---------------------- Forwarded by Carla Hoffman/PDX/ECT on 08/08/2000 11:45 
AM ---------------------------
   
	Enron Capital & Trade Resources Corp.
	
	From:  "Pergher, Gunther" <Gunther.Pergher@dowjones.com>                      
     08/08/2000 11:34 AM
	

To: "Leopold, Jason" <Jason.Leopold@dowjones.com>
cc:  (bcc: Carla Hoffman/PDX/ECT)
Subject: DJ Power Price Cap In Calif Puts Brinksmanship On Grid 



17:25 GMT 8 August 2000 =DJ Power Price Cap In Calif Puts Brinksmanship On
Grid

   By Mark Golden
   Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--California's new, lower cap on the price of wholesale
power is intended to bring relief to consumers burned by this summer's
high-flying electricity rates.
But it has also set the stage for a game of chicken between utilities and
power producers - with the operator of the state's power grid caught in the
middle and a major blackout the consequence if both sides hold their course
on a hot day.
By creating incentives for power producers and power buyers to wait on the
sidelines, the price cap has put the California Independent System Operator
in the position of covering much of the state's power demand at the last
minute - something the grid operator was never intended to do.
"It's not designed to handle a third of the load, and it's not designed to
be the arbitrage tool for either those buying electricity or those supplying
it," Jan Smutny-Jones, chairman of the ISO's board of governors, said of the
ISO's real-time power market. "For the ISO to find 15,000 MW of power on any
given day is a huge undertaking that puts a tremendous amount of pressure on
the real-time operation of the grid. We're going to be in trouble."
Thanks to a break in this summer's high temperatures in California, the ISO
managed to find the power it needed Monday and bought it under the new price
cap of $250 a megawatt-hour. It also looks to be able to make it through
Tuesday.
But the real test could come with higher temperatures forecast for Wednesday
and Thursday - or whenever the next heat wave comes.
The state's power grid is run by the ISO, established by the state's
legislature to ensure that California's utilities were getting enough power
to meet their customer needs.
Utilities typically buy most of the power they need a day in advance based
on weather forecasts and system capacity. A different state-chartered
organization, the California Power Exchange buys most of the power the
utilities need one day ahead of time.
The ISO is supposed plug unexpected gaps by purchasing marginal amounts of
power on a last-minute basis as necessary.
But the price cap is changing the way the game is played.
Prices in the ISO's real-time market are capped at $250 a megawatt-hour. But
prices in the CalPX's day-ahead market are uncapped and free to skyrocket.
As a result, California's main utilities - PG&E Corp. (PCG) unit Pacific Gas
& Electric, Edison International (EIX) unit Southern California Edison and
Sempra Energy (SRE) unit San Diego Gas & Electric - will buy only those
supplies available on the day-ahead market that are bid at the ISO cap or
less.
That policy makes sense - electricity is widely regarded as the most
volatile commodity in existence, prices can rise 100-fold in a matter of
days and California's prices are about four times their level last summer.
But it isn't the most sustainable.
Grid Operator Left To Cover Large Shortfall
On Monday, for example, the California PX reported that the utilities bought
all the power suppliers bid in below the price cap, a total of 27,500
megawatts of supply for peak afternoon hours.
But as the sun rose over the California sky and air conditioners ramped up,
the three utilities needed 40,000 megawatts of power to meet demand -
leaving the ISO not just to tweak the system, but to buy almost a third of
what was required.
"It makes it a lot harder for our people to operate the system," ISO
spokesman Patrick Dorinson said.
On Monday, the ISO had to leave its official, computer-based market and
scramble to secure needed power supplies from neighboring utilities by
telephone, as it has done numerous times this summer.
The question for California is whether independent generating companies and
utilities outside the state will sell their power to the state at or below
the $250 price cap, or whether they'll be able to sell their output for a
higher price elsewhere.
Like much of the rest of the country, the western U.S. now needs more
electricity during summer afternoons than it can generate. The booming
electricity-driven new economy has been met with almost no additions to
generating capacity. Companies that have generating capacity are looking for
top dollar.
"Our real-time folks' job is to optimize revenue and get the highest price
for that energy that they can," said Larry Bryant, spokesman for the Public
Service Co. of New Mexico (PNM), which regularly sells power to California.
"There is no preference of customer. There's preference for maximizing the
revenue that hour of that day."
The $250 cap, half what it was until Monday and a third of what it was until
July 1, is well under prices the western wholesale power market has seen
frequently this summer.
The ISO has the authority to break its own cap if necessary to keep the
lights on, but doing so could make a shambles of the state's official power
market.
Traders at utilities with excess power to sell say they will have no
incentive to bid in supply on the ISO's computer system at prices under the
cap if they know the ISO will be picking up the phone later with sweeter
deals.
"At 10 a.m. the ISO operators have to run around and find a sufficient
amount of capacity in the West to serve our needs, and on some days there
really is only a limited amount of capacity to go around," Smutny-Jones
said.
"We're going to have figure out a better way of managing this," he added.
-Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
Copyright (c) 2000, Dow Jones & Company Inc


G_nther A. Pergher
Senior Analyst
Dow Jones & Company Inc.
Tel.  609.520.7067
Fax. 609.452.3531

The information transmitted is intended only for the person or entity to
which it is addressed and may contain confidential and/or privileged
material.  Any review, retransmission, dissemination or other use of, or
taking of any action in reliance upon, this information by persons or
entities other than the intended recipient is prohibited. If you received
this in error, please contact the sender and delete the material from any
computer.

 <<Gunther Pergher (E-mail).vcf>> 
 - Gunther Pergher (E-mail).vcf