Alliance Info Alert: Richardson and FERC Orders

---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 12/19/2000
03:07 PM ---------------------------

"The Alliance of Energy Suppliers" <alliance@eei.org<@ls.eei.org on
12/18/2000 12:19:56 PM
Please respond to "The Alliance of Energy Suppliers" <alliance@eei.org<
Sent by: bounce-app-ippexecs-33275@ls.eei.org
To: "Generation and Power Marketing Executives" <app-ippexecs@ls.eei.org<
cc:
Subject: Alliance Info Alert: Richardson and FERC Orders

Dear Generation/Power Marketing Executive:

The following are summaries of two significant activities that occurred
Friday, December 15
1. Energy Secretary Richardson issuance of an emergency order.
(Richardson's statement and FPA Section 202© order is posted on DOE's
Web site at:
http://www.energy.gov/HQPress/releases00/decpr/pr00309.html )

2. FERC's 12/15/00 final order to fix California wholesale markets
(FERC's Order can be viewed at
http://www.eei.org/issues/news/cal1215order.pdf)

California Supplies Ordered by Richardson

o Richardson orders listed entities to supply excess power to California ISO
o Order is effective as soon as ISO certifies shortage, but ends 12/21/00,
unless extended
o Prices to be agreed to by supplier and ISO, or FERC will set rate later
o FPA emergency power authority transferred to DOE in 1977

As he said he would on December 13, U.S. Department of Energy Secretary Bill
Richardson found "an emergency exists in California by reason of the shortage
of electric energy" and issued an emergency order under section 202 © of
the Federal Power Act (FPA) requiring listed generators and marketers to
provide any power in excess of the needs of their firm customers to the
California ISO. In a statement, Richardson said the threat to the
reliability of the California grid requires a long-term solution, but that in
the short-term power must keep flowing to the state to avert blackouts.

The 76 listed suppliers have 12 hours after the ISO certifies to DOE that it
has been unable to acquire adequate supplies in the market to begin providing
requested service to the ISO. The ISO must inform each supplier subject to
the order of the amount and type of energy or services required by 9:00 PM,
Eastern Standard Time, the day before the services are needed. The order
directs the ISO to allocate, to the extent feasible, requested services among
subject entities in proportion to each supplier's available excess power.
The order is effective immediately and will terminate at 3:00 AM, Eastern
Time, December 21, 2000, unless extended. To continue to obtain supplies
under this emergency authority, the ISO must re-certify the shortage to DOE
headquarters every 24 hours.

The terms of the provision of electric energy and other services by suppliers
to the ISO "are to be agreed to by the parties." If no agreement is reached,
then under the FPA's emergency authority Secretary Richardson "will
immediately prescribe the conditions of service and refer the rate issue to
the Federal Energy Regulatory Commission for a determination at a later date
by that agency in accordance with its standards and procedures, and will
prescribe by supplemental order such rates as it finds to be just and
reasonable." The authority of FERC to set rates for power supplied under
emergency order at just and reasonable levels where the parties themselves do
not agree to a rate is explicitly included in FPA Section 202©. The DOE
Organization Act of 1997 transferred the emergency powers of this section
from FERC to DOE.

The 76 entities identified in the order's attachment are all the entities
that have provided power to the ISO over the last 30 days. Those entities
are ordered "to make arrangements to generate, deliver, interchange, and
transmit electric energy when, as, and in such amounts as may be requested by
the" ISO, "acting as agent for and on behalf of Scheduling Coordinators."

[Source: DOE Secretary Richardson's December 14, 2000 statement and order;
Electric Power Daily, December 15, 2000]

FERC De-Federalizes California Markets, Adopts Other Structural
Reforms
A summary of the December 15 Order and Commission Discussion

At its special meeting today, FERC unanimously approved its eagerly awaited
final order reforming the California wholesale markets, adopting the major
outlines of its November 1 proposed order and sending back to California the
responsibility for addressing state-related matters, as discussed below. At
the same time, FERC deferred consideration of retroactive refund issues as
well as the imposition of region-wide price caps.

FERC reiterated the November 1 conclusions that under certain circumstances,
California ratepayers were subjected to unjust and unreasonable power rates
due to California's "seriously flawed" market structure and rules in
conjunction with tight demand and supply conditions throughout the West.

While all four commissioners supported the order as a consensus-based outcome
that appropriately balanced all competing interests, each commissioner
expressed reservations with particular aspects of the order. Chairman
Hoecker and Comm. Breathitt expressed the strongest endorsement, while Comms.
Hebert and Massey laid out their positions where they believed the Commission
had either "over-reached" or not gone far enough, just as they did on
November 1, as discussed below.

Highlights of key actions:

(1) FERC adopted the November 1 proposal to eliminate, effective immediately,
the state's mandatory requirement that the state's investor-owned utilities
buy and sell electricity through the PX, and allow these utilities to
purchase electricity through forward contracts and other alternative
mechanisms to manage supply risks. FERC terminated the PX's rate schedules
effective at the close of business on April 30, 2001. In effect, as Chairman
Hoecker stated, the order de-federalizes 60 percent of the California
wholesale market established under the state's restructuring law, returning
ratemaking authority over company-owned generation to the California Public
Utilities Commission (CPUC).

(2) FERC modified the effective period of the November 1 $150/MWh "soft cap"
proposal, limiting its application through April 2001, whereupon a
"comprehensive and systematic monitoring and mitigation program which
incorporates appropriate thresholds, screen and mitigation measures" must be
in place. In a related move, FERC ordered a technical conference early next
year to develop such a program by March 1, 2001, so that these measures can
be place by the May 1, deadline.

In a major modification, FERC revised the refund conditions to clarify that
while certain refund conditions will continue to apply, unless FERC issues
written notification to the seller that its transaction is still under
review, refund potential on a transaction will close after 60 days.

As proposed, however, supply bids in excess of $150 will be prohibited from
setting the market-clearing price for all bidders and sellers bidding above
$150/MWh will be required to report their bids to FERC on a confidential,
weekly basis and provide certain cost support.

(3) FERC adopted the November 1 proposal to require the establishment of
independent, non-stakeholder governing board for the ISO. The ISO Governing
Board must relinquish their decision-making power and operating control to
the ISO management on January 29, 2001. A future order will set procedures
for discussion with state representatives on the board selection process.

(4) In a major modification, FERC adopted a $74/MWh "price benchmark" for
assessing prices of five-year energy supply contracts. This benchmark will
be used in assessing any complaints regarding justness and reasonableness of
pricing long-term contracts.

To facilitate prompt negotiation of longer term power contracts at reasonable
rates, FERC announced that it will hold a settlement conference with market
participants.

(5) FERC adopted the November 1 proposal to require market participants to
schedule 95 percent of their transactions in the day-ahead market and
instituting a penalty charge for under-scheduling (in excess of five percent
of hourly load requirements), in order to discourage over-reliance on the
real-time spot market.

(6) FERC directed the ISO and the three investor-owned utilities to file
generation interconnection standards.

(7) FERC affirmed the longer-term measures proposed in the November 1 order,
including submission of a congestion management design proposal by April 2,
2001.

(8) FERC deferred resolving key issues, including establishing new ISO board
selection procedures, developing appropriate market monitoring measures and
negotiating protective orders associated with data collection.

(9) FERC reiterated its November 1 call to California policy makers there to
resolve state issues, such as: (1) immediately implementing the availability
of day ahead markets for power purchases; (2) development of demand
responses; (3) siting of generation and transmission; and (4) assurance of
sufficient reserve requirements.

Commissioner Responses

Comm. Hebert reluctantly concurred, calling the final order a "missed
opportunity" to, among other things, send appropriate signals for new
generation siting and conservation. Reiterating his November 1 concerns,
Hebert recounted the remedial remedies that he maintained the Commission
should and should not have adopted. While expressing pleasure at the tone of
the order ("balanced and considerate"), the bid certainly reversal, and the
role reserved for the state in the selection of the new ISO board, Hebert
nonetheless objected to the benchmark prices established in the order, which
he maintained appeared to be unreasonably low. Hebert faulted the Commission
for not attempting to reconcile the instant order with the November 8 order
approving the CA ISO's emergency $250/MWh "soft cap" proposal. Hebert ended
by challenging the CPUC to do what it can to encourage utilities there to
forward contract, including easing the existing prudence review requirements.

Comm. Breathitt endorsed the Order, reiterating her support for progress
towards open and competitive markets. She noted that the Order properly
"walked the line" by taking all of the competing interests into account,
calling it less than ideal, but a step in the right direction. She also
concentrated her remarks on the importance of creating stability which will
be accomplished by encouraging long term contracts and the implementation of
the $150/MWh breakpoint. Additionally she mentioned that any price below the
$74/MWh benchmark will be presumed just and reasonable.

Comm. Massey concurred, but prefaced his remarks by expressing sympathy for
California ratepayers, stating that he felt that market power had been
exercised, that prices were not just and reasonable and that the marketers
had profited too much at the expense of others in the market. He warned
that, as he understood the legal precedents, the Federal Courts were poised
to grant cost recovery relief to the retailers which would then be passed on
to consumers. On the positive side, he approved of the de-federalization of
60% of the market and the creation of long term contracts. However, he
emphasized that California regulators must now take the responsibility of
creating more generation and transmission. In the long term, Comm. Massey
hoped that solutions could be reached starting with a technical conference
and that the market would have rules more like PJM.

Finally, Comm. Massey articulated what he would have liked to have done
differently. He stated that he disagreed with the fact that there is not
enough evidence to show that market power existed and he pointed to the
on-going investigation. He also disagreed with the $150/MWh breakpoint,
preferring instead a hard price per generator. The Commissioner said he
would have set the long term benchmark for only two years instead of five and
that he would have opened a section 206 investigation in the West. Finally,
he stated that he would have liked to address the issue of refunds.

Chairman Hoecker began his comments by saying that the Commission was forced
to act and act quickly because the stakes are so high. He feels that it is
now time for the state regulators and markets to act. He noted that by
shrinking the Cal PX, the responsibility is now with the CPUC to fashion the
long term contracts and that hopefully we will exit this situation with the
least amount of damage to the utilities. In regards to suggestions for a
regional price cap, the Chairman stated that this would not work due to the
fact that the Commission has no jurisdiction over Bonneville, WAPA and the
public power producers and that there is no spot market in the Northwest.
However, he did urge Secretary Richardson to convene a conference in order to
address regional issues. Finally, in conceptually addressing the California
situation, the Chairman stated that competition or "deregulation" did not
fail in California, but that there never was competition in California.