Karen - thanks for getting the word out!

PowerPlus


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Seeking to eliminate price caps as solution
Enron Pushes Four-Point Fix To CA Wholesale Power Market

Broad-scale power marketer Enron, on the eve of the release of a proposed 
FERC remedy, has delivered a four-point plan of its own to remedy structural 
problems in the California wholesale power market.

Observers say that the power marketer is seeking to push FERC into preempting 
state rules with structural changes for the California market, rather than 
continue reliance on price caps and other bidding controls as an interim 
solution to nascent wholesale power markets. In a white paper submitted to 
the commission for consideration, Enron tells the commissioners that the 
"problem in California is not that competition cannot work but that it has 
not been given a chance to work because the existing structure of the 
California market is only half complete."

Enron's proposal, developed by two experts who are intimately familiar with 
the California Independent System Operator (Cal-ISO), suggests that FERC 
order four specific structural remedies:

-- Removing Barriers to Market Transparency. Enron argues that the Cal-ISO 
"must release more information to the public in order to allow for efficient 
arbitrage." The absence of this information "is thwarting critical elements 
necessary for a vibrant and competitive electricity market;"

-- Development of Forwards Markets and Risk Management. Here Enron places 
some of the blame on state regulators, stating that the "rules established by 
state authorities make the wholesale market in California overly reliant on 
real-time and spot market supplies." This has prevented the development of an 
adequate forwards market. "Virtually all observers agree that forwards 
markets are critical for whole market efficiency and competitiveness." Enron 
urges FERC to "preempt state policies that are interfering with the use of 
forwards markets" by utility distribution companies. [On the same day that 
Enron filed its white paper with FERC, Cal-ISO filed a plan with the 
commission intended to shift power sales from the higher-priced spot market 
to the forward market. The plan would cap generators' bid prices to $100 per 
megawatt hour (MWh) unless they offered a minimum of 70 percent of their 
power for sale in the forward markets.];

-- Removing Distortions on Prices That Affect Supply and Investment. 
According to Enron, generation supply and electricity demand signals "are 
distorted in the California market." Arguing against continued use of price 
caps, Enron states unequivocally: "Dealing with this through continuous and 
increasingly severe price caps causes price discrimination and creates 
disincentives for the development of needed generation." Enron says there are 
changes that can be made to the bidding process that will make the California 
market "more efficient, with undermining its long-term development through 
short-sighted price caps;

-- Revising Cal-ISO and CalPX Governance Structures to Ensure Independence. 
Enron argues that the Cal-ISO and the California Power Exchange Corporation 
(CalPX) are governed by stakeholders that are not independent from local 
political forces and from the incumbent utilities that formed the basis for 
the ISO. "This conflicts with the 'bedrock' policy of [FERC] Order No. 888 
that ISOs must be independent," Enron asserts. "The commission should 
therefore change the California ISO's board from a stakeholder board to an 
independent board comprised of industry experts."

Enron tells the commission that structural changes are needed instead of 
continuation of short-term price caps and bidding controls. FERC is 
considering whether to implement a policy of price caps and bid controls 
being pushed by incumbent utilities for the California market and possibly 
for the New York market as a solution to shaky wholesale bidding markets. 
Power marketers are pressing hard for FERC to propose a more pro-competitive 
solution. Enron tells FERC that its proposed changes will prevent the 
commission from abandoning "its pervasive scheme of regulation (under Order 
No. 888 and Order No. 2000) to increase competition in the wholesale 
electricity market, as it would if it maintains perpetual price caps, or 
worse yet, it implements a return to cost-based generation rates." FERC is 
considering a proposal by the California Municipal Utilities Association for 
just that, based on the argument that reregulation is required until more 
generation capacity is brought on line in California.

The Enron white paper comes just as FERC commissions begin to review a report 
by FERC staff on what went wrong in the California market last summer and a 
proposed remedy scheme. The commission is scheduled to release the findings 
of the report on November 1, along with a proposed remedy. There will be a 
three-week period of public review and comment before FERC makes a final 
decision.

There has been much controversy over whether FERC should release the findings 
of the FERC probe immediately for stakeholders to review before they comment 
on a proposed FERC remedy. But FERC chairman James Hoecker has held hard, 
even in the face of criticism by fellow commissioner Curt Hebert, arguing 
that the commission needs time to review the document before releasing it.