Lay's Comments to FERC on Power Market

Note: The FERC meeting is today. See the link below that can be checked for
updates.

Enron's Lay Urges Bold Solutions to Power Market Woes

As the Federal Energy Regulatory Commission prepared to weigh in this morning
with the federal government's answer to California's be-deviled power market,
free market advocates issued last minute warnings against taking the price
cap route espoused by the Cal-ISO. FERC's meeting is scheduled to start at 9
AM EST. (Check http://intelligencepress.com this morning for updates)

In a letter fired off to FERC Chairman James J. Hoecker yesterday, Enron CEO
Kenneth Lay urged the Commission to find a fix for the underlying structural
problems in the power market rather than follow the steps of policy makers
who have placed "price cap 'band aids' over hemorrhaging wounds."

Lay told Hoecker the power market is "halfway across a busy street in its
transition from monopoly to competition. It can't stand where it is." He said
FERC has to make a choice between falling into the "same trap of political
expediency as California's ISO, leaving the nation's electric system in the
lurch from one crisis to the next, [o]r it can take a big step toward
fundamental structural reform."

At the same time the Electric Power Supply Association (EPSA) called on FERC
to issue an emergency cease and desist order prohibiting the Cal-ISO from
"unilaterally implementing" any changes to its current $250/MWh price cap for
wholesale electricity purchases. In a motion filed Monday, the marketer group
specifically asked the Commission to bar the Cal-ISO board of directors from
putting into effect its decision to impose a fiendishly complex
load-differentiated price cap of $100 or less during the off-peak season
effective Nov. 3. The plan was designed by the state's main utility consumer
group (see Daily GPI, Oct. 30). In addition, the EPSA urged FERC to "state
explicitly" that the Cal-ISO does not have the authority to impose or extend
price or bid caps, unless expressly authorized to do so by the Commission.
The Cal-ISO's current authority to set price caps expires on Nov. 15.

Lay said the Cal-ISO's complicated new formula caps prices below the cost of
gas-fired generation, "making obvious errors such as failing to take into
account gas transportation costs between the Henry Hub and power plants in
California; in doing so the bid cap makes it more economic for generators to
sell their gas supply, rather than use it to make electricity in California."
The new formula also forces the ISO into the market to buy power on an ad hoc
basis "to keep the lights on when the capped market fails to attract
sufficient supplies (which it inevitably will do)," Lay said. In addition,
the capped formula "invites generators to shut in production, export power
out of state and deploy their turbines in other states or countries."

He noted that the ISO's Chairman voted against the measure while all of the
state's utilities voted for it "presumably knowing full well that it simply
will not work."

California is "just the latest failure of partial or compromised open
access," said Lay. "It's time for the Commission to reject this approach.

"The power industry --- the nation's most essential industry --- is mired in
the transition from regulated monopoly to open access and customer choice.
Every step forward has been compromised out of concern for alienating one
vested interest or another. As a result, utilities are free to slow the
interconnection of new generation, withhold equal access to the transmission
system, favor their own sales over those of competitors, miscalculated
available transmission capacity, and exercise control over supposedly
'independent' system operators and reliability organizations.

Lay predicted that installing price caps for political expediency would
"plunge markets into greater uncertainty and discourage new supplies and
conservation methods..."

FERC has to complete the work that it started, said Lay. It has to ensure
that all parties have equal and fair access to transmission by "ending the
special priority for utility uses of the system. Second, FERC must require
transmission owners to separate operation of the monopoly transmission assets
from their other businesses. Third, FERC must take politics out of
transmission system operations by revising governance structures to ensure
independence. Finally, FERC must end its reliance on shortsighted price caps
by putting in place the necessary reforms to allow these markets to operate
efficiently to encourage conservation and attract new supplies."

EPSA said the Cal-ISO board "acted in obvious disregard for the Commission's
orderly processes." It "cannot be permitted to make the Commission's
decisions for it, or to alter so radically market rules, thereby injecting
more uncertainty and confusion in the market and subverting the process for
fashioning fair, effective and comprehensive remedies" for California's
"flawed" electric markets, the group noted.

The EPSA believes that any remedial actions taken by FERC with respect to the
California markets will be "severely compromised" if the Cal-ISO board's
imposition of new prices caps is allowed to take effect.

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