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One more item
1 e. Suspend or relax the RACT ("Reasonably Available Control Technology") adjustment requirements to promote the creation of cleaner air and ERCs. Example: When we were having difficulty in finding ERCs for Pastoria, we realized that there were quite a few operating gas turbine projects in Kern County. We developed an agreement with GE, because the projects all had GE turbines and GE serviced them, to approach the owners of the projects and offer to retrofit new emissions reduction technology in exchange for an attractive business deal. The appropriate technology is Dry Low NOX ("DLN") which reduces NOX emissions from permitted levels of ~25ppm to <9ppm. To our surprise, since these reductions are "RACT", per present Clean Air Rules we can get credit only for reductions below 9 ppm. Maybe that is intellectually OK, but the shocker is that there is now in Kern County no requirement to reduce emissions to RACT standards. So, they keep polluting at 25 ppm... We have the same concern with the cement plant initiative we are taking, mentioned in item 1.d. We are working with the largest single source of pollution in the SF Bay Area to retrofit it with SCRs, which if successful, will reduce emissions by <1000 tons per year, enough for at least a 1000 MW plant. However, there is a plant in Germany just starting up with SCRs. We are concerned that air officials here will become aware of that plant and "RACT adjust" any emissions reductions we may get. I will tell you if that happens, the plant will not make the retrofit as the economics simply do not work and they will continue to pollute...... You can mention in public the Kern County example, but please do not breathe a word about the cement plant initiative. ----- Forwarded by David Parquet/SF/ECT on 01/30/2001 09:15 AM ----- David Parquet 01/29/2001 12:08 PM To: Elizabeth Linnell/NA/Enron@ENRON cc: Alan Comnes/PDX/ECT@ECT, James D Steffes/NA/Enron@Enron, Jeff Dasovich/NA/Enron@Enron, John Neslage/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT@ENRON, Margaret Carson/Corp/Enron@ENRON, Mary Schoen/NA/Enron@Enron, mday@gmssr.com, Richard B Sanders/HOU/ECT@ECT, Sandra McCubbin/SFO/EES@EES@ENRON, seabron.adamson@frontier-economics.com, Steve Walton/HOU/ECT@ECT, Steven J Kean/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON Subject: Re: Urgent - Steve Kean to testify at Senate hearing, need info I have little that Steve does not probably know by heart. But a few comments to Steve's point on siting new power plants. I ASSUME "SENATE ENERGY COMMITTEE" IS THE FEDERAL SENATE, NOT THE STATE SENATE. I HAVE GEARED MY SUGGESTIONS TO THINGS THE FEDS CAN OR SHOULD DO.: THE PREAMBLE: The continuing lack of leadership by the Governor is causing serious concern for anyone looking for a stable environment in which to make the $billions in investments required for new power plants. The desparate search for blame placing (of exactly the guys that would make the investment), the lawsuits, the simplistic, outright misrepresentations of what happened and is happening, the threats of condemnation, etc. are doing a good job of making the public very uneasy and effectively destroying the "market" that resulted in the largest initiation of investment in power plants in the state's history. To the point, the debt lenders are getting nervous; the equity providors are getting nervous. (Duke: "I would have less third world risk developing a plant in Brazil...") If the final result of all of this is a public power agency that basically controls the grid and the buying and selling of power, the cynic might observe that we will have traded the accusations of greed of the present environment for a reversion to the old environment of inefficiency and escalating rate bases. In my opinion, there is no way that the governor's present political initiatives will result in the number of power plants that are necessary to cover the demand. He may be covering the near term price/supply issues with his CDWR initiative (I note that it is winter time and power demand is down, notwithstanding stage 3 alerts - wait until summer peak demands...), but destroyed the desire of the long term risk takers to develop new plants in this market. If the politicians think the "state" can do the development, I don't think so. Think about it: there just is not anyone in the IOUs or CDWR or the Munis or any state agency that can make the decisions necessary to make the investments required IN A TIMELY MANNER. The public entities do not even have the staffs to do the required work, much less the political environment to get anything done, given the continued thirst for "doing things right" vs "doing the right thing." Maybe we will get back to long term power purchase agreements for the development of new power plants. I point out that the Standard Offer contracts developed by the "State" and entered into 15 - 20 YEARS AGO in a regulated environment by nearly 10,000 MW of QFs are STILL OUT OF THE MONEY. (Per SCE, since the PX began in 4/98, only during August and December of last year were they in the money. We checked it out - they are right. That is astounding. And we want to go back to that??) Enron would be pleased to participate in long term PPAs, especially since we are developing several sites, and can make money doing that. But if we want to be statesmen about this, we need must get a market paradigm back. THE SUGGESTIONS : 1. Federal Environmental issues: There are 4 agencies in CA that get involved in air issues: US EPA, CEC, CARB, and the local AQMD. Lot's of rhetoric that each is just doing its own job, but the de facto result of that many agencies looking at the inevitably overlapping issues is that the requirements end up much tougher than they need to be. Letting the state deal with the last 3, and focusing on the US EPA because of where Steve will be testifying, seems like the US EPA (probably through a change in law at the Federal level) could do the following: a. Take a leadership position in rationalizing the rat warren of districts and basins and ERC creation and transfer restrictions. To our utter amazement, every little district that we have gone into to develop power plants have completely different rules and have required a completely different approach re ERCs- SF Bay Area, South Coast, San Joaquin County, Kern County, Placer, etc. ERCs are the single biggest problem we have in moving forward on the development of over 2000 MW of new plants we have on the books. I point out the ERC market in the east for SOX. SOX ERCs produced in Ohio can be used in a new plant in Indiana. This is not technically crisp, but was a rational, political decision as part of the Clean Air Act. We need that same rationalization now in California. Granted, CA and its politics was probably the genesis of the arbitrariness of AQMD vs county boundaries vs basin boundaries, but if we can get the state to the table to change this, the EPA will be involved. Leadership by all is necessary. When 2.5 ppm new plants are being held up, the 100 ppm plants will continue to be used to produce the power. Do the math and tell me if the pollution produced during the period of delay is worth the result. Do it again realizing that many of these 2.5 ppm plants will never be developed, given the difficulty. b. Consider impact fees: the concept of "pay to pollute." In LA, there are car pool requirements to reduce pollution. If a company cannot or will not carpool sufficiently, they can pay a fine that the district applies (I think) to general programs, like electric water heaters vs gas, electric lawn mowers vs gasoline, mass transit, etc. Implement a similar program for power plants. Work in concert with the local air district and the EPA to develop a program that allows the developer to pay the market price for credits (FYI: +$20 million for Pastoria) which the district uses to develop credits from existing sources that have not yet been cleaned up (see list 4 lines above, and others.) Necessity: power plant proceeds while credits are being develop. If it takes 10 years to develop the credits, consider issues and value of fact that the 2.5 ppm plant will eventually replace the 100 ppm plants. c. Stop the crusade for ever lower BACT requirements that are based on vague representations, inconclusive data and over zealous developer agreements. Example: Several years ago, Goalline Technologies developed SCONOX for NOX reduction in a 25 MW unit in LA. Good thing to do, but based primarily on the results of that small unit and the salesmanship of Goalline's president, we got ratcheted down on our 500 MW plant in Pittsburg to 2.5 ppm. SCAQMD calls to SCR vendors indicated "we can do that". EPA jumped on board. Guarantees from EPC contractors with LDs for nonperformance are different than "we can do that" from an equipment supplier. Now, EPA and others are wanting 2 ppm, again based on vague data. Sam even advises requests to consider ~1 ppm. (I point out that there are ZERO frame 7Fa units in operation at these levels in California.) GE has told us "absolutely not" to a 2ppm guarantee. However, I believe that requirements will in fact be reduced again by EPA, just because they can. Again, do the math on delaying or stopping the development of, say, a 2.5 ppm plant (because EPA wants 2 ppm) in favor of the continued operation of a 100 ppm plant. Hugely more resultant pollution. d. Be open minded and proactive with developers' novel methods of creating new sources of ERCs. PG&E had a heck of a time creating ERCs for their Otay Mesa 500 MW power plant in San Diego, ending up putting new engines in 4 harbor boats and +100 garbage trucks. Enron has several similarly dificult initiatives underway (Steve cannot tell anyone this, FYI only: we are looking at replacing engines in harbor boats in SF Bay, replacing engines in "yard" locomotives in Sacramento and LA, replacing agricultural pumping engines in the Central Valley, putting SCR technology in cement plants all over CA.) We could take years to get these programs approved as did PG&E, or we can take several months, with EPAs (and others) leadership. 2. Federal Siting Issues: California is at least attempting through legislation to speed up the siting on new power plants. Unfortunately, the Federal agencies do not have the time line requirements to provide their review on the speeded up schedules. For example, a request of the Fish and Wildlife Department for a review/permit gets put on the priority pile, first come first serve: shopping centers, housing developments, power plants, power lines, etc. I understand that our Pastoria project had 65 F&W applications ahead of it when we applied. And, there was no limitation on how long they could take to get the review done. I understand that one power project has waited 2 years for its review. The only way we got our permit was Sam Wehn begged F&W to figure a way to get it done ahead of the 65 other applications. Fortunately, F&W figured that we could reapply under an EPA rule in this specific case, which did have a timeline limitation. We should not have to rely on luck to get plants permitted. Suggestion: require the federal agencies involved in power plant or transmission line permitting to speed up their review/permitting times to be consistent with the state initiatives to speed things up. 3. Market Issues: I will not go into this in detail, as Steve is more able than I to vocalize these issues. However, from a power plant development point of view, if we want the private sector to develop MERCHANT power plants, and I believe we do because of the enormity of the investment required, we must get back to a market structure. As I am sure Steve remembers, one of the big issues we all dealt with in "deregulation" was stranded cost. We can avoid those issues by getting the private sector to make the investments. Steve knows all the issues: stability, liquidity, credit worthy counterparties, lots of counterparties, etc. Elizabeth Linnell@ENRON 01/26/2001 10:24 AM To: Mary Schoen/NA/Enron@Enron, David Parquet/SF/ECT@ECT, Richard B Sanders/HOU/ECT@ECT, John Neslage/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Margaret Carson/Corp/Enron@ENRON, seabron.adamson@frontier-economics.com, Susan J Mara/NA/Enron@ENRON, Jeff Dasovich/NA/Enron@Enron, Sandra McCubbin/SFO/EES@EES, Steve Walton/HOU/ECT@ECT, Alan Comnes/PDX/ECT@ECT, mday@gmssr.com cc: Steven J Kean/NA/Enron@Enron, James D Steffes/NA/Enron@Enron Subject: Urgent - Steve Kean to testify at Senate hearing, need info Steve Kean will be testifying at the Senate Energy Committee's hearing on Wednesday regarding California. Steve and Jim Steffes asked me to contact you for the following information. I've listed specific requests for several people, but am copying many more of you for your input as well. Anything you can provide by sometime on Monday will be appreciated! Dave Parquet - Siting of new power plants in California. Any insight you can provide regarding the rules, the current climate, what would fix the current situation, etc. Richard Sanders - Steve thinks he might be asked about whether the market was manipulated. Please provide information on whether this was the case and who the participants likely were. What's the current climate regarding sanctions, etc.? Mary Schoen - Any information you can provide relating to air emission issues in California, and specific details for our recommendations regarding air emissions. Steve Walton - The status on RTO West, Desert Star, Cal ISO and general information on RO development. Sue Mara - Specific ordering language requiring the utilities to buy only from the PX. Was it required through legislation or the CPUC, and what exactly does it mean. Who was involved in formulating the language? Information on block forward markets. Alan Comnes - A copy of the CDWR response and anything they might have available regarding long term proposals from the government. Dan Allegretti - We have the e-mail Jim sent regarding the UI deal. Please provide more specifics on the deal, and information regarding portfolio management approach. Thanks for your help!
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