Re: RTO Advocacy Positions

FYI.

----- Forwarded by James D Steffes/NA/Enron on 02/21/2001 09:47 AM -----

Tim Belden@ECT
02/21/2001 09:33 AM

To: James D Steffes/NA/Enron@ENRON
cc:
Subject: Re: RTO Advocacy Positions

i concur.

From: James D Steffes@ENRON on 02/21/2001 09:13 AM CST
To: Kevin M Presto/HOU/ECT@ECT, Tim Belden/HOU/ECT@ECT
cc: Alan Comnes/PDX/ECT@ECT, Christi L Nicolay/HOU/ECT@ECT, Joe
Hartsoe/Corp/Enron@Enron, Mary Hain/HOU/ECT@ECT, Sarah
Novosel/Corp/Enron@Enron, Steve Walton/HOU/ECT@ECT, Susan J Mara/NA/Enron,
Ron McNamara/NA/Enron@Enron, Jeff Brown/NA/Enron@Enron, Steven J
Kean/NA/Enron@Enron, Richard Shapiro/NA/Enron@Enron
Subject: Re: RTO Advocacy Positions

To the discussion I would add the following -

1. Our efforts to push hard zonal markets has not been overly successful.
The opponents of such schemes continue to win converts that the interzonal
and intrazonal congestion costs will be large and that it is very difficult
to get the "right" zones. Moreover, in markets like ERCOT, the zonal
structure has been co-opted by the large incumbents to frustrate the
development of the market.

2. One solution discussed throughout the East is the "Hybrid" model - LMP in
the real-time and Flowgates to manage forward transmission congestion. If
structured properly, this allows the power desk to have (a) a real-time
energy market and (b) managable transmission risk. There are disagreements
between the policy "experts" about Flowgates (see point 5).

3. Our goal is to work within the RTO process and build markets that work for
Enron. Key goals - 1. single control area for the RTO, 2. real time energy
market with no penalties for unbalanced positions, 3. market hubs (similar to
PJM West) for liquidty, and 4. manageable transmission congestion using
market solutions.

4. I agree with Tim that it is very difficult to come up with "one" perfect
market structure proposal for Enron (both for technical and timing reasons -
California is in a different place than SPP). We are trying to coordinate
our statements in each of the markets as much as possible. Most importantly,
and we have had some troubles in ERCOT lately, we need to make sure that
saying something in one market doesn't damage our other advocacy efforts.
Government Affairs is trying to make sure that we push at the right time and
place and ensure that our messages have the necessary context.

5. We still hear some open questions about the best form of market-based
congestion managment (option vs. obligation; use it or lose it). Christi
Nicolay is having a call on Friday to discuss these issues. Please contact
her if anyone from your teams should attend.

Call with any other questions. At some point, we need to ensure complete
agreement of our policy(s) and our advocacy efforts on RTOs.

Jim

Kevin M Presto@ECT
02/20/2001 06:35 PM

To: Tim Belden/HOU/ECT@ECT
cc: James D Steffes/NA/Enron@Enron, Christi L Nicolay/HOU/ECT@ECT, Sarah
Novosel/Corp/Enron@ENRON, Joe Hartsoe/Corp/Enron@ENRON, Steve
Walton/HOU/ECT@ECT, Alan Comnes/PDX/ECT@ECT, Mary Hain/HOU/ECT@ECT
Subject: Re: RTO Advocacy Positions

Are you putting words in my mouth Tim.

The East is absolutely adamant about having a liquid real-time energy markets
with a "real supply curve" and a "real demand curve" such that hourly
clearing prices reflect the true economic value of the commodity. With
respect to the number of hourly price signals within an RTO that is
necessary, that is subject to much debate. Although I prefer a zonal model
for simplicity reasons, the reality is that congestion is more prevalent in
the East in most of the markets and in order to get a functioning real time
energy market, we may have settle for a limited LMP, in which nodal pricing
is necessary for managing the congestion, but proxy buses are created in
zones (3-5 per RTO) for purposes of real-time energy markets.

Our views, I believe, are still very much aligned, however, I need to make
some progress on the creation of real time energy markets. The zonal
markets implemented in NEPOOL and contemplated for ERCOT result in a
mis-priced commodity with no "real" price signal sent to the market. Out of
merit generation is and will continue to be dispatched because the congestion
is managed through energy uplift payments (congestion price signal is not
sent to the market). This results in a very inefficient commodity market
where the consumer gets screwed and market makers can't price the commodity
or transportation on a forward basis.

I hope this clarifies any misunderstanding.

------------------------------------------------

Steve Walton was in Portland last week and updated me on the latest vision
for RTO's that was developed by the east desk. This vision seems to differ
somewhat from what we are advocating in the west. In particular, it seems
like the east has embraced a nodal system while the west is firmly planted in
the zonal / flow-gate camp. I have asked Steve to flesh out more details of
the nodal approach -- in particular, how do the nodes map to a fairly
homogeneous zone and how does this impact pure trading positions (i.e., a
transaction with no asset being directly scheduled to support it) versus
asset-based trades where the meter must settle with the RTO while the trade
settles with the market.

It may be that the physical characteristics of the east and west warrant
different models. For example, the west has large, long-distance, high
voltage lines that are very amenable to a zonal approach. The east has more
local transmission bottlenecks that may not be modeled as easily. It also
could be that the political reality in the east and west require different
positions. As things sit now, there is no way that a zonal approach could
fly in the northwest. In contrast, PJM seems firmly planted in the nodal.
Finally, it could be that the east desk and the west desk have a difference
of opinion on what the "ideal" market structure should be. If that is the
case, then perhaps we need to talk some more.

Given the different advocacy positions in the east and the west, I don't
think that we can come up with a broad, nationwide advocacy position at this
time. That is, I don't think that we should endorse either zonal or nodal as
"the answer" at FERC. Instead, I think that we should focus on the
objectives that RTO's should try to achieve and be flexible as to what the
best market structure should be to achieve these objectives.

What do you guys think about this?

Regards,
Tim