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---------------------- Forwarded by Peggy Mahoney/HOU/EES on 08/28/2000 02:01 PM --------------------------- dereg-survey@mail.energycentral.com@mail.energycentral.com on 08/25/2000 12:22:19 PM Please respond to dereg-survey@mail.energycentral.com To: <pmahoney@enron.com< cc: Subject: Energy Central Competition and Deregulation Forum - 08-25-00 ---------------------------------------------------------------------- Energy Central Deregulation Public Forum Question August 25, 2000 http://www.energycentral.com ---------------------------------------------------------------------- * The Energy Central Deregulation Public Forum Question is a feature of * Energy Central's Competition and Deregulation Topic Center. Find this * week's question and the previous questions and answers by pointing your * browser to: * http://www.energycentral.com/sections/surveys/ ********************************************************************** * NEW QUESTION (respond to dereg-forum@energycentral.com): * Although natural gas is used to make only 25% of the electricity generated in the U.S., almost 95% of all power plants planned for the future are expected to be fired by natural gas. However, shortages caused by cutbacks in exploration budgets and restrictions on where new drilling can occur have analysts predicting gas prices this winter will be the highest they've ever been. Should there be a change in policy to encourage exploration and production of natural gas on federal lands and the continental shelf to help meet future demand requirements? * * RESPONSE DEADLINE: September 15, 2000, 5 P.M. MDT * Please keep your responses short and to the point. Selected * responses will be published in the next Deregulation Public * Forum e-mail. * ********************************************************************** ********************************************************************** * PREVIOUS QUESTION (Responses published below): * Uncontrolled prices spikes in the wholesale market have caused electric bills to soar for San Diego Gas & Electric customers this summer. Are power generators deliberately manipulating the market to obtain higher profits and, if so, should price caps be imposed to protect ratepayers? * ********************************************************************** ********************************************************************** * WHAT IS THIS? * The Deregulation Watch Public Forum is a free interactive service * provided by Energy Central. Every three weeks we address * an issue related to the deregulation and restructuring of the * electric power industry. It is designed to provide a platform for * the intelligent examination of issues, a forum where industry * professionals can share their pro, con and middle-of-the-road views * on a variety of issues. * * SEE THE END OF THIS MESSAGE FOR SUBSCRIBE/UNSUBSCRIBE INFORMATION, * SUBMITTING YOUR OPINION, AND ADDITIONAL DETAILS ON THIS SERVICE. * ********************************************************************** ---------------------------------------------------------------------- SELECTED RESPONSES: I have been following the California story for some time. I have consulted with CA utilities over the past 9 years and have spent considerable time examining the recent events and their history. I believe each and every person that reviewed and approved California's deregulation should be required to go back to school and take Economics 101. I don't believe the AG in California will find any manipulation unless the generators have figured a way to control the weather - and raise temperatures 10-15 degrees above normal. There is no significant baseline power in California. The consumers, regulators and politicians in California that have been pushing for deregulation are experiencing first hand the effects the flawed legislation California enacted and the reality of economics. The regulators in California, the NE part of the country, and elsewhere created imbalanced markets in the 1980's and early 1990's. We now are asking the same agencies, if not the same individuals, that created the mess to fix it. Talk about the fox watching the hen house, but its even better. The fox built a hen house and is being asked to fix the problem now that we're noticing chickens are missing. Spot market prices for ANY commodity will skyrocket, when demand increases dramatically and supply is limited. If you cap prices, you'll almost certainly create shortages. I would have hoped we would have learned something from the seventy years of Communist rule in Russia. Can you say "RATIONING"? Almost everyone has been misled to believe electric prices will decline under "competition" without examining the underlying capital and operating realities of the electric industry compared to other "deregulated industries." If you want your power at prices below those a free market will support, be prepared to go without your electricity at times. After an accurate comparison of the electric industry to other deregulated industries, you will discover that in a "fully" deregulated electric industry, retail electric prices will average from 10 to 20 percent higher than existing prices. And prices will reach from five to ten times above current prices at times during demand spikes. David L. Robbins, N/A, N/A David.Robbins@WellsFargo.COM ---------------------------------------------------- The answer is Yes and No. Tremendous price increases for the cost of energy over the last 6 months have an inevitable impact on the cost of generating electricity. However, those price increases do not cover the full extent of the increased cost for electricity for San Diego Gas and Electric. My sources tell me that there has been some collusion among the major IPPs servicing SDG&E which accounts for some of the other increases. SDG&E's mismanagement accounts for the rest. Carl R. Clark, President, Energetech Corp. cclark@energetech.com ---------------------------------------------------- Was any assistance offered recently when the price of gas increased? Would any assistance be offered in any substantive way if the price of sugar or rice increased? The increase in electricity prices is a function of a mismatch between supply and demand. The consumers' concerns about this issue should be heard by suppliers in the form of new peaking power units, cogeneration, combined-cycle technology or improvements to the efficiency of existing generating plants. If local suppliers are unwilling or unable to address the issue, new suppliers will do so. "Market forces" work well enough in other sectors; they will work in CA given time. David Whitehead, VP Sales - GENTRACK, Sanderson Computers davidw@gentrack.com ---------------------------------------------------- The generators are closely following the rules set by the independent system operator. The solution would be to have the consumers educated enough to demand, and pay for, a service that provides them consistent pricing - this would be a niche for a service provider to go to the generators and capture enough generation capacity at a given rate to meet the customer demands. One thing that is not discussed in any of these articles is the average price of electricity over a longer period, say the entire year. In addition, as I recall, during the transition period, the ratepayers received quite a reduction in rates. Gary Hilberg, Vice President - Business Development, The PIC Energy Group ghilberg@picworld.com ---------------------------------------------------- Competition is as competition does, usually with little thinking or planning involved. Some of us in California tried to bring various forms of planning and scenario forecasting to management and public eyes on thoughts on the future. But scenarios of belief in the grow-and-build era of the 60s-70s tended to over-forecast load growth for nuclear power (7%a year), just as it was logical for management to believe in low forecasts for the 90s (2% a year) in the deregulation era. The reality of growth cycles is a bit like saying "feet in ice and hand in fire," i.e., the average temperature is pretty comfortable. Was AB 1890 a good thing? No value judgement, it was a political deal for $28 billion. Remember Diablo Canyon. Some CEOs and public officials made their careers on this sort of thinking. Best wishes California, hopefully there will be light in the night skies. Place blame appropriately. N/A, N/A, N/A GEOHAY3@aol.com ---------------------------------------------------- Is this question a joke? Of course they are. This behavior will continue as long as the PR fog that has been created by the IOUs' shameful campaigns while they have had their hands in our pockets. These managements know they will not be fit to compete in a competitive market and will do anything to keep the "fat, dumb, and happy" mindset promoted they think that blaming their shortage exploitation on deregulation. Randy Castleberry, CEO, Tempulse Information Management randy@tempulse.com ---------------------------------------------------- Whether or not individual generators are trying to manipulate is not the question and price caps are certainly not the answer. The main problem is that the press has been led to believe that the situation is the result of 2 years of deregulation, not the 100 years of regulation that led to shortages of both generation and transmission. In addition, one must remember that the vast majority of generation remains under regulatory and/or legislated prices -- only about 10% is actually "bid" and cleared; no wonder the market thinness has lead to volatility. Second price auction certainly doesn't help, since everybody gets paid whatever (the one manipulating?) is the highest bidder's bid. Price caps will only stifle the construction of new supply and new supply is half of the answer to price volatility. The other half is meaningful demand responsive behavior -- price caps will hide true costs from consumers and stifle that too. A little more patience is what's needed. Tom Tanton, N/A, California Energy Commission rtanton@psyber.com ---------------------------------------------------- Oh sure, why not -- it worked for the phone companies, right, well, didn't it? Okay. Admittedly they're making over twenty-percent returns on investments, but you've never heard about a phone brownout, have you? ;) David Draper, Regulatory Analyst, Florida Public Commission DDraper@PSC.STATE.FL.US ---------------------------------------------------- Power marketers (and utilities with generating capacity to sell and traders to sell it) are not manipulating the market, just taking advantage of the opportunities it is offering. That's what a market, unfettered by regulation, is about. The answer to your second question, then, is that price caps are clearly re-regulation and anti-free market. We either deregulate or re-regulate the electric industry. Reginald Ankrom, President, EnNova Energy Solutions rankrom@rnet.com ---------------------------------------------------- You reap what you sow. CA rushed into deregulation without a complete review of the impact. Market value means profit and any company, to remain in business, looks at the profit motive as the primary driving force. Putting a cap on prices is going back to the old system of guaranteeing a profit without regard to efficiency and conservation. The current system, like all systems in the past, will eventually self correct. Users and suppliers will reach a common plateau. It may take some time and may hurt financially but eventually we will work it out. The United States has historically swung in large amplitudes in everything we have done. From complete isolationism prior to WWII to complete globalization in the 1950s and 1960s; from no environmental controls to (what some people may consider excessive) tight controls. I wish us a happy future. Signed, Someone who has been in the power business longer than he would like to. N/A, N/A, N/A N/A ---------------------------------------------------- If coal is the least expensive fuel, install two used coal-fired steam generators (boilers), each capable of supplying turbo- generators adequate for the entire San Diego County load. As an alternative, install used boilers capable of burning waste fuel to supply the turbo-generators; free fuel is a very good price. San Diego can surely issue the various permits? Sell any surplus power, so the residents of San Diego can enjoy free electricity, i.e., generate for 3 cents/KWh and sell it for 6. I understand a large quantity of used equipment is available? Fifty years associated with power generation in USA and overseas. N/A, N/A, N/A dorca@home.com ---------------------------------------------------- Market manipulation, no. Taking advantage of a somewhat silly demand/supply imbalance situation, yes. The analogy that comes to mind is that of a farmer whose crops in the midst of a drought are doing okay, so he can charge more for them. (We should remember that this same farmer at other times will suffer through lean times where supply exceeds demand.) A few additional points: 1. The current focus in the press is on summer price spikes. What about the generally lower energy commodity prices that SDG&E ratepayers got in the winter and spring? 2. Until a bunch of merchant plant capacity comes online to serve the California market, things may get uglier before they get better. Then again, maybe Mr. Greenspan's interest rate hikes finally will begin to take effect. 3. Summer price spikes in California seem to be lower than spot market situations that occasionally occur in the Midwest and in the New York area. 4. How about getting the CEC off its duff and getting some additional generating and transmission capacity approved? 5. Don't count out DSM completely yet (at least for peak-shaving). Phil Sisson, N/A, Sisson and Associates, Inc. pasisson@mcgi.com ---------------------------------------------------- Price spikes in California, as in other parts of the country, are a sign of electricity markets that are not entirely efficient or competitive. In the specific case of California, the reasons for this can be found in the way that the state has deregulated the market and the subsequent actions they have taken in an attempt to control it. Cal-ISO's creation of the government-granted monopoly known as the PX or power exchange helped to ensure that California's market could never truly be efficient. Many of California's generators are forced to buy and sell from this power pool which discourages the development of a true, robust bilateral market for wholesale electricity. The introduction of further price caps not only discourages power marketers from short-term sales into the state in times of need, but also creates an atmosphere that will discourage long-term entry as well as the development of independent generation. California needs real, robust competition -- not another step deeper into the regulatory morass that they have created. Kevin O'Donovan, Director, Government Affairs, Industry Networks kmodonovan@hotmail.com ---------------------------------------------------- I live in the Pacific Northwest yet we are paying prices as high, and at times higher, than southern California. Generators are withholding power until pricing reaches acceptable levels in markets where they can sell, not in local service areas. Why else would generation be reduced "for economic reasons"? Once again opportunists have twisted a good idea into a profitable venture for a very small group. The concept of deregulation was to enhance competition through freedom of choice of the end user, NOT THE SUPPLIER. We are a captive audience. Try to get by for just one day without use of electricity. When price controls were removed, generators and marketers were allowed to set pricing at whatever level they wanted. There is not one single fuel source used by medium to large generators that costs an equivalent of $250 per MWh. A solution would be to cap prices, not at a fixed level, but at a cost of service (fuels, maintenance, labor, etc.) plus a maximum allowable profit margin. Also, require generators to run regardless of economics. Under the "must run" would be a requirement to satisfy native loads and contract obligations before selling power outside of local service territories. Let's get away from pricing based on whatever the market will bear and get back to pricing based on cost of service. Let the electric industry face the same economic problems as the rest of industry. David Michaelson, P.E., Electrical Engineer & Industrial Energy Manager, N/A N/A ---------------------------------------------------- I believe that the current, deregulated, marketing infrastructure invites manipulation and artificially inflated rates simply because the new laissez-faire market has no real constraints. The new arbitrage trading has created multiple layers of parasites who are living well by adding no value to the commodity...only extra cost to the end user. The trend of abuse is clear and I think price ceilings are inevitable. Roy (Chip) Burton, Project Engineer, Multi-Level Technologies, Inc. Chip@m-lti.com ---------------------------------------------------- As a market moves up the supply curve on peak, there is no doubt that there is more supplier concentration, and the potential for market manipulation. However, price caps are not a satisfactory long-term solution to high prices. They will inevitably lead to blackouts. A better long-term solution will be encourage more competition by identifying and removing barriers to new peaking and base load generation, particularly distributed generation, that can be located in load centers to serve peak loads. Peter Evans, Senior Vice President, Catalytica Combustion Systems PEvans@mv.catalytica-inc.com ---------------------------------------------------- The two-part question goes first to motive, then to solution. No one can prove THAT the generators are gaming the system, versus the system is working as it should. The fact is that the result of operating the open market system as presently designed is unacceptable. It is totally unacceptable that the competitive market in California is supposed to, and attempting to, operate in a condition of supply-demand-price equilibrium that does not exist. That Californians should pay many billions of extra dollars to support an ineffective market system imposed upon them by regulators and legislators in the name of lower costs is sane only to those currently lining their pockets. That price caps are needed in this ineffective or, as some people laughingly call it, imperfect market goes without question. That generators or marketers cannot make a buck at a $250 per MWh cap is laughable. This is five times more than consumers ever paid for energy. The only issue that needs resolving is how long the price caps should remain in effect. That answer should depend on when the promised market-in-equilibrium can be brought to bear, and when a workable western RTO can guarantee economic transmission rates for California consumers. Otherwise, re-regulate. At any cost, it will be cheaper than where we're heading. Joe Bongiovanni, General Manager, Hardwick Electric Department Joebhed@aol.com ---------------------------------------------------- I believe that the people in San Diego are not able to see the full picture regarding deregulation of electric rates. They were proposed as a means of overall rate reduction because of competition, and on a yearly basis this is still possible. (1) Electricity was already high in California because of the environmental controls and difficulty of building new plants. (2) Very few new plants are being built, and a perfectly good plant at San Onofre (Unit 1) was shut down reducing our resource margins. (3) Californians were not told that price volatility will be high in a free market as the price charged will be the price of the most expensive unit on line. (4) Today, no one is talking about what happens during the low demand periods when the competition for selling power will be very high driving the price down to the point that some plants will probably want to pay you to use power so that they can stay on line. Thus, the situation of a free market system for electricity is not good for either a public that wants consistent bills or the power producers that can make money only when demand is very high. It will take several years of bumpy conditions to iron out the competitive market for electricity. Bill Hannaman, P.E., Senior Staff Engineer, DS&S hannamang@ds-s.com ---------------------------------------------------- Don't blame this situation on the market players - a utility without generation is like a race car without tires. Until investors, customers, and employees stand as one against utilities selling off all their generation, this situation will continue to be one of simple market economics (supply vs. demand). The only winners are the executives of these utilities as they get rewarded for the high sale prices of the plants, while customers are exposed to higher prices and lower reliability and, sadly, employees lose jobs, pay level, and seniority that are hard, if not impossible, to replace. Frank Richards, Technical Sales Rep., Austin Energy Frank.Richards@austinenergy.com ---------------------------------------------------- IF there is manipulation of prices, price caps are not the way to penalize the criminals because price caps affect every single seller, not the individual or handful of individuals who are restraining the market and acting against the public interest. I do tend to believe that price runups in California today aren't due to market manipulators so much as they are due to the regulatory neglect (and complacency bordering on hubris) CA has labored under for the past 15 years (with no new plants being built while domestic demand grew and regional available importable supply shrank). Returning to price caps, isn't it fairly simple to illustrate that the California caps have served to do the following: normal sellers of power sell at x. Let's say there are nefarious actors who withhold power to later sell it at artificially inflated prices, of x + 10, rather than the market rate of x + 1 that would have arisen as demand increased and supply tightened. This is crude but bear with me. In high dudgeon the politicians intervene and impose a cap of x - 10, which captures the bad actors but also unfortunately penalizes all of the other actors in the market, slam dunking them in order to stop the few bad actors. Results: All the investors who put money into the market in good faith that the rules would allow them to make an adequate return on their investment, are now penalized by caps that shave off money from their profit-making times in the market, for what is so far an unproven allegation against other unspecified bad actors. So how many will want to build in this "market," with this new and highly volatile form of risk? And, what California accomplished for fifteen years through regulatory neglect, it will now persist to accomplish through political intemperance. Putting caps onto the market will not solve shortages, it will not solve price problems, more plants will not be built, transmission won't be built, reliability will get worse. California is in for many more years of problems if they don't put their energy problems in order. What is with California and price controls? First President Richard Nixon, who imposed national wage and price controls which failed miserably, had to be pulled off because they only hid, not solved, problems that continued to fester, and contributed greatly to the inflation of the later 1970s. Now price caps, which will do about the same. William Jordahl, Manager Federal/State Relations, Alliant Energy billjordahl@alliant-energy.com ---------------------------------------------------- The "Electric Wholesale Market" and "Deregulation" in general is primarily in name only. One of the regional issues is the allowance of existing monopolistic participants to divest wholesale production in their own service territory and to ultimately repurchase wholesale production under non-regulated entities in the same electrical region. Allowing the same entities to have monopolistic ownership of the transportation and distribution of the product, while also owning non-regulated regional wholesale production of the product, begs for market problems. Placing caps on the wholesale price of the product not only masks the real issues, but also could prevent the entrance of new participants. Anonymous, Senior Domestic Marketing Manager, N/A N/A ---------------------------------------------------- Are power generators deliberately manipulating the market to obtain higher profits in San Diego? Of course they are -- the bidding rules for selling power into the PX require that all producers receive the price asked for by the most expensive producer selected. Thus, there is a tremendous profit-making incentive to withhold power until the price goes up. But the bidding rules are only a part of the problem. The whole premise that electric power can be delivered competitively is a big lie. Why? As economist Eugene Coyle explains in "Price Discrimination, Electronic Redlining, And Price Fixing in Deregulated Electric Power" (Washington, DC: American Public Power Association), a commodity product with high fixed costs will force producers to discriminate between customers, to collude with each other to maintain profits, and to merge to eliminate competitors. The best examples are the airlines, which charge different prices between leisure and business customers, who collude through their ticketing computers, and who have merged into four or so major carriers (and they are exploring joint ventures to reduce it to about two or three). The same is now happening in deregulated electricity. Many will argue that electricity competition hasn't been given a fair chance. However, even if you believe that competition can somehow develop in a commodity market with high fixed costs, who will have the political muscle to create more competitive wholesale markets, which will require true open access to the transmission system? Enron, the loudest promoter of open access, just got its butt kicked by the big investor-owned utilities, which have proved their strength on Capitol Hill by killing open access legislation. And the big for-profit holding companies are very strong at the state level as well. So, just as we have been saying for more than four years, deregulation will only lead to unregulated monopolies, because of the physical and economic nature of the electric power itself, and because no one has the political power to enact the structural reforms needed to overcome the power of the for-profit holding companies that still completely dominate this industry. Charlie Higley, Energy Research Director, Public Citizen higley@citizen.org ---------------------------------------------------- I believe the answer to the question is NO! The problem is lack of supply during peak demand periods. The cry for re-regulation is ludicrous. Part of what FERC intended with the implementation of wholesale deregulation was for the market to send accurate price signals to the supply side so they would be motivated to develop and innovate new forms of supply and demand side management. And this is precisely what is occurring. Politicians are ignoring the fact that the price of natural gas has at least doubled in the last several months, the electric supply from the Pacific Northwest is reduced because of reduced summer run-offs that supply the extensive hydro system, an unplanned nuclear plant outage, as well as very hot weather covering the entire West Coast. All of the combined events have contributed to the current problems faced in the West and, more specifically, southern California. Is anyone complaining, when during light load periods, the price of power is low and at times almost zero? Would "regulation" have changed any of this? I fail to see how. As long as consumption goes unchecked and the "not in my backyard" (NIMBY) prevails when companies propose additional new generation and transmission facilities, we will continue to have high prices during peak demand. While the above is a simplification of the problems being faced in the West, these are some of the basic issues that need to be addressed whether wholesale deregulation had been implemented or not. (The opinions expressed above are my own and do not represent any official position of my company) David F. Perrino, Director Market Development - West, Automated Power Exchange, Grid Management Services dperrino@apx.com ---------------------------------------------------- Hot weather and lack of surplus capacity caused the price spikes and price caps now just prolong the pain. The state of California's actions in imposing wholesale price caps is a simple issue of politically motivated interference in the free market that will ultimately harm consumers. The price caps tarnish the allure of investing in new generating capacity and the incentive for electricity buyers to plan ahead more effectively. How many lotto tickets would a state sell if the politicos decided that a $3 million prize is too extravagant? Would reducing lotto winnings to $1,000 make it a better producer of state revenue? There are market-based forwards, derivatives and other mechanisms for buyers and retailers to protect themselves from price spikes caused by summer supply shortages. The long-term answer is to let the market provide financial rewards To those who take risk to build generating capacity. When enough new generators join in, the market will reach equilibrium. Eric C. Williams, Market Solutions Analyst, EPRI Market Solutions ewilliam@epri.com ---------------------------------------------------- Assuming that the excess demand in the wholesale market is based on capacity limits, then capping market rates confuses the situation by encouraging consumption and discouraging conservation and the availability of alternative supply sources. The de facto vertically integrated electric utility system with its comprehensive regulatory oversight has been in place since circa 1935. Transition to a restructured system is going to take more than a few years. In the meantime, dealing with system peak loads is where attention should be focused. Reregulation and wholesale market caps on prices harken back to the old system. It's time to begin figuring out how to deal with these system peaks more creatively. Ken Saulter, Principal, ICF Consulting ksaulter@icfconsulting.com ---------------------------------------------------- ********************************************************************** + + ENERGY CENTRAL DEREGULATION INFORMATION SERVICES + http://www.energycentral.com + + -Competition & Deregulation Update + Receive the most up-to-date analysis of deregulation + events in your e-mail box each week. $289/year via e-mail. + For a free four-week trial, send a message to + dereg-trial@energycentral.com + + -Online Database + Access to the most comprehensive database of all state and federal + deregulation legislation, international activity and more - updated + every day! + ********************************************************************** ********************************************************************** * HOW TO START/STOP THE SERVICE * To STOP or START receiving this service, send an e-mail message to * dereg-service@energycentral.com with a subject of 'STOP' or 'START'. * You will stop or start receiving the Deregulation Watch Public Forum * e-mail messages. * * SUBMITTING YOUR OPINION * This is your chance to share your opinion with over 20,000 electric * power professionals. 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