussion on privatisation, 
which is good, but does not seem to demonstrate the benefits of merger 
activity, which I read is the premise of your speech, per paragraph one.  In 
addition, recitation of ownership of miles of gathering lines and 
transmission lines does demonstrate change in aggregate ownership, but not 
clear it is all due to mergers (e.g., I thin NNG is just capital expansion), 
nor does the connection get made that this has lead to innovative or enhanced 
service offerings.  I do think excellent points can be made about the 
deregulation/divestment of gathering, and getting it out of federal 
regualtroy purview, but that is not in the speech at this point.

Sixth, you describe "network industries" well, but in the broader context of 
your speech, I think your listeners will assume you are referring to the 
physical network, rather than the Enron vision, which you capture accurately, 
nor is it easily understood how this demonstrates or adds to your point about 
convergence.  

Seventh, in your table of converged companies, you could be asked about the 
fact that Duke has already disposed of the pipeline assets it acquired in the 
PanEnergy deal (since sold to CMS), apparently keeping only the trading 
business.  Also, our pieeline assets to do not serve our cogen facilites in 
NJ, so not clear to me that thisdemonstrate convergence in the East Coast.

Hope this helps.  I will be travelling today and Monday, but if you have 
questions, please leave me voice mails, and I will return your calls.

P.S. at p. 7 you describe "secular" change.  I assme that this should read 
"sectoral" change.

Mark
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