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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\All documents X-Origin: FOSSUM-D X-FileName: dfossum.nsf http://www.consultrci.com ************************************************************************ Miss last week? Catch up on the latest in the energy industry at: http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch ************************************************************************ =============================================================== SCIENTECH IssueAlert, October 30, 2000 SCE, California ISO Propose Market Stabilization Plans; FERC to Meet This Week By: Will McNamara, Director, Electric Industry Analysis =============================================================== Southern California Edison (SCE) filed a four-point plan calling on the California Public Utilities Commission (CPUC) to act by year's end to settle the financial uncertainty threatening state consumers and utilities resulting from California's dysfunctional electricity market. This follows a separate measure filed by the California ISO with the Federal Energy Regulatory Commission (FERC) that attempts to limit reliance on spot markets for energy purchases. FERC is scheduled to meet on Nov. 1 to discuss the California power market and remedies for the state's troubled move to deregulate retail service, which caused drastic price spikes this summer. ANALYSIS: This is the latest chapter in the ongoing saga surrounding California's energy market. FERC's meeting on Wednesday of this week is being met with a great deal of anticipation as many market participants hope that some sort of regulatory decision will be made to repair the California market. First, let's establish what SCE is proposing. SCE has petitioned the CPUC to take four immediate steps: 1). Support market reform by providing utilities with greater freedom to contract for longer-term supplies of power, completing review of SCE's bilateral contract proposals, and rectifying market structure problems that have become apparent; 2). Confirm that utilities will be able to recover their reasonable procurement costs incurred on behalf of customers; 3). Implement a post-rate-freeze rate stabilization plan instead of the current approach that directs utilities to pass through volatile wholesale power costs, and provide for a modest rate increase beginning Jan. 1, 2001, to avoid larger future increases; and 4). End the uncertainty about the disposition of remaining utility generation assets. I think this can all be translated as follows. 1). SCE (and presumably PG&E) want to overturn California's strong resistance against bilateral contracts. Under California restructuring law, the local distribution company must purchase power directly from the Power Exchange. Bilateral contracts with generators are largely prohibited, meaning that currently in California suppliers cannot establish direct contracts with utilities, as is allowed in other states such as Texas. 2). SCE and PG&E are both in severe debt, due to accumulated under-collection resulting from the disparity between the high cost of wholesale power and rate freezes in their service territories. SCE's debt is about $2.4 billion, while PG&E's debt could be as much as $2.9 billion. Both utilities want to be able to charge customers for their debt. 3). SCE and PG&E want to avoid the sky-high prices that San Diego Gas & Electric had to charge its customers when they were exposed to market-based prices this summer. SCE claims that its rate stabilization plan would increase rates by less than 10 percent, keeping rates at 1996 levels when adjusted for inflation. SCE will identify the term of this rate increase in a more formal proposal to the CPUC, but believes that the less-than-10 percent increase would be sufficient to recoup its $2.4 billion debt if it were in place for four to five years. 4). AB1890 strongly encouraged that the California IOUs divest their power plants, as part of the agreements for stranded cost recovery. SCE sold 12 natural-gas plants, and presently has two coal plants and its shares of one nuclear plant in Arizona in escrow. The CPUC has dragged its heals on approving or disapproving the sale of plants currently in escrow, and SCE is pushing the agency to finally decide whether or not to allow pending sales to be completed. The California ISO's proposal is more specific, but also geared toward market stabilization. The Cal-ISO wants to implement a $100/MWh bid cap (reduced from $250/MWh) on electricity purchases in the ISO's spot market. However, the Cal-ISO's plan includes several exemptions, including those generators that can prove they will lose money at the $100 rate, generators that contract 70 percent of their supply to serve California customers, and generators producing less than 50 MW (renewable power, imported power, etc.) Thus, the current rate cap of $250/MWh would remain in place and serve as the absolute rate cap for those suppliers who are exempt from the $100 payment cap. Further, the Cal-ISO wants to require that generators contract 70 percent of their capacity in forward markets, and that users schedule at least 85 percent of their load in forward markets. The Cal-ISO contends that California IOUs should be easily able to schedule 85 percent of their load by entering into contracts with generators. The Cal-ISO wants to affix a "real-time deficiency charge" on both generators and users that do not use the forward markets. The Cal-ISO submitted its plan to FERC because it want its proposals to be implemented not just in California, but on a national basis. Although the Cal-ISO is approaching the matter from a national perspective, the lack of forward contracting has caused particular problems within its own state. The lack of adequate forward contracting has placed a burden on the Cal-ISO's Real-Time Market, which was designed to handle only 5 percent of the electricity traded in wholesale markets, but in fact is handling about 20 to 30 percent. The Cal-ISO proposal seems to be taking into account the problem of an out-of-sync wholesale/retail market by encouraging generation to stay in the state. Otherwise, capped generators may sell power outside of California if the wholesale prices were to exceed $100 per megawatt hour in the neighboring states. Should FERC approve this national rate cap, however, it will be precedent setting and will signal that the wholesale power market is not truly deregulated. As noted, FERC plans to meet on Nov. 1 to examine the California market in detail. FERC initiated a formal probe of the California market in late August, with its investigation focused on the summer's price spikes, the state's market structure including the Cal-ISO and the Power Exchange, as well as market-based sellers in California. The meeting this week reportedly will disclose findings from FERC's investigation and "consider proposed remedies." SCE's proposal has been submitted to the CPUC for review and is not on FERC's agenda for approval. However, it is likely that whatever FERC decides will have a direct impact on how the CPUC rules on SCE's plan. In particular, FERC will be examining the issue of market power, and whether or not any generators active in the California market intentionally gamed the system by withholding generation to drive up energy prices. And the problem is by no means limited to what occurred in San Diego this summer. Even though the summer demand season has now ended, wholesale prices remain high, a problem that is exacerbated by concerns surrounding supplies of natural gas across the country. =============================================================== SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html =============================================================== SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =============================================================== Feedback regarding SCIENTECH's IssueAlert should be sent to wmcnamara@scientech.com =============================================================== SCIENTECH's IssueAlerts are compiled based on independent analysis by SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, please reply to this message and in the body of the email type "remove."
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