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Sounds very good.
Might be useful to get a "reputable" economist to write a paper that 1) describes traditional means for defining, identifying and mitigating market power, 2) compares those with the "new" means folks are coming up with these days, and 3) comments on the "split" in the academic community over the issues. When Steve Kean and I discussed the notion initially, thought it might be a good idea to gently "pile on" to the public discussion with the goal of making clear 1) just how complex this issue is and 2) how important it will be to have a thorough analysis (say, about 12+ months worth?) before rushing to judgment on anything Joskow might allege in his paper. Thoughts? Best, Jeff James D Steffes 12/11/2000 10:02 AM To: Alan Comnes/PDX/ECT@ECT, Joe Hartsoe/Corp/Enron@ENRON, Richard Shapiro/NA/Enron@Enron cc: Jeff Dasovich/NA/Enron@Enron, Mary Hain/HOU/ECT@ECT, Susan J Mara/NA/Enron@Enron Subject: Re: Analysis of Joskow / Hogan Papers Having read the Hogan paper, I think that the "academic" community is somewhat divided on this issue. If we want to move forward on the issues Joskow addresses, I would recommend that EPSA be the vehicle. The entire marketer / generator community needs to counter. What do people think about seeking activity through EPSA, WPTF, and/or IEP of CA to push back on the studies and analysis especially after the Dec 13 Order? I don't think that the discussions will be ending very soon. Jim Alan Comnes@ECT 12/07/2000 03:07 AM To: James D Steffes/NA/Enron@ENRON cc: Jeff Dasovich/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON, Mary Hain/HOU/ECT Subject: Re: Analysis of Joskow / Hogan Papers The Joskow/Kahn paper raises two issues: price above cost and witholding. Enron obviously has concerns with the "price above cost" analysis. I drafted some specific concerns and put them into a draft to Enron's reponse to Hoeker Question 1. Although the detail was dropped in the final draft, the basic technical concerns were laid out there. To really rebut Joskow/Kahn would take considerable work. Jeff D's idea was to write a paper that raised issues and indicated how complicated a "correct" response would be. The Joskow/Kahn withholding section has recieved criticism from the ISO so I am not sure Enron needs to respond to that. I think my bottom line now is that the debate at FERC will soon be over or enter a new stage on the 13th. As far as how a response would help us in California, I think requires a discussion with Jeff. Alan From: James D Steffes@ENRON on 12/05/2000 07:22 PM CST To: Alan Comnes/PDX/ECT@ECT, Jeff Dasovich/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON, Mary Hain/HOU/ECT@ECT cc: Subject: Analysis of Joskow / Hogan Papers Alan -- Before we bring in Seabron Adamson to do some analysis, I'd like your read of the Joskow and Hogan papers. When we have our understanding straight, let's talk. Jim ----- Forwarded by James D Steffes/NA/Enron on 12/05/2000 07:20 PM ----- Jeff Dasovich Sent by: Jeff Dasovich 11/30/2000 11:49 AM To: skean@enron.com, Richard Shapiro/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Sandra McCubbin/NA/Enron@Enron, Paul Kaufman/PDX/ECT@ECT, Joe Hartsoe/Corp/Enron@ENRON, Sarah Novosel/Corp/Enron@ENRON, Mary Hain/HOU/ECT@ECT, Karen Denne/Corp/Enron@ENRON, mpalmer@enron.com, Susan J Mara/NA/Enron@ENRON, Alan Comnes/PDX/ECT@ECT cc: Subject: From Today's Electricity Daily FYI. In bizarre times, help can sometimes come from bizarre places. Granted, we're likely to disagree strongly with Hogan's continued obsession with Poolco, but the discussion in his paper regarding market power may be helpful---I've read the Joskow paper, but haven't yet had a chance to review the Hogan piece. Steve and I discussed the need to do a focused assessment of the Joskow/Kahn "analysis" (remember it's Ed Kahn, not Alfred Kahn). Seems that it would be very useful to fold into that analysis any useful stuff on market power included in the paper done by Hogan & Co. If, in the end, there ain't nothing useful, so be it. But seems like there's little downside to exploring it. Jim, my understanding is that Alan is already working with the fundamentals folks on the Portland desk to deconstruct the Joskow paper. Might want to include the Hogan paper in those discussions and might also be useful to pull Seabron Adamson into the thinking, too. Ultimately, may be preferable to have any assessment of Joskow and/or Hogan to come from economists, rather than directly from us. Best, Jeff ----- Forwarded by Jeff Dasovich/NA/Enron on 11/30/2000 11:38 AM ----- "Daniel Douglass" <Douglass@ArterHadden.com< 11/30/2000 11:29 AM To: <Barbara_Klemstine@apsc.com<, <dcazalet@apx.com<, <BillR@calpine.com<, <jackp@calpine.com<, <glwaas@calpx.com<, <Ken_Czarnecki@calpx.com<, <cabaker@duke-energy.com<, <gavaughn@duke-energy.com<, <rjhickok@duke-energy.com<, <gtbl@dynegy.com<, <KEWH@dynegy.com<, <jdasovic@enron.com<, <susan_j_mara@enron.com<, <curt.Hatton@gen.pge.com<, <foothill@lmi.net<, <camiessn@newwestenergy.com<, <jcgardin@newwestenergy.com<, <rsnichol@newwestenergy.com<, <Nam.Nguyen@powersrc.com<, <rllamkin@seiworldwide.com<, <Roger.Pelote@Williams.com< cc: Subject: From Today's Electricity Daily Has FERC Gone Far Enough in California? The Federal Energy Regulatory Commission isn't going far enough in its attempt to reform the California wholesale electric market, according to a paper by three prominent economists done for San Diego Gas and Electric. The paper by John D. Chandley, Scott M. Harvey, and William W. Hogan argues that FERC should first end the artificial separation that divides the California Power Exchange and the California Independent System Operator, rather than worrying about the governance of the two institutions. "The change in governance may help," says the paper - "Electricity Market Reform in California" - "but it is not likely to be decisive in the near term. Explicit guidance from the commission regarding the nature and trajectory of reforms will be essential if market reform is to be accomplished within an acceptable time frame." Hogan, of the Kennedy School of Government, has been writing since 1995 in opposition to California's market separation. Also, argues the paper, freeing the California utilities to engage in forward contracting is no panacea. "The expectation that merely allowing utilities to participate in forward contracting necessarily would be the solution to high prices is problematic and not supported by the commission's staff report," says the analysis, adding that "putting pressure on buyers to sign contracts in the present environment may make things worse." If the underlying problem in California is high cost and low capacity, requiring forward contracting could harm not only California but also the entire Western U.S. electric system. FERC's $150 so-called "soft cap" is a wild card that has the three economists scratching their heads. "It does not appear in the staff report and there is little critical analysis of their implications, other than the discussion of Commissioner [Curt] Hebert." If the intent of the soft cap is to move toward cost justification for bids above $150/MWh, then FERC is headed into an administrative morass "that would rival those under wellhead price controls in the natural gas industry." If, on the other hand, the soft cap is "truly soft" and would only require some paper work at FERC and the possibility of a refund if the price is eventually deemed not just and reasonable, "there might be little impact on consumer prices (particularly if the principal sources of those high prices are high costs and regional capacity shortages rather than the exercise of market power). Even so, the proposal might serve to deter entry and new investments, thus combining the worst of both worlds, high consumer prices and little or no new investment." FERC's proposed order in California also demonstrates confusion about just what constitutes market power. The paper cites the proposed order's lawyerly, obfuscatory conclusion that "while this record does not support findings of specific exercises of market power, and while we are not able to reach definite conclusions about the actions of individual sellers, there is clear evidence that in California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight and can result in unjust and unreasonable rates under the [Federal Power Act]." The economists note, "In this regard, the debate is confused because we are dancing around the words where the truth may be hard to face." In the case of California, say the economists, there is no evidence of market power. Even the practice of generators avoiding the day-ahead market in favor of the real-time market "is a response to bad market design and pricing incentives (including price caps), but does not demonstrate the exercise of market power." Nor is bidding above marginal cost necessarily an exercise of market power, they add. "The distinction between direct marginal cost and opportunity cost is sometimes lost in the discussion. Hence, a competitive bidder whose direct cost of generation is $40 but who could sell the same energy outside California for $100 should bid no less than $100. This would not be an exercise of market power."
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