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Jeffrey K. Skilling Testimony
Senate Committee on Energy and Natural Resources
Thank you, Mr. Chairman. It is a privilege to participate in this workshop, and I commend the committee for devoting attention to what should be the most talked about consumer issue this year: giving every consumer better, less expensive electric service, regardless of where they live.
My name is Jeff Skilling. I am the President and Chief Operating Officer of Enron Corp., a diversified energy company operating across North America and overseas. Our businesses include oil and gas exploration and production; natural gas transmission; power plant construction and operation; energy commodity marketing and finance; and renewable energy generation.
Most recently, we have become a significant buyer and seller of wholesale electricity, and our experience has taught us a great deal about the immense potential of the consumer electricity market and the extraordinary benefits and savings that await all consumers.
Above all, it has taught us to place a very high value on giving consumers more choices. I believe that has made us a better company. Fortune magazine has ranked Enron as the most innovative company in America for the last two years, something in which we take great pride. To us innovation means discovering new ways to give consumers more choices and better service. That may be the key to our success, and I also believe it is at the heart of today's workshop.
For decades, electric power has been delivered to American households by a patchwork of utility monopolies. No one can seriously defend that system anymore. It is inefficient. It is unnecessarily costly. It stifles innovation. It forces consumers to pay high rates while large industrial customers get special rates. I am absolutely certain, Mr. Chairman, that if you reconvene this panel ten years from now, all of us will wonder aloud why we ever let the monopoly persist for so long.
The challenge for you today is to hasten the arrival of genuine customer choice by setting a date-certain that will eliminate barriers to open access in the retail electricity market. Our goal should be nothing less than ensuring that next year every American, rural and urban, has the right to buy electric power from the provider that serves them best.
Of course, you will hear from others that Congress doesn't need to do a thing. You will hear that the process is taking care of itself. You will hear that this is an issue of states' rights, and that the federal government has no role.
I believe those arguments are false and misleading. More important, I believe they represent a disservice to American consumers. Deregulation of the electricity market is the largest pending issue of competitiveness in the U.S. today. If Congress turns its back on this issue and chooses not to create a system of open access, the consequences are predictable: consumers throughout the country will continue to pay artificially high prices for electricity.
A NEED FOR A NEW SYSTEM
Today's system of providing electricity to American homes and businesses is a relic. It is a product of decades of protectionism that allowed monopoly utilities to supply services without ever having to meet the demands of competition. That system has certainly served the interests of the utilities, but there is now overwhelming evidence that consumers are on the losing end of this arrangement.
To give you an idea of the distortion in the electricity market, consider that bulk or wholesale electricity sells for, on average, 2 cents per kilowatt-hour. Yet consumers pay anywhere from three times to eight times this amount. There is no rational basis for that kind of mark-up. It would never be tolerated in any other business.
For this high price, consumers get little in return. They receive electricity at a single fixed rate with virtually no flexibility and few, if any, options. While we have the ability to tailor long distance telephone service to meet our individual needs, that kind of flexibility and innovation is unheard of under today's antiquated electricity system.
Think of this: in an age of wireless communications, what kind of industry would have people jumping over fences to read an analog meter?
It has been said that if Thomas Edison were alive, he'd easily recognize today's electric utility service. It has changed so little despite enormous advances in technology and the broad diversity of consumer preferences. Indeed, simply repealing outdated laws that govern public utilities is an incomplete step. We want to make those laws obsolete by establishing a federal standard that guarantees a consumer's right to choose service from the best supplier.
That is what real competition means. It is about consumers having choices -- not protecting the companies that serve them. Compared to other industries, electric utilities are lagging far behind. The reason is simple: companies in other industries are forced to compete and innovate, while the electric power industry clings desperately to the monopoly franchise which keeps them free of such forces. The policy debate is over. No one can seriously contend that government-enforced monopoly is better than individual choice and competition. The only tactic left to the utilities is delay, delay, delay.
This type of foot dragging costs money-- and the American consumer is paying for it every day we delay -- $200 million/day!
A 30-40 PERCENT SAVINGS FOR CONSUMERS
On this score, there is an impressive amount of evidence. A joint study by the Brookings Institution and the Center for Market Processes at George Mason University surveyed the economic literature of five deregulated or restructured industries: trucking, railroads, airlines, long distance telecommunications and natural gas. And I'll quote the study: "in virtually every case," they concluded, "the economic benefits from deregulation or regulatory reform have exceeded economists' predictions."
That same study found that, in the short term, consumers save 15 to 20 percent through deregulation and as much as 50 percent over a ten-year period. When another analysis was completed by Citizens for a Sound Economy, which used a formal modeling study of the electric market, it concluded that customers would see a 43 percent savings.
It is impossible to overstate the magnitude of these savings. Electric power is a $200 billion a year market. Here we have two separate studies -- studies that come from different points on the political spectrum -- that tell us we could be saving $60-80 billion a year or more.
Put those numbers in perspective. The savings that would be generated by competition in the electricity market would be enough to reduce the federal deficit by over 60 percent. It is the equivalent of a tax refund of $800 for every family in the country.
When Citizens for a Sound Economy ran some numbers based on their model, they concluded that a competitive electric market would increase GDP growth by 2.6 percent over 10 years, increase employment by over 3 million workers, and drop the producer price index by over 2 percent.
Open the electric market to competition and the savings are staggering.
These savings are not restricted to just one part of the country. Take the Pacific Northwest, which is considered to be a "low cost" utility region. There, the Bonneville Power Administration sells what is known as "preference power" to publicly owned utilities of the Northwest at prices lower than other regions in the country. Several of you from the Northwest are concerned about the impact of open markets on your prices. I would advise you: keep the preference and watch as the market makes it irrelevant with even lower prices. In our wholesale business, we routinely beat BPA's preference price in our competitive offerings. We can slash the cost of electricity for every region of the country including the Northwest. That isn't a prediction, we're doing it now.
TIMING IS EVERYTHING
The only way to slash those costs, as I mentioned at the outset, is for Congress to pass legislation that lets consumers buy electricity from any company that is willing to sell it to them. Such legislation must be accompanied by a date-certain deadline. Without it, the utility monopolies will continue to dawdle and stall market innovation while consumers foot the bill.
The worst outcome of your deliberations would be further studies. To be blunt, the study phase of electric restructuring has come and gone. It has been almost three years since the California Public Utilities Commission issued the "Blue Book" proposal that began this debate. Since April 1994, tens of thousands of pages of academic studies, popular writings, and utility-commission filings, and hundreds of restructuring conferences have scrutinized all aspects of electric restructuring. Last year, the terms and conditions for the wholesale electric market were finalized by the Federal Energy Regulatory Commission, providing utilities with choices and the rest of us with a model for the retail market. We have reached the point of diminishing returns with reform studies of the electric industry. It is time to reach a decision and set a deadline. It's time for solutions.
The very act of setting a deadline makes the process work. Monopoly utilities will parade before you what they believe are the horrible and intractable problems of ending their monopolies. Until you set a deadline, that's all they'll do. A deadline forces them to stop listing problems and start listing solutions.
A NATIONAL SOLUTION TO A NATIONAL ISSUE
Now many of you will ask, and some will suggest, that we simply let the states do it. Indeed, there has been very promising movement toward open access in ten states. I'm encouraged by it, but it is no substitute for national competition.
I urge you to remember the flip side of the story: 40 states have not set timetables for transition. In Texas, Michigan and Ohio, resistance to any change is well-funded and well-organized by entrenched interests. In Texas, utilities have reportedly hired 80 lobbyists to fight legislation in Austin. Last year, Alabama actually took a step backwards.
Let's remember what we are talking about here. Electric power is not an obscure commodity purchased by a select group of the population. It is used everyday, by every home, every business, every school, every church, every community, every local government. There are few issues so national in scope. We are all connected to a grid that knows no state boundaries. It is the quintessential interstate market. Retail electric choice is the quintessential consumer issue. It demands federal action.
Sitting back and hoping that 50 states will gradually come around is no policy at all. That will lead to a disjointed transmission grid, when electricity transmission currently depends on a seamless system that transcends state boundaries. It will also create reciprocity problems as some markets are open to rival suppliers while other markets are not. Under open access, states can and will still exercise control over environmental policies related to energy, and carry out all the other responsibilities that traditionally belong to them. Low-income ratepayers will be protected. Universal access can be guaranteed. Indeed, you can enable states to do this better by clarifying and expanding their authority to deal with social and environmental issues.
Allowing individuals access to lower cost electricity is hardly an example of trampling on states' rights. Rather, we trample individual rights when we let any government tell citizens that "because of who you are and where you live, we are choosing your supplier for you".
I have no doubt that the opponents of choice and competition will provide you with many excuses for delay or inaction. But they know that competition is inevitable. They are simply urging Congress to "go slow" in order to extend their monopolies for as long as they can. They know the advantages of open access. After all, utilities are buying and selling competitive wholesale power from one another now. Several opponents of open access are busy crafting special deals with their largest industrial clients. The largest industrial customers can build their own power plants. Utilities have been cutting special deals with them for years. Indeed, between 1990 and 1995 industrial rates fell while commercial and residential rates have risen by 5% and 7% respectively.
At Enron, we see no reason why these same "special deals" should not be extended to the consumer. Instead of perpetuating the great disparities between what businesses and residential customers pay for their electricity -- shouldn't we be working to lower costs for everyone? The question answers itself.
CONCLUSION
Let me conclude by pointing out that reducing electricity costs is only one benefit from choice and competition. I think what will surprise most customers is how electricity can be packaged to meet their special needs and demands. When I have described this aspect of competition to some people, they scratch their head, believing that there is only so much you can do when selling electricity. Many people thought the same of telephone service back when our only choice was a black rotary phone. Now we have cellular, call forwarding, caller I.D., call waiting, voice mail, conference calling, paging, and so on. . .
I urge you to imagine the possibilities. Imagine the elderly and the poor having a fixed energy bill rolled into their mortgage or rent. Imagine an electric service that could let consumers choose how much of their home power is generated by renewable resources. Imagine farmers negotiating an agreement that ties their electric bill to the prices for their crop (we can serve rural and urban customers alike). Imagine a business with offices in ten states receiving a single monthly bill that consolidates all its energy costs. Imagine a meter you can read. Introducing competition into these related services will unleash massive innovation.
I hope I have given you a glimpse of these possibilities so that you may lay the groundwork for their achievement. By passing legislation that sets a deadline for open access, you will create an unprecedented opportunity for consumers and businesses. An opportunity for consumers to come first. Choosing to delay, to go slow, or to simply withdraw will be a setback to American ingenuity and competitiveness.
I appreciate the opportunity to speak here today and look forward to answering your questions.
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