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® XII Repsol YPFHarvard Seminar Palma, Majorca-Spain July 7, 2001 Dr. Kenneth L. Lay Chairman Progress and Challenges for Electricity Liberalization
© 2001 UB-Repsol-v2-0601-2 Lessons from the California electricity crisis Progress of gas and electricity liberalization in the U.S. andEurope Challenges to complete the liberalization process Agenda
© 2001 UB-Repsol-v2-0601-3 Enron A Neutrally Positioned Market Maker Cash Markets Forward Markets Futures Markets Transactions Logistics Settlement eCommerce Platforms Risk Management Process Capital Market Making Capabilities Operating Capabilities Other Capabilities Define Product Standards and Contracts Obtain Access to Physical Product Develop Physical Distribution Market Making Establishes Liquidity Risk Management Innovative Structured Products
© 2001 UB-Repsol-v2-0601-4 California Wholesale Electricity Prices vs. Enron Stock Price $4,175
© 2001 UB-Repsol-v2-0601-5 California Wholesale Electricity Prices vs. Enron Stock Price $4,175
© 2001 UB-Repsol-v2-0601-6 Politically compromised industry restructuring (not deregulation) Unfavorable change in supply and demand fundamentals (the perfect storm) Politicized responses to distorted marketspiraling problems and badwill What Happened in California?
© 2001 UB-Repsol-v2-0601-7 Summary of the California Problem u Very little new capacity added u Tight emissions limits u Increasing dependence on imports u Old, inefficient (polluting) facilities subject to breakdown – emissions costs – gas costs u Lower hydro capacity availability u Reduced imports into California u Flat to lower supply u Increased demand u Shortages Blackouts u Skyrocketing wholesale prices u Powerful NIMBY/BANANA sentiment u Rapid economic growth throughout Western U.S. u Highly compromised, negotiated legislation u Retail Rate Caps (no demand response) u Stranded cost recovery mechanism inhibiting switching (utilities continue to serve most load) u State constructed spot market; no hedging u Deregulated wholesale prices u Bankruptcy u Utilities totally exposed to spot prices
© 2001 UB-Repsol-v2-0601-8 NIMBY S/D Shift Wholesale Price Spikes Wholesale Price Spikes Retail Price Caps Shortages Bankruptcies Conflict Lost Confidence Government Intervention Shortages Bankruptcies Spot Dependence Jawboning Populist Threats New Intervention
© 2001 UB-Repsol-v2-0601-9 Lessons Learned Liberalization did not cause Californias problems –Regulatory barriers to infrastructure, hedging, competition, and equilibration exacerbated by unfavorable supply and demand shifts Full liberalization is the answer for California –Real choices, opportunities to manage risk –Eased entry for new generation –Real market prices to end users (phase in) –Remove utilities (and state regulators) from procurement What doesnt work –Heated political rhetoric (actually increases costs in California) –Price caps (discourages production and forces political rationing) –Nationalization
© 2001 UB-Repsol-v2-0601-10 NIMBY and the Environment Postponed modernization of gas plants creates more pollution from ? Higher utilization of older, less efficient plants ? Emergency new generation such as diesel units Price spikes/shortages have resulted in air permit exceptions Imports of emergency power to California have exported environmental stress to the Southwest and Northwest
© 2001 UB-Repsol-v2-0601-11 Californias Aging Gas-Fired Powerplants Source: 1999 EEI Statistical Yearbook, Table 26 U.S. AverageLACaliforniaNYTX 10,360 14,425 10,506 10,264 9,751 9,883 FL 40% (BTUs per KWH) Gas Usage Premium = Emission Premium
© 2001 UB-Repsol-v2-0601-12 Emissions Comparison California Power Generation (pounds/MWh) Source: Energy and Environmental Analysis, Inc. Old Oil Boiler Old Gas Boiler New Gas CC 0.6 0.08 NO X 2.9 -85% -80% 2.9 -99% -60% 0.0040.01 SO 2 Old Oil Boiler Old Gas Boiler New Gas CC
© 2001 UB-Repsol-v2-0601-13 Emissions Comparison California Power Generation (cont.) (pounds/MWh) Source: Energy and Environmental Analysis, Inc. Old Oil Boiler Old Gas Boiler New Gas CC 0.1 0.04 PM 10 0.4 -60% -75% 1,644 -32% -26% 819 1,112 CO 2 Old Oil Boiler Old Gas Boiler New Gas CC
© 2001 UB-Repsol-v2-0601-14 If I wanted to raise rates, I could have solved this problem in 20 minutes. California Governor Gray Davis March 2001 The Golden What f?
© 2001 UB-Repsol-v2-0601-15 Supply is increasing Demand is moderating Gas and power prices are falling Californias Outlook is Improving Will a new message emanate from California?
© 2001 UB-Repsol-v2-0601-16 Market forces are smarter at allocating resources Open markets reduce prices and improve quality, other things the same Consumers like choice Why Liberalization?
© 2001 UB-Repsol-v2-0601-17
© 2001 UB-Repsol-v2-0601-18 Power Liberalization in the United States Most States are still moving ahead Markets representing 4% of population and 5% of total load have elected to delay market opening –Nevada and Oklahoma delayed indefinitely –Arkansas, West Virginia and Montana postponed Restructuring Legislation Enacted Comprehensive Regulatory Order Issued A Commission and/or Legislative Investigation is Ongoing No Significant Activity Status Current as of 06/01 Alask a * Legislation and Regulatory Order have both been issued. * * DE * AK HI 57% of this $220B market is expected to be deregulated by 2004
© 2001 UB-Repsol-v2-0601-19 Natural Gas Liberalization in the United States For Residential and Commercial Customers States with legislation passed or comprehensive PUC order issued for all customers; however, the quality of access may vary States with access for some commercial customers States considering reform No significant activity Source - Government Affairs as of 06/00 Note: Industrial open nationwide Alaska Hawaii
© 2001 UB-Repsol-v2-0601-20 Progress of gas and electricity liberalization in Europe
© 2001 UB-Repsol-v2-0601-21 Natural Gas Liberalization Summary EU Directive Not Yet Effective Very Limited Competition in Practice Some Competition – On The Way To Full Liberalization Fully Liberalized
© 2001 UB-Repsol-v2-0601-22 Pace of Natural Gas Liberalization Portugal GreeceFinland Sweden Luxembourg FranceDenmark Italy Netherlands Austria Belgium Spain Ireland Germany UK 0%20%40%60%80%100% Market Opening Market "Openness" Ireland
© 2001 UB-Repsol-v2-0601-23 Electricity Liberalization Summary Very Limited Competition in Practice Some Competition – On The Way To Full Liberalization Fully Liberalized EU Directive Not Yet Effective
© 2001 UB-Repsol-v2-0601-24 Pace of Electricity Liberalization Portugal Greece Finland Sweden Luxembourg France Denmark Italy Netherlands Austria Belgium Spain Ireland Germany UK 0%20% 40%60%80%100% Market Opening Market "Openness" Switzerland Norway
© 2001 UB-Repsol-v2-0601-25 Positive EU Liberalization Developments Faster-than-expected change in some countries Maturing trading market Role of EFET Florence and Madrid processes Number of countries adopting independent regulators Proposed energy directive (acceleration directive)
© 2001 UB-Repsol-v2-0601-26 Challenges to complete the liberalization process in Europe
© 2001 UB-Repsol-v2-0601-27 Cross-border access problem for gas and electricity Lack of attention to wholesale markets Resistance to the proposed energy directive NTPA and unbundling problems EU Liberalization Issues
© 2001 UB-Repsol-v2-0601-28 Concentration from integration/mergers Upstream/importer concentration in gas Inadequate policies from European Commission Gas-oil price link on the continent EU Liberalization Issues (cont…)
© 2001 UB-Repsol-v2-0601-29 Competition Works! Since May 1999 all domestic electricity customers in Great Britain have been able to choose which companies supplies their electricity.... The 6.5 million customers who had changed their electricity supplier by June 2000 have seen their bills fall by £299 million [15 per cent real].... The 19 million customers who have not switched suppliers could save up to £674 million, or 13% per cent of their annual bills were they to switch. - UK Office of Gas and Electricity Markets, Giving Domestic Customers a Choice of Electricity Supplier (January 2001)
© 2001 UB-Repsol-v2-0601-30 Market signals intelligently drive production and consumption in open markets Reserve development, LNG expansion, and financial hedges can meet growing customer requirements Beware of half slave-half free approaches--the EU does not want to have a California Security of Supply A sophisticated market can manage supply security under liberalization
© 2001 UB-Repsol-v2-0601-31 Bad California Dreaming: Warnings for Europe? Let the market work –Reveal supply/demand imbalances rapidly –Connect the functions of the wholesale and retail markets Avoid political/regulatory favors to privileged market parties Safeguard efficient functioning of the gas market
© 2001 UB-Repsol-v2-0601-32 Governments and Civil Society All Have a Role in Market Liberalization Affordability Technological Progress Reliability Environmental and Social Sustainability
A 2030 framework for climate and energy policies Marten Westrup
Energy in Todays Economy: Challenges and Opportunities Dr. Kenneth L. Lay Chairman, Enron Corp. Economy Roundtable Austin, Texas January 3, 2001 For further.
© 2000 JN Natural Gas Outlook & Issues AB 1890 Implementation Group Annual Meeting November 14, 2000 ®
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Electricity and Natural Gas Supply, Reserves, and Resource Adequacy CMTA Energy Conference Energy: Growing Californias Economy William J. Keese California.
1 April 2006 Collaborative Labeling and Appliance Standards Program (CLASP) The Rationale for Energy Efficiency Standards and Labels.
A © 2001 Arthur Andersen. All rights reserved. The Accountants Role in the New Economy Robert A. Johnson February 5, 2001.
1 Doingbusiness in 2006 Creating Jobs Simeon Djankov Manager, Doing Business Project, World Bank September 15, 2005 Belgrade.
DG Energy and Transport, European Commission Fabrizio Barbaso 16/04/2008 EU ENERGY SECURITY STRATEGIES ARF Energy Security Seminar EUROPEAN COMMISSION.
European Parliament February rd energy package Customers point of view Effects of the Package on Consumers prof. Krzysztof Żmijewski Warsaw University.
– The appropriate route to increased competition? – Ownership Unbundling Brussels, February Results of an A.T. Kearney study.
Press Conference by EU Commissioners Viviane Reding and Meglena Kuneva.
1 EU ETS: Relative importance of the different factors affecting the competitiveness of the energy intensive industries Wyn Jones OBE High Level Group.
The South East Europe Natural Gas Market FABIO TAMBONE & SERGIO ASCARI (Autorità per lenergia elettrica e il gas)
Report on the State of the single market integration 2013 Meeting of the Committee on the Internal Market and Consumer Protection, European Parliament.
1 7 th Progress Report: The regional and urban dimension of Europe 2020 Lewis Dijkstra Deputy Head of the Analysis Unit DG for Regional Policy European.
1 European Commission DG TREN / C: Conventional Energy The Regional Electricity Market in South East Europe: Mechanisms and Aims in Unified.
World Bank Framework for Energy Trade in South East Europe David Kennedy World Bank.
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