I talked to Bill Newman (Southern) about this proposal yesterday.  I asked Bill if we were correct in reading the proposal to say that Southern was now open to consider the use of financial rights for transmission rather than physical rights.  He said that was correct.  I asked him if they were also willing to consider an auction as a mechanism to allocate financial rights.  He said they would consider an auction as long as they could have a way to obtain the rights needed to serve native load without driving up the cost of that service.
 
This is a major change in Southern's position and may open the door for resolving the major differences between the SETrans group and the Grids on congestion management functions, assuming the Grids stay with the approach that came out of the FERC mediation sessions.
 
I also asked Bill if he was negotiating with Entergy to form an RTO.  He said he could not confirm that officially (but confidentially- they were talking a lot more and we should see something in a couple of weeks.  He also indicated that this was the reason they were now open to the financial rights approach).
 
Based on the above, I think the Southern transmission pricing proposal was their attempt to gain support of the PSCs, by addressing the PSCs concerns about transmission cost increases, and to open the door to resolving the differences Southern has had with Entergy over financial vs physical transmission rights.
 
As far as the proposal is concerned, and the study by the Analysis Group/Economics,  there are a lot of issues we could raise with both.  The study is only valid for the specific assumptions they made (rolled in rates for all transmission and long-term sales from Henry Hub to PJM) and Southern's proposal, once again, leaves too much unspecified to know exactly what they intended.  
 
I think we would be best served by taking the position that we welcome the study report pointing out the some of the very issues that need to be addressed in the next phase being proposed by FERC for the development of a Southeast RTO, and we are glad to note that the Analysis Group recognized that many of the issues raised could be resolved by  previous proposals to reform transmission pricing, such as the proposal to auction financial rights that Enron has been advocating.  We are also pleased to note that Southern has also recognized the use of financial rights as a viable alternative to physical transmission rights.
 
Please let me know if you do not agree with the above approach, and I'll give you a list of issues we could raise with the Southern proposal. But, I think we should wait a couple of weeks and see if Southern and Entergy have something put together we can address.

-----Original Message----- 
From: Steffes, James D. 
Sent: Fri 11/2/2001 9:50 AM 
To: Connor, Joe 
Cc: Nicolay, Christi L.; Novosel, Sarah 
Subject: FW: Southern Company releases reports on nation's transmission system



Joe -- 

Can you please give me your comments on this report by Southern?  Also, what do you think that Southern intends to gain for itself? I guess that the zonal model would force all generation to site on the boundries of Southern.  This goes against the single rate model for RTOs that FERC appears to desire = continues pancaking.

Jim 

 -----Original Message----- 
From:   "Samantha Slater" <SSLATER@epsa.org>@ENRON  
Sent:   Friday, November 02, 2001 9:21 AM 
To:     bhueter@enron.com; Linnell, Elizabeth; Kingerski, Harry; jmigden@enron.com; jsteffe@enron.com; Robinson, Marchris; Petrochko, Mona L.; Kaufman, Paul; rboston@enron.com; rshapiro@enron.com; snord@enron.com; Montovano, Steve; Landwehr, Susan M.

Subject:        Southern Company releases reports on nation's transmission      system 

Southern Company releases reports on nation's transmission system 

Thursday, November 01, 2001 
Contact: Laura A. Gillig, 404-506-5333 or 1-866-506-5333 
media@southerncompany.com 

Southern Company today released two reports on critical issues facing the nation's electric transmission system that need increased attention by federal policymakers.

The first report authored by the economics consulting firm Analysis Group/Economics, Inc. presents some of the key problems with traditional regulatory policies that are inhibiting investment in new transmission facilities and distorting location decisions by new generators.

On October 10, 2001, Allen Franklin, Southern Company's chairman, president and CEO, testified before Congress regarding the need to provide better transmission pricing signals to generators so that they will be incented to locate closer to customers and in areas not requiring substantial new transmission investment. The problem presented is critical to Southern Company, as over 30,000 MW of new generation is seeking to locate in Southern Company's service area - an amount far greater than will be needed by area consumers. Most of this generation will be sold outside of the region, and will require major expansion of the transmission system. In most of these cases, it would have cost less and have been more reliable to locate the generation closer to its customers, but because generators don't face the true costs they impose on the transmission system, they are more likely to locate closer to sources of gas to fuel the plants, without regard to the transmission costs imposed.

The study conducted by Analysis Group/Economics finds that it generally would be less expensive to locate generation close to consumers and build gas pipelines when needed than to build generation near the gas fields and transmit the power to consumers located far away. Yet under current Federal regulatory policies, where gas pipeline pricing is distance sensitive and transmission pricing is not, exactly the wrong price signal is being provided to generators. Inconsistent pricing simply does not make sense for two competing energy infrastructures.

Southern Company has proposed a solution to this current inefficient pricing regime, which is described in the second report being released today - a "Southern Company Transmission Pricing Proposal." The proposed solution is a regulated pricing framework that takes into account the major factors that affect the incremental costs of providing transmission service - distance, congestion and losses, more closely aligning electric transmission and gas pipeline pricing policies. Distance

sensitivity is factored into the pricing proposal by using a zonal rate system, where longer distance transactions over multiple zones pay more than shorter transactions within a zone. Congestion is dealt with through the use of locational marginal pricing, and losses are handled through

distance-based loss factors or some other method of measuring marginal losses. 

The Southern Company proposal also suggests that generators who create the need for transmission upgrades that do not benefit other customers should pay for those upgrades, in return for which they would receive rights to use the transmission system without paying congestion costs. These transmission rights could be sold to third parties in a secondary market. This form of "participant funding" will ensure that generators face the costs of the location decisions they make, leading to more efficient decisions and eliminating uneconomic and unnecessary transmission investment and thus reducing energy costs for consumers.

The Southern Company proposal also points to the importance of sufficient returns on transmission investments to provide the proper incentives for expansion of the networks. The nature of the transmission business is changing dramatically, and returns have to be re-evaluated as a result. Also emphasized is the importance of incentive or performance-based rates, particularly for regional transmission organizations that are being formed around the country, and the need to eliminate regulatory lag for cost recovery of the substantial investments that will be made in the transmission system over the next decade.

 - SO_FullRep.pdf <<SO_FullRep.pdf>> 
 - AGE_FullRep.pdf <<AGE_FullRep.pdf>>