---------------------- Forwarded by Jennifer Rudolph/HOU/EES on 07/09/2001 
03:27 PM ---------------------------
From: Alan Comnes/ENRON@enronXgate on 07/06/2001 06:33 PM
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cc:  
Subject: POWER POINTS:Nevada Suffers FERC Unintended Consequences 

Great dialog on everything that's wrong with price controls. 

 -----Original Message-----
From:  "Onukogu, Ernest" <Ernest.Onukogu@dowjones.com>@ENRON 
[mailto:IMCEANOTES-+22Onukogu+2C+20Ernest+22+20+3CErnest+2EOnukogu+40dowjones+
2Ecom+3E+40ENRON@ENRON.com] 
Sent: Friday, July 06, 2001 1:11 PM
To: undisclosed-recipients:;@ENRON
Subject: POWER POINTS:Nevada Suffers FERC Unintended Consequences --

> POWER POINTS:Nevada Suffers FERC Unintended Consequences
>
>    By Mark Golden
>    A Dow Jones Newswires Column
>
>   NEW YORK (Dow Jones)--Those who have opposed wholesale electricity price
> controls have been labeled as extreme free-market ideologues who are
> insensitive
> to the practical impacts on peoples' lives of high electricity prices.
>   But the most common argument against price caps has been logical, not
> ideological: Price controls have never worked. Market participants always
> find a
> way around the rules.
>   This week the Federal Energy Regulatory Commission decided that it will
> have
> to consider at its meeting next week revisions to its June 19 price
> control
> ruling. The initial price cap rule, set by the California Independent
> System
> Operator last spring, was only a few paragraphs long. Each successive
> price cap
> order has gotten longer, though effectiveness still appears out of reach.
> The
> FERC's April order was 28 pages long; the June order was 48 pages. And now
> additional rules are on call to plug the new loopholes.
>   The revisions will also try to repair damage done to the market by the
> June
> order. During a spell of very hot weather Monday, Sierra Pacific Resources
> (SRP)
> subsidiary Nevada Power had to initiate limited rolling blackouts to a
> small
> number of customers for 45 minutes. The company attributed the blackouts,
> in
> part, to the new price controls.
>   Sierra Pacific's chief spokesman, Paul Heagen, provided a bird's eye
> view of
> the practical realities of the FERC's new price cap regime.
>   Power Points: After having a few days to look into it, can you say that
> price
> caps definitely contributed to blackouts in Nevada on Monday?
>   Paul Heagen: Yes, but first let me say that all of it was unintentional.
> FERC
> was trying to do the right thing. Price caps were a noble effort to solve
> a real
> problem in California.
>   But on Monday the market needed speed and clarity to function. It had
> neither,
> and that can be attributed to the price caps. Normally, in one or two
> phone
> calls we could have got what we needed. On Monday, we were five to six
> calls
> into it and still on the phone.
>   Price caps are having the unintended consequence of dragging other
> states into
> the California morass. We have this artificial environment which we are
> all
> trying to sort through.
>   PP: How, specifically, are the caps having this effect?
>   PH: There are a couple of elements. The 10% premium for power sold to
> California is supposed to reflect concerns about credit. That 10% in an
> open
> market is no big deal, but in a constrained situation the seller will grab
> it,
> because now it's his only chance to make money.
>   Also, the way this is set up, they look backwards. They determine the
> price
> after the fact. I can't think of any business in the world where you sell
> a
> product and find out later what price you sold at.
>   This had a very chilling effect on people's willingness to sell.
> Normally, a
> cloud cover comes in and a utility has a little extra power to sell in the
> real-time market. Normally, those little 50-megawatt packets move pretty
> easily,
> and that's really important for maintaining reliability.
>   With the price cap, utilities hunkered down. Selling at $92 wasn't worth
> the
> risk. They figured they might as well hang on in case they needed it.
>   Also, we have a voluntary curtailment program that allows us to share
> savings
> with customers who agree to curtail use. If the market is, say, $500, we
> might
> pay them $250/MWh to curtail demand. But in a $92/mkt, we can offer them
> such a
> small amount of money that they stay on.
>   PP: Have you talked to FERC about these problems with the price
> controls?
>   PH: We've had a senior team in Washington, D.C., at the FERC since last
> week.
> Right away we saw another effect of the FERC order: It penalizes companies
> like
> ours that signed long-term supply contracts before the order because many
> of
> those deals were done at prices above the price cap.
>   The biggest issue for us, is, did FERC really mean to penalize companies
> like
> us that planned ahead? It's long-term contracts that provide price
> stability.
>   It's unfair to our customers to expect them to pay for long-term
> contracts
> that have been undercut by price caps. If we get into a situation where we
> have
> a little extra to sell, now we can't recover our costs.
>   PP: With such high prices the past year, a lot of small, oil-fired
> turbines
> have been dusted off and put into service on time for this summer. Traders
> for
> other southwest utilities have said that all these little turbines have
> been
> very helpful when supplies got tight earlier in the year, but they weren't
> available this week because they cost more to run than the price cap. Did
> you
> see the same thing?
>   PH: We have some small turbines that we put in Reno and the Lake Tahoe
> area in
> the last few months. They were supposed to provide peak power, but they
> get
> uneconomic in a hurry under the price cap scheme.
>   You know, we've tried to isolate ourselves as best we could from the
> California situation and behave very independent of how California
> behaves. So
> Nevada is a great test case to see if price caps have an unintended effect
> outside of California. We were able to minimize the impact on our
> customers
> Monday, but the situation has maximized the attention of the country on
> the
> impact of price caps.
>   -By Mark Golden, Dow Jones Newswires; 201-938-4604;
> mark.golden@dowjones.com
>
>   (END) DOW JONES NEWS  07-06-01
>   03:14 PM- - 03 14 PM EDT 07-06-01
>