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Jeffrey Skilling
Chief Executive Officer, Enron Corporation
Answers to Written Questions from the Floor:
Q: Could you please respond to the Federal Regulatory Commission's price controls, and the discussion of settlements for overcharging?
A: Any economics professor will tell you that price caps just don't work. They exacerbate the problem. There might have been a political need to do it - I think price caps have been set so that they probably won't interfere with the operation of the market during most hours of the day. If it was for political expediency I think it probably will damage the equilibrium in the markets. But it's probably designed about as well as it could be to keep from damaging those markets too much.
Q: Do you expect to collect the full amount that you think Enron is owed by California and its utilities?
A: Yes. We are not a generator of power. We have about 20 or 30 megawatts of power in California - actually that's wind capacity. But we own no thermal plants in California - basically no thermal plants in the Western U.S. We pay people for power that we purchase, then we put it in our pool and turn around, carve it up, and resell it back to people that need that power. We've incurred full cost in purchasing that power; we expect to be paid the full amount that we have in contracts with our customers. We make a very small margin. The typical cost of natural gas, which is a pretty pure form of energy, is probably $4 per million BTUs. We make on average about 12 cents per million BTUs for a product that we purchase and resell. So if we're not paid the full amount that we're owed, that hurts our shareholders and our employees - we've already paid the suppliers, we've actually met our contractual agreement and paid suppliers of power.
Q: Given that electricity, like water, is essential to life in the U.S., why should companies like Enron be able to make such large profits from it?
A: Our growth rate in overall profitability over the last year and a half is lower than it's been over the last fifteen years. As to the issue of an important basic service, I think that's the argument for using markets. The wheat market is very efficient. The power markets, once they are allowed to operate, will guarantee that people will be allowed to get the lowest price product in the quantities they want with the service levels they want attached to it.
To put this in perspective, go back to the mid-90s and look at voided costs - what their wholesale power prices would have been if they had to either build a facility themselves or buy the long-term power. Those prices in 1994, inflation adjusted, were about $80 per megawatt hour. Even the most expensive contracts - rolled-in contracts the DWR is purchasing right now - are running probably in the mid- $70s. So even over the last decade, we've seen a decline even to this number.
It's up higher than two or three years ago, absolutely. But over a long period of time prices have gone down because the market has gotten more competitive. Even if we'd had competitive markets in California, for the last five years, the prices would have been significantly lower. If the utilities were allowed to hedge, or term up those contracts, starting in 1999, when AB 1890 went into effect, average term prices for power at that time were about $28. If they were like every other utility, every other market structure in the country, 90 percent of their power would have been purchased on the order of $25-30 per megawatt hour. There would have been significant declines for the consumers in California had the markets been allowed to operate.
Q: In 1999 California paid 7 billion dollars for electricity. Last year the state paid 27 billion dollars. This year the state's on track to pay 50 or 60 billion dollars - an eightfold increase in just three years. Given that California has reduced its electricity usage by 9 percent in the past few months, isn't Governor Davis right to claim that the state is being gouged for electricity?
A: If the markets had been allowed to operate this never would have happened. The tragedy of history is that you can only see what was, you can't see what could have been. If we had done it right, and this marketplace looked like every other marketplace in the country, 90 percent of the purchases of power in this state would have been in the $25-30 per megawatt hour. We would have had increases as supply and demand were stretched this last year, because demand was high. Prices would have spiked up, demand would have come down and new facilities would have been built. The average embedded price to the State of California would probably have been well under $40 a megawatt hour.
Q: You've been blaming the regulators in California for most of the problem, yet the major utilities - PG&E and SoCal Edison - helped write the legislation. What role did Enron play in the legislative process?
A: When the CPUC was looking at alternatives for structuring the marketplace, two models were being proposed. One was the POOLCO model, which California basically put into effect. The other was called a bilateral market. There was a huge intellectual battle concerning which of the two market structures was the appropriate structure in the electricity industry.
I spent a month in California testifying and I told them that they were doing it wrong. We did everything we could to publicize the need for open, competitive markets, and that the pool structure was an inappropriate structure. I still have a little button in my office that has a red line across POOLCO, which we passed out at one of the CPUC hearings to emphasize that this was the wrong way to structure a marketplace. But it made it easier to regulate the system, and that's the direction the regulators decided to go. We tried everything we could, and in fact I think it's on videotape, including a couple of heated exchanges between Dan Fessler and I.
Q: What's your opinion about public ownership of power generation and distribution and what advice do you have for municipalities thinking about public power?
A: If you look at the history of public power and at the history of more market-oriented structures, costs and efficiency are typically higher the more the market forces are allowed to act. To the extent that people are shielded through municipal or governmental ownership, costs tend to go up and accountability tends to go down.
Q: But in Los Angeles they're doing quite well. They didn't buy into deregulation, and they're selling power to California at a handsome profit.
A: That's because the generating facilities from municipal power facilities were exempted from the regulations that the CPUC put in place. Had they been covered by the same regulations, they would have had to dispose of those assets and they would have been in exactly the same situation as the other utilities in the state of California were in. Again it comes back to the regulatory structures that were in place.
Q: But doesn't that argue for public power?
A: No. It argues for open, free, competitive market places. If you have the same generating facilities that are owned by the Los Angeles Department of Water and Power owned by an independent company, I would guess that the operating cost structure would be lower. The one advantage public power does have is that there is a tax benefit that public power gets relative to investor-owned utilities. I'd imagine Los Angeles has made quite a bit of money selling power to the consumers of the State of California, but any excess revenues they get are tax-free: An investor-owned or public company would have to pay taxes. There is essentially a tax subsidy that goes to municipal power, and that tends to lower their average cost. But it raises the cost for everybody else, because our taxes are higher than they would be otherwise.
Q: Do power generators presently have any incentive to build power plants in California?
A: The only incentive is the price structure: Prices are high. People will have to bet that they stay high enough. These plants last for twenty years: Even if you think prices are going to be high next year, you have to be pretty confident prices are going stay high for a long time to make the economic investment pay off. Most people believe that it is probably a reasonable economic idea - it's not a great one right now - but I think people are concerned that there will be additional price caps or confiscation of returns from those facilities. That has dampened enthusiasm for building power plants in California.
When prices spiked up in Ohio we built power plants in Kentucky, Tennessee and Mississippi to serve that power grid. It took eleven months from conception to the date that those facilities came online and were generating power. We brought 1,2000 megawatts on the first year; we brought another 1,2000 megawatts the next year. There is one facility in the State of California that we have been working on for seven years, just to get siting permits.
People need some assurance that they can actually get these facilities sited before they're willing to take the risk of putting all that capital in the ground, to build these facilities. I think the governor's trying to streamline the process, trying to simplify it. That helps, but concerns about price caps - the ability to actually sell the output into the free market - has people concerned.
Q: That wasn't a concern in the last fifteen years and price caps didn't exist, yet there has been not a single major plant built in California.
A: The biggest problem has been the difficulty in siting facilities. I think there are 25,000 megawatts in the process right now. 25,000 megawatts. Last year there were 10,000 that couldn't get the approval to go ahead. You have to invest a lot of money, buying the land and doing the preliminary engineering. It's a very expensive process. And at the time prices in California were really low. So you had a double whammy of difficult siting and low prices. Well right now you still have difficulty siting, but prices are up. So people are looking for opportunities to build power plants as long as they feel that they will be treated fairly once those facilities come online.
Q: Governor Davis has called you and other companies in the business "profiteers" and "pirates." How are his rhetoric and the way this is playing out politically in Washington and Sacramento going to affect the ability to solve the problem?
A: My heart goes out to the man because he stepped into something that was not of his making. I can understand his frustration. His career is in trouble over this. I think the rhetoric makes it harder for people of goodwill to sit down and figure out how you fix things. If we can just kind of tone it down - there are lots of solutions that can be done in relatively short order.
Q: Like what?
A: Things can be done on the demand side almost instantaneously. The rate increase that's been proposed for the State of California is ludicrously high. If they had said, "we're going to raise prices 15% immediately, we'll raise it 15% a year from now, 15% the year after that or until whatever point that line intersects with the wholesale power price line," the problem is over. With that level of certainty, people would have built the plants, the utilities would have been fine, and they wouldn't have gone out of business. Customers knowing that they were going to be facing that kind of price track would have started conserving.
The demand reduction in California so far this year is unprecedented. We were projecting a 2% increase in demand in the first quarter this year versus first quarter last year, but it is down 9%. I don't know of any developed economy in the world that's seen that sort of a change. People know that prices are going to go up and they are starting to do things now to conserve. We use less energy; there's less impact on the environment. It creates opportunities: If people knew that they had a reasonable price track, some certainty, there are new technologies available.
When you pull your car in at night, if you had a fuel cell, you could plug the car into the garage, and it generates enough power for about two houses. So when you buy your car you're not only buying a car, you're buying your electricity supply for the life of that automobile. If people knew what the prices were, that would have an impact on the economics of that decision. It could be very beneficial to the state, beneficial to the environment. You need to have rational market signals. Right now no one is really certain what's going on. If we can get the rhetoric down and start working on solutions, we'd all be a lot better off.
Q: Last week The New York Times reported that you made more than $62 million from stock options alone. How do you explain that to the California consumer who is having a hard time paying his or her electric bill or to the small business owner who had to shut down because of the energy crisis?
A: I started the business at Enron back in 1988-1989. Our stock price split-adjusted and price adjusted in 1990 was about $2.50 a share. The stock price last year was about $90 a share. We've gone through a very significant increase because we created value. We have created a lot of good things in the marketplaces. I had to exercise those stock options because they were maturing. I converted my options into stock, paid the taxes on it, and held the stock. So when you see the stock price go down, it's not $62 million: take off the taxes and divide by two. The number is a whole lot less for twenty years of my life. It's not "dot-com" world and I'm not Larry Ellison, but I think we have employed a lot of people and we have done a lot of good things to build a business and create an innovative company for our employees. That's just the way it works.
Q: Vice President Cheney said a few weeks ago that while conservation might be a personal virtue, it really didn't have anything to do with the energy equation. What's your response to that?
A: I fundamentally disagree with that. Again I encourage you to listen to Amory Lovins - he developed a concept called "Negawatts." This means that you have to invest money or effort to reduce energy consumption, but the return on that investment is much higher than building new facilities. I believe that. I was at the San Jose Mercury News talking about energy conservation and they had incandescent lamps in the conference room, which are incredibly inefficient. Just by re-lamping the building they probably could have reduced consumption by 20-30 percent. The pay back on that is about six months. We are helping customers in California with demand-side management, cutting their energy consumption, and the rates of return on that are great.
Q: Your company donated hundreds of thousands of dollars to both the Bush Campaign as well as the Republican National Committee. The was a Frontline documentary which pointed out that Chairman Lay was essentially interviewing candidates for the Federal Regulatory Commission, inquiring about their positions on regulation and deregulation. Are Americans right to question that kind of relationship and that kind of access? Is the average consumer really on a level playing field with companies like Enron?
A: I've met George W. a couple of times; I had dinner with him once. He's a nice guy. We supported him. He believes in free, open, competitive markets, which we believe is in the best interest of all consumers, long term. It is absolutely not true that Ken Lay interviewed FERC commissioner. Chairman Hebert of the Federal Regulatory Commission, retracted some of his earlier statements that Ken had somehow asked him questions about where he stood. Ken is an outstanding individual: son of a preacher, self-made man. The conviction that we all share is that open, competitive markets and the free enterprise system is the best way to provide goods and services at a low cost to consumers. I personally will do anything to support people who believe that. I think it's good for the country.
Q: Is there any place for regulation?
A: I don't want it to sound like I am anti-regulation; I am anti bad regulation. The role of the regulator has to shift as you use market mechanisms as your organizing approach for the economy. You need to move from cost plus rate-determination, which is this just and reasonable clause in Federal Power Act, toward management or regulation of market fairness. Fair trade practices. I have absolutely no problem with anti-trust, because if markets become too concentrated they stop working. We need to move from rate of return regulation to fair trade practice regulation.
Q: Is there such a thing as price gouging, with regard to energy prices?
A: If you have free, open, competitive markets and you have true economic efficiency - you have multiple buyers, multiple sellers, and people are contracting with one another on an arms length basis - then the market price is the market price. If there is market manipulation or concentration of power of individual producers to influence individual prices, then fix that and the markets will operate effectively. But once the markets are operating effectively, the market price is fair and reasonable. It's axiomatic.
Q: The Attorney General of California believes that there has been market manipulation - that plants have been shut down for maintenance at times that look suspicious in order to increase the price of energy. What kinds of penalties would you endorse if these companies did in fact participate in market manipulation?
A: There is a whole body of law related to that and I think the laws are pretty good. If you look at the Microsoft case, or go all the way back to Standard Oil, the laws are draconian if people are doing that. I think the laws ought to be enforced.
Q: Do you think there has been market manipulation?
A: I personally don't think so.
Q: Why do you say that?
A: The prices we saw in California are not dissimilar from what you've seen in every other market in the world. This is how it works. Prices get very high, and as I look at the players in the business, I think they were trying to get every possible electron out into the marketplace.
Q: In the Frontline documentary you said, "We are working to create open, competitive, fair markets. We are the good guys. We're on the side of the angels." Could you explain what Enron has in common with angels?
A: We believe in fairness. Fair, open, competitive markets give consumers a choice. I found it morally offensive that in the city of Houston, Texas, it is illegal to sell power to someone even if someone wants to buy it from me. I think angels are in favor of choice too.
Q: Is Enron involved in nuclear power, and do you think it should be part of the solution to the nation's energy needs?
A: I am very skeptical about nuclear power; the fundamental problem is a waste elimination problem. There are plenty of other solutions. Wind power is cheaper than thermal natural gas-fired facilities right now. Gas is plentiful; gas facilities are cheaper than nuclear facilities. And you don't have toxic waste that sticks around for 50,000 years.
Q: What kind of job is the media doing in covering both Enron and the energy crisis?
A: If I made you doubt today that what you are reading in the newspaper is the total truth, then the newspapers probably haven't done a good job. This is what I believe is going on in the State of California. It's very hard to compete with the political system. I came out here for no other reason then to try to get the story across. I hope the media picks up on some of this and tries to give a more balanced appraisal of what's happening in the state.
Q: How would you compare today's energy crisis with the oil crisis of the 70s?
A: They are fundamentally different. This one is easy to fix and it will be fixed. There is no shortage of natural gas in the country. There are plenty of turbines. We can build these things fast. If you give the industry free rein the supply will be there in a year. If you gave price signals to consumers, demand reduction would be there in two months. This is something that can be solved. I think the governor said, and I support him, that he could fix this problem in twenty minutes if you allowed prices to rise. Within a year, those prices would be down to levels that probably have never been seen in this state before.
