Major energy players, such as Enron, PG&E Corp. and EdisonInternational, are butting heads increasingly overmulti-million-dollar assets and future market leverage out West ina series of “electricity range wars” sparked by the advent of morecompetition.

In the Northwest, PG&E is challenging plans by Enron’sPortland General Electric Corp. to move its hydroelectric plantsfrom the utility to an unregulated affiliate in the Enron corporatefamily rather than holding an open-market auction. However, in itsown backyard, PG&E’s utility is quietly beginning a processwith state regulators that could result in its sizable ($1.5billion book value) hydropower network being transferred to itsunregulated affiliate, U.S. Generating Co., while other parties,which presumably will include Enron, are arguing for the plants tobe competitively sold if they are divested out of the utility.

In a nutshell, the concern among some market players is that thehydro plants in the control of less closely regulated affiliateswill give Enron and PG&E undue market power in western powermarkets, particularly since hydroelectricity is such a major partof the burgeoning competitive ancillary services.

More recently in California, Edison and Enron opposed oneanother on a proposal that surfaced at year-end 1998 in the City ofLong Beach to extend its municipal gas and water operations intoelectricity, ultimately turning to an Enron-backed third party tomake the transfer work.

Consumer advocacy groups and other observers are questioningwhether the ultimate end-use customers are having their needsadequately protected by these latest schemes. Conceivably, thefurther these operations are removed from state regulation, thegreater chance there is for substantially increased profit in thenewly acquired operations.

FERC, which still must regulate many of these entities, such asmost private sector hydroelectric plants, is keeping a wary eye onthe developments that should unfold more fully in the first half of1999.

The Edison-Long Beach brouhaha is the latest and most complexcase. As an offshoot of pending franchise renegotiations withEdison, the port city of Long Beach is pursuing amulti-million-dollar deal, involving Enron Capital & TradeResources Corp., in which the city would eventually own the Edisonelectrical system. Edison’s assessment is that its currentfranchise is still viable and under current formulas will result ina multi-million-dollar “windfall” to the city coffers. They areadamant about keeping Long Beach’s 190,000 electricity customersand the approximately $250 million of annual revenue they provide.

“We want to negotiate a good franchise with the city,” saidEdison’s Bob Foster, senior vice president. “We will try to protectour property from being taken unjustly, and we will try to makesure the customers we have served for 100 years have excellentservice.”

The Long Beach City Council put the municipalization proposal inplay Dec. 22 in authorizing its city manager to commence franchiserenegotiations with Edison, including the added request that aletter of intent be developed by early February with Long BeachPower Co., a partnership between Enron and a street lightingprovider, Long Beach Light and Power, to operate and maintain amunicipal power distribution system.

“Whichever option is settled upon, the city stands to earnmillions of new dollars annually that can be applied to its budgetas the city council directs, including increasing services orreducing taxes, such as the utility users tax,” said Chris Garner,general manager of the Long Beach Gas and Electric Department,noting that the city is still actively pursuing the possibility ofnegotiating with Edison to take over its entire distributionsystem-as opposed to municipal condemnation. Long Beach has theonly franchise in Edison’s territory whereby the city canunilaterally declare it wants to explore ownership of theinvestor-owned utility’s system within the city and a pre-approvedprocess is established for a five-member independent board ofappraisers to give the city a dollar valuation of the assets.

Earlier in 1998, Edison completed the sale of two power plantsin Long Beach, so acquisition of the distribution system by thecity would effectively sever all of Edison’s ties to this part ofits traditional service territory.

According to Garner, Long Beach’s move has been prompted byCalifornia’s electricity restructuring and a provision in itscurrent 60-year franchise which is nearing its 30-year mid-point in2001. Current provisions call for the city’s take from thefranchise changing from a straight percentage (1.4% of Edison’srevenues in Long Beach) to what Garner calls a “real complexformula we would like to avoid.” The formula would give Edisoncredit for the property taxes it paid on its largest of two LongBeach power plants, the 2,000 MW Alamitos facility, which is nowowned by AES Corp. A combination of NRG and Dynegy owns the otherformer Edison plant (550 MW Long Beach plant).

This ambiguity in the future franchise formula provides theincentive for the city to forge a more favorable fee arrangementwith Edison, according to Garner. (Foster contends the city can dothis via the provisions of the existing franchise.)

Foster said that Edison does not dispute the city’s right toexplore better options for its residents, but that it should notbind the local municipality to a deal with Enron and its partnerwithout competitive bidding.

“I’ve never seen a contract like this [proposed letter ofintent],” Foster said. “It has so many conflicts of interest. I amflabbergasted that someone would bring this deal to a governmentbody in this form where a key party [Enron] with an economicinterest in the outcome is in the front-end of the negotiations ofthe new franchise agreement.”

The city traditionally has collected millions of dollars inannual franchise fees from both Edison and Southern California GasCo. because of cumulative electric sales in the city and thelocation of four major gas-fired electric generating plants withinthe city boundaries, for which SoCalGas pays franchise fees on thelarge gas volumes it transports to the power plants from its nearbytransmission pipelines outside of the city.

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