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.