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Cc: anna.mehrer@enron.com, bernadette.hawkins@enron.com, beverly.aden@enron.com,
binky.davidson@enron.com, bridget.maronge@enron.com, carol.moffett@enron.com, cindy.derecskey@enron.com, debra.davidson@enron.com, dolores.fisher@enron.com, emy.geraldo@enron.com, esmeralda.hinojosa@enron.com, ginger.dernehl@enron.com, jan.king@enron.com, janette.elbertson@enron.com, joseph.alamo@enron.com, karen.heathman@enron.com, kathryn.sheppard@enron.com, kay.chapman@enron.com, kimberly.hillis@enron.com, leasa.lopez@enron.com, leticia.botello@enron.com, lora.sullivan@enron.com, lysa.akin@enron.com, marcia.linton@enron.com, maureen.mcvicker@enron.com, mercy.gil@enron.com, mollie.gustafson@enron.com, paula.warren@enron.com, robert.hermann@enron.com, rosalinda.tijerina@enron.com, rosario.boling@enron.com, rubena.buerger@enron.com, ruth.brown@enron.com, ruth.mann@enron.com, sharon.purswell@enron.com, sharron.westbrook@enron.com, stephanie.harris@enron.com, stephanie.truss@enron.com, susan.skarness@enron.com, twanda.sweet@enron.com, vscruggs@wyattfirm.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: anna.mehrer@enron.com, bernadette.hawkins@enron.com, beverly.aden@enron.com, binky.davidson@enron.com, bridget.maronge@enron.com, carol.moffett@enron.com, cindy.derecskey@enron.com, debra.davidson@enron.com, dolores.fisher@enron.com, emy.geraldo@enron.com, esmeralda.hinojosa@enron.com, ginger.dernehl@enron.com, jan.king@enron.com, janette.elbertson@enron.com, joseph.alamo@enron.com, karen.heathman@enron.com, kathryn.sheppard@enron.com, kay.chapman@enron.com, kimberly.hillis@enron.com, leasa.lopez@enron.com, leticia.botello@enron.com, lora.sullivan@enron.com, lysa.akin@enron.com, marcia.linton@enron.com, maureen.mcvicker@enron.com, mercy.gil@enron.com, mollie.gustafson@enron.com, paula.warren@enron.com, robert.hermann@enron.com, rosalinda.tijerina@enron.com, rosario.boling@enron.com, rubena.buerger@enron.com, ruth.brown@enron.com, ruth.mann@enron.com, sharon.purswell@enron.com, sharron.westbrook@enron.com, stephanie.harris@enron.com, stephanie.truss@enron.com, susan.skarness@enron.com, twanda.sweet@enron.com, vscruggs@wyattfirm.com X-From: Bernadette Hawkins X-To: Alan Comnes, Andre Cangucu, Andrew S Fastow, cbone@wyattfirm.com, ceklund@llgm.com, Christian Yoder, Christopher F Calger, Cliff Baxter, Dan Leff, David W Delainey, Donald M- ECT Origination Black, Elizabeth Tilney, Eric Letke, Gordon Savage, Greg Wolfe, Harold G Buchanan, Harry Kingerski, jklauber@llgm.com, James D Steffes, James Derrick, Jeff Dasovich, Jennifer Rudolph, Jeremy Blachman, Joe Hartsoe, John J Lavorato, Karen Denne, Keith Holst, Linda Robertson, Karen S Owens@ees, Mark E Haedicke, Mark Koenig, Mark Metts, Mark Palmer, Mark S Muller, Marty Sunde, Marty Sunde, Mary Hain, Michael Moran, Michael Tribolet, Mike D Smith, Mike Grigsby, Mitchell Taylor, Paul Kaufman, Phillip K Allen, Richard B Sanders, Richard Causey, Richard Shapiro, Rick Buy, Robert Badeer, Robert Johnston, Robert C Williams, Roger Yang, Sandra McCubbin, Sarah Novosel, Scott Stoness, Shari Stack, Shelia Benke, Shelley Corman, Stephen Swain, Steve C Hall, Steven J Kean, Susan J Mara, Thomas E White, Tim Belden, Travis McCullough, Vicki Sharp, Wanda Curry, William S Bradford X-cc: Anna Mehrer, Bernadette Hawkins, Beverly Aden, Binky Davidson, Bridget Maronge, Carol Moffett, Cindy Derecskey, Debra Davidson, Dolores Fisher, Emy Geraldo, Esmeralda Hinojosa, Ginger Dernehl, Jan M King, Janette Elbertson, Joseph Alamo, Karen K Heathman, Kathryn Sheppard, Kay Chapman, Kimberly Hillis, Leasa Lopez, Leticia Botello, Lora Sullivan, Lysa Akin, Marcia A Linton, Maureen McVicker, Mercy Gil, Mollie Gustafson, Paula Warren, Robert Hermann, Rosalinda Tijerina, Rosario Boling, Rubena Buerger, Ruth Ann Brown, Ruth Mann, Sharon Purswell, Sharron Westbrook, Stephanie Harris, Stephanie Truss, Susan Skarness, Twanda Sweet, vscruggs@wyattfirm.com X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf FYI ----- Forwarded by Bernadette Hawkins/Corp/Enron on 03/13/2001 06:30 PM ----- "Jackie Gallagher" <JGallagher@epsa.org< 03/13/2001 05:48 PM To: <bhawkin@enron.com<, <bmerola@enron.com<, <christi.l.nicolay@enron.com<, <donna.fulton@enron.com<, <james.steffes@enron.com<, <janelle.scheuer@enron.com<, <jeff_brown@enron.com<, <jhartso@enron.com<, <Mary.Hain@enron.com<, <rshapiro@enron.com<, <sarah.novosel@enron.com<, <tom.hoatson@enron.com< cc: Subject: Summary of FERC Recommendation on California Market Monitoring & EPSA Comment Outline MEMORANDUM TO: Regulatory Affairs Committee Power Marketers Working Group FROM: Joe Hartsoe, Regulatory Affairs Committee Chair Bob Reilley, Power Marketing Working Group Chair Julie Simon, Vice President of Policy Erin Perrigo, Senior Manager of Policy DATE: 03/13/01 RE: Summary of the FERC Staff Recommendation on California Market Monitoring and Mitigation and EPSA Comment Outline Pursuant to its December 15, 2000 Order (EL00-95-000) (December Order), FERC released its Staff Recommendation on Prospective Market Monitoring and Mitigation for the California Wholesale Electric Power Market (Report), issued March 9th, addressing mitigation of price volatility in the California markets. Comments on the Report are due on Thursday, March 22nd. The following is a summary of the Report, along with an outline of possible EPSA comments. We will discuss the report and EPSA's comments further on our weekly Power Marketers conference call. To access the call, dial 1-800-937-6563 and ask for the Julie Simon/EPSA call. If you have any questions, please feel free to contact Erin Perrigo at 202-628-8200 or eperrigo@epsa.org. Report Summary Stressing that the proposal is designed to apply only to approximately five percent of the market that remains in real-time and not to the bilateral and forward markets, the Report immediately notes that "ultimately the real solution to California's problems lies in increased investments in infrastructure." The Report recommends that the California ISO conduct a real-time auction with associated measures to mitigate the impact of physical and economic withholding and significant exercises of market power during periods of scarcity: (1) Coordinating and Controlling Outages - The ISO should coordinate and approve all planned outages by units that have a Participating Generator Agreement (PGA) with the ISO. Coordination and outage control procedures should then be coupled with reporting requirements to FERC and dispute review should be expedited. Similarly, the ISO should closely monitor unplanned outages and report questionable outages to FERC for further investigation. (2) Selling Obligations - All capacity that is available and not scheduled to run under sellers with PGAs should be offered in the real-time market - this obligation would not be imposed on bilateral markets of the ISO day-ahead markets. PGA generators would have to submit to FERC a dependable capacity for each unit in addition to other operating parameters necessary to calculate marginal costs, such as heat rate. FERC Staff would then use this data, in combination with published fuel costs and emission credit data to determine a price that the ISO would use pre-determined to mitigate prices during times of reserve deficiency. Load Serving Entities should also be required to name their curtailment price and to identify which loads will be curtailed. (3) Price Mitigation - When called upon to provide the available and unscheduled capacity as mentioned above, PGA unit prices would be mitigated in hours when there is a reserve deficiency, or Stage 3 emergencies (the Report notes that it is "these hours which are extremely conducive to the exercise of market power by suppliers") and will be obligated to sell capacity in real-time at the marginal cost of the highest-priced PGA until called upon to run. (4) Real-time Price Mitigation for Each Generating Unit - all generating units should have a standing, confidential price based on its marginal costs. This price will be used by the ISO to establish the real-time market clearing price when mitigation is appropriate. Staff believes that a single market clearing price auction design is appropriate, thus reversing the recommendation to use an as bid design in the December Order. (5) Market Clearing Price - All real-time energy offers should be paid the applicable market clearing price. (6) Conditions for Invoking Mitigation - Mitigation measures should only be applied to critical operating periods, such as emergencies. As noted in the Report, Staff recognizes that there are potential difficulties in implementing the proposal, and that "there are no easy answers to the current problems in the California market." Among the purported difficulties, Staff notes implementation problems with bidding obligations on imported power, incentive effects on load scheduling, treatment of purchased power, mitigating prices during emergencies, and setting a price component for scarcity. Suggested EPSA Comments EPSA has a number of concerns with the proposal, however there are a few things we commend. Namely: (1) the Staff's timely turnaround of the report, as directed in the December Order; (2) their admission that the overarching problem cannot be solved by these shorter-term mitigation measures, only by increased investments in infrastructure; and (3) recommendation of the single price auction in the real-time market, noting that it should be used for only approximately five percent of the market. Also, to stress the importance of regulatory certainty, the Report recommends a date-certain "sunset" for the mitigation approach of no more than one year. Areas of concern include: (1) It is not acceptable to use a cost-based model to explain what happens to prices in a shortage period. The oil shortages of the 1970s are a good illustration - a nine percent cut in free world oil supplies led to the first quadrupling of oil prices from about $3 to $12 per barrel. Similarly, prices rose to $42 in 1980 with an eight percent reduction in free world oil supply. (2) Staff's proposal for calculation of the market clearing price does not create a market clearing price in scarcity situations, and does not take into account the customer's value of the commodity. To the extent seller's costs are used, full costs are not included Staff's recommendation. As outlined in EPSA's recently filed white paper on market monitoring, full costs should include opportunity costs, scarcity value, capacity value, and risk. (3) The Report fails to link high prices to any anti-competitive behavior, yet still alleges such behavior throughout the Report. (4) EPSA opposes the forced bidding into the real-time market as recommended. This prescription precludes and preempts competitive business decisions and retards the healthy development of the market. (5) The Report's method for calculating the market clearing price is not illustrative of a true market and may create an artificial market clearing price. The method proposed in FERC's refund order of March 9th may be preferable to the method proposed in this Report. Staff's method only includes participating generators and does not include imports, and out-of-market purchases. EPSA prefers a method that is more inclusive of details and characteristics of a true market.
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