Ever since word hit the street last July that Portland General Electric Co. (PGE) would merge with gas industry giant Enron, the news has been rather one-sided. It's been "Enron this" and "Enron that." From reading the papers one might think Enron, with its strong reputation as a commodities trader, was buying an entire electric utility simply to take a bigger position on the NYMEX futures market. Going "long" on electricity, you might say.
So it came as no surprise the other day when I picked up the first-ever issue of Portland General's brand-new company newsletter (Energy Access, Vol. 1 No. 1, Nov/Dec 1996), and discovered that PGE had devoted its cover story entirely to commodities trading. PGE had even thrown in a attractive photo of a trading floor, showing a roomful of traders surrounded by a battery of telephones and computer screens.
Being a skeptical sort, I questioned who was behind the story. Heck, I figured the photo was faked, that Enron was already taking over to manipulate public relations. I suspected that the photo actually showed Enron's trading floor, filled with Enron employees.
So I picked up the phone and called Elaine Donaldson, public relations director at Portland General. She told me that Portland General indeed managed its own trading floor, and in fact was the first electric utility in the nation to do so. She also directed me to Paul Koehler, PGE's manager of wholesale markets, who proved kind enough to stay a few more minutes in the office at the trading floor on a December evening to talk about commodities trading at PGE, when he probably needed to be out finishing up his holiday shopping.
"Yes, Enron has expertise in commodities trading, but that's not the reason we're merging," said Koehler. "Frankly, we're just combining two very innovative companies.
"We designed our trading floor back in 1994, and opened it in February 1995, I think. A lot of it (the idea for a trading floor) was driven by the Trojan nuclear plant closure in January 1993.
"It had quickly become apparent to us that we were sitting on a pile of commodity risk," says Koehler, talking about the Trojan plant. "[So] we visited Enron. We visited Electric Clearinghouse. We asked them how they managed their commodity risk." As things turned out, Portland General ended up being "pretty instrumental," as Koehler claims, in convincing NYMEX to design its futures contract to trade at the California-Oregon Border (COB).
Was it proximity to the NYMEX COB contract that drew Enron to PGE? Koehler didn't say, but he noted that the NYMEX contract opening "has had a huge effect on the business."
In the end, as Koehler explains, Portland General shifted strategy and moved away from "hard" assets: "We didn't replace it with [Trojan] generators. We decided to purchase off the market. We traded a resource asset position for a market position."
Maybe it was Portland General, making itself attractive, just as much as it was Enron, looking for a match.
* * *
Suppose you are an industrial customer and are happy with your electric rates, because you threatened the local electric utility with bypass or self generation, and then negotiated a long-term contract for discounted rates.
But suppose Congress comes through, passes legislation for customer choice, and rates then drop across the board (em even lower than in your prized long-term contract, which you signed when rates were still "regulated" to serve the public interest. Can you choose then to back out of your ill-advised contract?
Clearly, others have started thinking about this prospect, as shown by a couple of recent news items:
• A "Shut-up" Clause. A news release from International Paper Co. (IP), criticizing Entergy for restricting IP's right to intervene in future rate cases to challenge rates, since Entergy had already signed rate contracts with IP, and
• "Fresh Look" Rights. A decision from the Ohio Public Utilities Commission (PUC), guaranteeing that certain business customers who had signed contracts for discounted local telephone services (such as Centrex) would be allowed an open season (em a so-called "fresh look" (em to escape their contracts if it should turn out that local exchange rates fall even lower after the current deregulation imposed by the Telecommunications Act of 1996 and recent initiatives from the Federal Communications Commission (FCC) and the Ohio PUC.
IP's complaint asked the Arkansas Public Service Commission to void Entergy's attempt to require a "shut-up" clause from IP (forbidding intervention in rate proceedings) as a condition for extending current power supply contracts with IP's Pine Bluff and Camden mills. International Paper alleged that Entergy's "shut-up" clause violates public policy, and asked the Arkansas PSC to direct Entergy to resume "good-faith" negotiations on a new contract.
Meanwhile, the Ohio PUC has already taken action. In Case No. 95-845-TP-COI, In the Matter of the Commission Investigation Relative to the Establishment of Local Exchange Competition and Other Competitive Issues, decided November 7, the commission formerly approved a 180-day "fresh look" window of opportunity allowing telephone customers to review rates set under old contracts, and decide whether to choose to abandon the contracts and seek instead to obtain service from other service providers now deemed competitive. This "fresh-look" right would apply on a market-by-market basis (not according to territory) and would extend to those local telephone customers who have at least two years remaining on their
contracts, and whose contracts pertained to formerly regulated monopoly-type services that would be deregulated by new PUC policy.
Well, as you can imagine, this new ruling did not sit well with established carriers, such as ALLTEL, GTE, and Cincinnati Bell.
Those three companies had challenged the PUC, alleging that its fresh look rule was unconstitutional. No surprises there, of course. But the eye-opener came when the Ohio PUC took up the fight willingly and actually went so far as to declare that it could to review prior contracts between utility and customer and to declare them invalid. It justified that power as necessary to protect customers, and as granted by the state constitution as a "recognized exception" to the principle of sanctity of contracts, and ratified by the state supreme court, writing in the 1948 decision of City of Akron v. Ohio PUC, when it advised:
[F]reedom of contract and private dealings may be restricted by law for the good of the community. ... [A]ll contracts the subject matter of which involves the public welfare will have read into them ... as if expressed in clear, and definite terms, all public regulation then existing or thereafter to be enacted ...
If utilities succeed in winning recovery for losses in stranded assets, will we see the well-heeled corporate customers step up to the trough for relief from their stranded contracts?
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