Kevin's RTO Ideas for East

FYI.

This background came out of one of our Govt Affairs - East Power Team
meetings. Highlights the importance of spot energy markets for Kevin's
business.

Jim

----- Forwarded by James D Steffes/NA/Enron on 03/05/2001 09:35 AM -----

Christi L Nicolay@ECT
03/02/2001 09:46 AM

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Subject: Kevin's RTO Ideas for East

The East desk's No. 1 priority for RTOs is The Real Time Energy Market (no
day ahead balanced schedule requirement). This means that the RTO should
post the supply and demand curve with real time prices (the best example at
this time is PJM's real time market). A real time energy market is
fundamental for customers to get proper real time price signals upon which to
base their decisions to hedge or not on a forward basis. It also provides
the proper price signals to the market on where generation and transmission
is needed. Getting a real time energy market would advance Enron's ability
to provide more financial tools to customers. This market can be nodal (or
zonal) in order to send location based price signals (for example, to NY
City), with the ability to aggregate from nodal to zone determined "proxy
buses."

While Kevin prefers the physical flowgate model with an option to collect
congestion revenues (rather than an obligation, similar to the PJM FTRs now),
the method of determining the congestion management is secondary to the
establishment of the real time energy market. Regulatory people should use
their judgment (and talk with the desk) when determining how far to push
option-type flowgates, rather than obligation-type FTRs. Such a physical
market transmission/congestion market can support a financial trading overlay.

If you do have an FTR type system, there should be an upfront allocation to
load. Ideally, the load should have an "network" right from the generator to
their load (or from load to the "hubs") in order to have the ability to
manage the congestion risk in the forward market when serving end use
customers (EES) or for the ENA full requirements deals. The nodes should be
grouped into logical "zones" and congestion within a zone should be uplifted.
This allocation to customers (or full blown auction of all rights) becomes
critical in Enron's ability to serve load and all requirements customers.
Without the proper allocation (not to incumbent utilties), the risk premium
to serve these customers becomes too high and can't be priced.

Finally, the market should have no price caps and preferably no icap market
like NEPOOL (prefer PJM's system where the load has to show the RTO that it
has contracted for enough reserves.) We have urged the FERC in Florida to
adopt a reserve monitoring system, whereby customers are not penalized for
lack of icap unless they actually go under the reserve requirement, then they
are required to purchase icap for a certain amount of time until they
demonstrate continued compliance.

Bottom line -- "Do not let the perfect be the enemy of the good." Congestion
does not need to be perfectly allocated to each load if that mechanism is
done in a manner that precludes Enron and others from developing efficient
real time energy markets that send a locational hourly price signal to the
generation (supply) and the load (demand). This type of market will provide
greater services to customers and allow Enron to grow its business.

Finally, as we work toward this goal, remember that in the absence of a
real-time energy market, we need to continue to focus our efforts on
non-discriminatory treatment with respect to transmission (no native load
exception) and parking and lending, scheduling flexibility, etc.