California - no problem
While Enron's name is often mentioned with regard to the California
power crisis, except for the production of a small amount of power
through wind facilities, Enron is not a power generator in the
state of California. In fact, as a market maker, Enron is the
largest buyer and seller of electric power in North America.
EnronOnline, the company's Web-based trading system, completed its
first full year of operation in 2000, executing 548,000
transactions with a gross value of $336 billion.
As a power producer in California, Enron is dwarfed by a number of other companies. However, the company is active as a trader in the state's wholesale market. The company has not released information on how much money it made from its California power trading either for the fourth quarter or for the full year. What is certain, however, is that for the third quarter, Enron's power trading volumes for the western US grew about 73 percent over the same period in 1999 whilst the business in the eastern US grew only about 24 percent.
However, Enron North America announced in late December that it has received unanimous approval from the California Energy Commission (CEC) for its 750MW Pastoria Energy Facility (PEF). The approval represents Enron's second permit in 2000 for a California-based power plant. Enron North America's first project in California, the 508MW Pittsburg District Energy Facility, received CEC approval on August 17, 1999, and was subsequently purchased and is being built by Calpine. That project, which was renamed the Los Medanos Energy Center, is expected to be operational next year. Enron officials note that the company is committed to the California market, with more than 2,000MWs of additional new projects under development in California.
Wall Street is a big believer in Enron. Salomon Smith Barney led a late January private placement. The 20-year convertible issue of $1.25 billion in convertible bonds represented the largest convertible issue of the year. The zero-coupon bonds will partially refinance existing debt and perhaps buy back common stock. The issue included a green shoe option for $250 million. For Enron, convertibles may be a good move. In a highly volatile market, convertibles often outperform both the equity and the bond markets because of limited downside potential.
Testifying on January 31 before the US Senate Committee on Energy and Natural Resources, Steven J Kean, executive vice-president of Enron, said, ?Contrary to what you may hear or read, our success is linked to efficient markets, not higher prices in California ? or anywhere else for that matter.?
Kean added, ?Our financial success is not built on California's back. A unit of Enron has announced that it will cease supplying power to its industrial and commercial customers in California, opting to turn the customers over to Pacific Gas and Electric Co, a unit of PG&E Corp, and Southern California Edison, a unit of Edison International. Those two companies are facing almost certain bankruptcy caused by a huge burden of debt built up buying electricity in the state's unstable energy market.
Uncertainty over how California will solve its worst-ever energy crisis, soaring wholesale power prices, the financial mess facing the state's utilities and the winding down of business at the state-sanctioned California Power Exchange are all factors behind the move by Enron Energy Services (EES).
Kean said the company's success in California grew ?in part because we migrated our market making activity to an online platform and because there is increased demand for risk management in many markets.? Kean said market participants are beginning to see the value of hedging against commodity price risk. The numbers bear that out. The company does engage in other operations, such as building power plants and operating gas pipelines, but 90% of its revenues come from wholesale trading. Enron is a risk management expert.
Kean noted that the California crisis is easily explained, with economic growth spurring increased power demand coupled with failure to add additional capacity. ?The state put excessive reliance on a state-created spot market, which meant that utility buyers were exposed to price fluctuations across their entire portfolio. The state did not deregulate. That is, the state did not enable new entry into the generation business and did not in fact give customers choices.?
Kean said that a combination of these factors put utilities between a volatile spot market and regulated customer rates, leading initially to rapid recoveries for utilities ? when the wholesale markets were low ? and into the current situation of impending bankruptcy as wholesale prices increased.
?California must allow supply to catch up with demand,? Kean said. It generally takes five to seven years to build new generation facilities in California. Enron and other companies have done it as quickly as 10 months in other states.? He called for a streamlining of the process in California. ?California must enable demand to respond when supplies are tight. In a true competitive market, buyers and sellers are free to set mutually beneficial terms.? Kean said that less than 1% of power users in California are served by a competing energy supplier.
In addition to encouraging suppliers to offer energy efficient equipment, Kean called for a change in the demand picture, specifically, the establishment of real time price signals to encourage conservation or demand shifting to off peak periods.
?Demand reductions at key times drive market prices down for everyone. To get a demand response, however, customers must see price signals from the marketplace. In the long run, prices must be allowed to reflect the market. In the near term, such prices would have to be introduced gradually and combined with purchased demand reductions. Paying for demand reductions makes sense.?
Kean said that if utility companies or the California government has no objection to paying $500 for a megawatt, ?they ought to be willing to pay the same for a ?negawatt.? He added that while new capacity cannot be added in time to cope with upcoming summer peaks, demand reductions could be purchased with a minimum of disruption.
The Enron executive noted that California is beginning to respond positively to the crisis by reducing reliance on the spot market in favour of long term contracts. With forward prices lower than spot prices, longer term contracts will produce average lower prices for utilities, reducing their costs.
?However, these markets are shallow and skittish today. Price caps and active government intervention in California's power markets combined with financial uncertainty about the utilities' ability to pay has built large risk premiums into bids in those markets.? Kean said. ?If California entered into forward contracts after an active programme to site new transmission and generation, forward prices would be lower and more bidders would bid in greater supplies.?
California will have difficulty attracting additional capacity unless the state works with utilities. ?The sobering fact is this: unless the state is willing to cut off significant load, it has only two choices ? it can buy the power the state needs in the short term, or it can let the utilities in the state become insolvent. The state appears to be on the right track with recently introduced legislation designed to ensure collection of past due amounts and provide support for future purchases.
Kean added that there are other proposals to address the California power crisis that wouldn't work.
?Price caps are bad for consumers, the economy and the environment. Price caps in the West have not worked and will not work. Price caps have led to the cancellation of peaking power projects which could have brought additional supply to California in the near term. Price caps have succeeded only in disrupting and bifurcating the market for power, sending the states' institutions into the real time market to buy the power needed beyond the amounts purchased at or below the caps. Price caps merely export California's problems to neighbouring states, discourage investors from developing needed supply resources, disrupt the markets, and force a last minute scramble for power which endangers reliability.?
State control also is not a solution, as the state cannot do a better job than the private sector in constructing and operating utilities. ?Competition in the generation sector has produced faster construction, more efficient facilities and has placed the risk of those facilities on investors ? not taxpayers or consumers. Government resources would be best focused on streamlining siting and interconnection rather than building and operating facilities with taxpayer funds.?
Enron has recently beat Wall Street estimates handily. For the fourth quarter, earnings more than tripled in the company's wholesale business to $347 million, compared with $259 million for the comparable 1999 period. For the year, Enron delivered an 89 percent return to shareholders. Enron's fourth quarter earnings were not surprising as the company had developed a head of steam, with earnings for that period up an impressive 31 percent to $292 million.
For 2001, Enron officials expect another blockbuster year, with Enron's further strengthening of its long-standing lead in the North American wholesale energy market, significant expansion of its European wholesale energy business, and extension of Enron's business model into new, large markets. Further, the company expects significant growth prospects in Enron's retail energy business, including increases in expected total contracting from record 2000 levels of $16.1 billion to an estimated $30 billion in 2001. Increases are predicted from Enron's other business units including broadband and interstate pipelines.
Enron's risk management and market making expertise has been channelled into several deals in the data storage commodity market. Enron entered into an agreement with StorageNetworks, Inc, in which storage capacity will be connected to Enron's pooling points and provisioned to a number of producers and consumers, creating the physical capability to deliver data storage capacity. Pooling points, such as the ones Enron already has in some 20 cities, will provide an interconnection and switching platform for enabling and monitoring bandwidth and storage transactions between buyers and sellers. In a separate arrangement, Best Buy Co, a retailer of consumer electronics, PCs and appliances, has agreed to purchase storage capacity from Enron to support a customer relationship management application, reducing the costs associated with acquiring and managing its own data storage. The Best Buy transaction leverages software technology and management services provided by StorageNetworks. Best Buy is the first user to acquire data storage capacity through a market-based model.
The arrangement establishes a global market for buying and selling telecommunications capacity more efficiently and flexibly. Buyers of bandwidth can purchase only what they need. Similarly, Enron has developed a niche in the rapidly growing data storage business to create a market where storage capacity can be bought and sold as needed, on demand, with reliable physical delivery.
Enron introduced the concept of trading bandwidth capacity in May 1999. Since that time, the market for bandwidth has accelerated, with many participants buying and selling bandwidth as a commodity on flexible, market-based terms. Benefits include greater price transparency, shorter provisioning times, and firm delivery of bandwidth. Enron is also creating a market for bandwidth that will allow network providers to serve a market marked by increasingly complex applications.
Enron Broadband Services and home video retailer Blockbuster have begun delivering movies via the Blockbuster Entertainment On-Demand service over Enron's broadband network in three cities in the US northwest and mid-west. The new service provides entertainment on-demand service.
The initial broadband distribution companies providing ?last mile? high-speed connectivity to consumers' homes are ReFlex Communications (Seattle and Portland) and SwitchPoint Networks (Salt Lake City). In addition, Blockbuster, Enron and Verizon are currently conducting technical trials in New York City. Aside from previously announced distribution providers, Blockbuster and Enron have signed an agreement with FiberRide to deliver the entertainment service in select California markets in the future. Enron is delivering Blockbuster entertainment over its global broadband network, providing bandwidth on demand, managing content and storage, and providing an unparalleled quality of service. Consumers are able to start, stop, pause, rewind and view movies on demand with television quality.
As a power producer in California, Enron is dwarfed by a number of other companies. However, the company is active as a trader in the state's wholesale market. The company has not released information on how much money it made from its California power trading either for the fourth quarter or for the full year. What is certain, however, is that for the third quarter, Enron's power trading volumes for the western US grew about 73 percent over the same period in 1999 whilst the business in the eastern US grew only about 24 percent.
However, Enron North America announced in late December that it has received unanimous approval from the California Energy Commission (CEC) for its 750MW Pastoria Energy Facility (PEF). The approval represents Enron's second permit in 2000 for a California-based power plant. Enron North America's first project in California, the 508MW Pittsburg District Energy Facility, received CEC approval on August 17, 1999, and was subsequently purchased and is being built by Calpine. That project, which was renamed the Los Medanos Energy Center, is expected to be operational next year. Enron officials note that the company is committed to the California market, with more than 2,000MWs of additional new projects under development in California.
Wall Street is a big believer in Enron. Salomon Smith Barney led a late January private placement. The 20-year convertible issue of $1.25 billion in convertible bonds represented the largest convertible issue of the year. The zero-coupon bonds will partially refinance existing debt and perhaps buy back common stock. The issue included a green shoe option for $250 million. For Enron, convertibles may be a good move. In a highly volatile market, convertibles often outperform both the equity and the bond markets because of limited downside potential.
Testifying on January 31 before the US Senate Committee on Energy and Natural Resources, Steven J Kean, executive vice-president of Enron, said, ?Contrary to what you may hear or read, our success is linked to efficient markets, not higher prices in California ? or anywhere else for that matter.?
Kean added, ?Our financial success is not built on California's back. A unit of Enron has announced that it will cease supplying power to its industrial and commercial customers in California, opting to turn the customers over to Pacific Gas and Electric Co, a unit of PG&E Corp, and Southern California Edison, a unit of Edison International. Those two companies are facing almost certain bankruptcy caused by a huge burden of debt built up buying electricity in the state's unstable energy market.
Uncertainty over how California will solve its worst-ever energy crisis, soaring wholesale power prices, the financial mess facing the state's utilities and the winding down of business at the state-sanctioned California Power Exchange are all factors behind the move by Enron Energy Services (EES).
Kean said the company's success in California grew ?in part because we migrated our market making activity to an online platform and because there is increased demand for risk management in many markets.? Kean said market participants are beginning to see the value of hedging against commodity price risk. The numbers bear that out. The company does engage in other operations, such as building power plants and operating gas pipelines, but 90% of its revenues come from wholesale trading. Enron is a risk management expert.
Kean noted that the California crisis is easily explained, with economic growth spurring increased power demand coupled with failure to add additional capacity. ?The state put excessive reliance on a state-created spot market, which meant that utility buyers were exposed to price fluctuations across their entire portfolio. The state did not deregulate. That is, the state did not enable new entry into the generation business and did not in fact give customers choices.?
Kean said that a combination of these factors put utilities between a volatile spot market and regulated customer rates, leading initially to rapid recoveries for utilities ? when the wholesale markets were low ? and into the current situation of impending bankruptcy as wholesale prices increased.
?California must allow supply to catch up with demand,? Kean said. It generally takes five to seven years to build new generation facilities in California. Enron and other companies have done it as quickly as 10 months in other states.? He called for a streamlining of the process in California. ?California must enable demand to respond when supplies are tight. In a true competitive market, buyers and sellers are free to set mutually beneficial terms.? Kean said that less than 1% of power users in California are served by a competing energy supplier.
In addition to encouraging suppliers to offer energy efficient equipment, Kean called for a change in the demand picture, specifically, the establishment of real time price signals to encourage conservation or demand shifting to off peak periods.
?Demand reductions at key times drive market prices down for everyone. To get a demand response, however, customers must see price signals from the marketplace. In the long run, prices must be allowed to reflect the market. In the near term, such prices would have to be introduced gradually and combined with purchased demand reductions. Paying for demand reductions makes sense.?
Kean said that if utility companies or the California government has no objection to paying $500 for a megawatt, ?they ought to be willing to pay the same for a ?negawatt.? He added that while new capacity cannot be added in time to cope with upcoming summer peaks, demand reductions could be purchased with a minimum of disruption.
The Enron executive noted that California is beginning to respond positively to the crisis by reducing reliance on the spot market in favour of long term contracts. With forward prices lower than spot prices, longer term contracts will produce average lower prices for utilities, reducing their costs.
?However, these markets are shallow and skittish today. Price caps and active government intervention in California's power markets combined with financial uncertainty about the utilities' ability to pay has built large risk premiums into bids in those markets.? Kean said. ?If California entered into forward contracts after an active programme to site new transmission and generation, forward prices would be lower and more bidders would bid in greater supplies.?
California will have difficulty attracting additional capacity unless the state works with utilities. ?The sobering fact is this: unless the state is willing to cut off significant load, it has only two choices ? it can buy the power the state needs in the short term, or it can let the utilities in the state become insolvent. The state appears to be on the right track with recently introduced legislation designed to ensure collection of past due amounts and provide support for future purchases.
Kean added that there are other proposals to address the California power crisis that wouldn't work.
?Price caps are bad for consumers, the economy and the environment. Price caps in the West have not worked and will not work. Price caps have led to the cancellation of peaking power projects which could have brought additional supply to California in the near term. Price caps have succeeded only in disrupting and bifurcating the market for power, sending the states' institutions into the real time market to buy the power needed beyond the amounts purchased at or below the caps. Price caps merely export California's problems to neighbouring states, discourage investors from developing needed supply resources, disrupt the markets, and force a last minute scramble for power which endangers reliability.?
State control also is not a solution, as the state cannot do a better job than the private sector in constructing and operating utilities. ?Competition in the generation sector has produced faster construction, more efficient facilities and has placed the risk of those facilities on investors ? not taxpayers or consumers. Government resources would be best focused on streamlining siting and interconnection rather than building and operating facilities with taxpayer funds.?
Enron has recently beat Wall Street estimates handily. For the fourth quarter, earnings more than tripled in the company's wholesale business to $347 million, compared with $259 million for the comparable 1999 period. For the year, Enron delivered an 89 percent return to shareholders. Enron's fourth quarter earnings were not surprising as the company had developed a head of steam, with earnings for that period up an impressive 31 percent to $292 million.
For 2001, Enron officials expect another blockbuster year, with Enron's further strengthening of its long-standing lead in the North American wholesale energy market, significant expansion of its European wholesale energy business, and extension of Enron's business model into new, large markets. Further, the company expects significant growth prospects in Enron's retail energy business, including increases in expected total contracting from record 2000 levels of $16.1 billion to an estimated $30 billion in 2001. Increases are predicted from Enron's other business units including broadband and interstate pipelines.
Enron's risk management and market making expertise has been channelled into several deals in the data storage commodity market. Enron entered into an agreement with StorageNetworks, Inc, in which storage capacity will be connected to Enron's pooling points and provisioned to a number of producers and consumers, creating the physical capability to deliver data storage capacity. Pooling points, such as the ones Enron already has in some 20 cities, will provide an interconnection and switching platform for enabling and monitoring bandwidth and storage transactions between buyers and sellers. In a separate arrangement, Best Buy Co, a retailer of consumer electronics, PCs and appliances, has agreed to purchase storage capacity from Enron to support a customer relationship management application, reducing the costs associated with acquiring and managing its own data storage. The Best Buy transaction leverages software technology and management services provided by StorageNetworks. Best Buy is the first user to acquire data storage capacity through a market-based model.
The arrangement establishes a global market for buying and selling telecommunications capacity more efficiently and flexibly. Buyers of bandwidth can purchase only what they need. Similarly, Enron has developed a niche in the rapidly growing data storage business to create a market where storage capacity can be bought and sold as needed, on demand, with reliable physical delivery.
Enron introduced the concept of trading bandwidth capacity in May 1999. Since that time, the market for bandwidth has accelerated, with many participants buying and selling bandwidth as a commodity on flexible, market-based terms. Benefits include greater price transparency, shorter provisioning times, and firm delivery of bandwidth. Enron is also creating a market for bandwidth that will allow network providers to serve a market marked by increasingly complex applications.
Enron Broadband Services and home video retailer Blockbuster have begun delivering movies via the Blockbuster Entertainment On-Demand service over Enron's broadband network in three cities in the US northwest and mid-west. The new service provides entertainment on-demand service.
The initial broadband distribution companies providing ?last mile? high-speed connectivity to consumers' homes are ReFlex Communications (Seattle and Portland) and SwitchPoint Networks (Salt Lake City). In addition, Blockbuster, Enron and Verizon are currently conducting technical trials in New York City. Aside from previously announced distribution providers, Blockbuster and Enron have signed an agreement with FiberRide to deliver the entertainment service in select California markets in the future. Enron is delivering Blockbuster entertainment over its global broadband network, providing bandwidth on demand, managing content and storage, and providing an unparalleled quality of service. Consumers are able to start, stop, pause, rewind and view movies on demand with television quality.
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