---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 12/19/2000 
03:07 PM ---------------------------


"The Alliance of Energy Suppliers" <alliance@eei.org>@ls.eei.org on 
12/18/2000 12:19:56 PM
Please respond to "The Alliance of Energy Suppliers" <alliance@eei.org>
Sent by: bounce-app-ippexecs-33275@ls.eei.org
To: "Generation and Power Marketing Executives" <app-ippexecs@ls.eei.org>
cc:  
Subject: Alliance Info Alert: Richardson and FERC Orders



Dear Generation/Power Marketing Executive:

The following are summaries of two significant activities that occurred 
Friday, December 15
  1.  Energy Secretary Richardson issuance of an emergency order.
      (Richardson's statement and FPA Section 202(c) order is posted on DOE's 
Web site at:
       http://www.energy.gov/HQPress/releases00/decpr/pr00309.html )

  2.  FERC's 12/15/00 final order to fix California wholesale markets
       (FERC's Order can be viewed at 
http://www.eei.org/issues/news/cal1215order.pdf)

                                  California Supplies Ordered by Richardson

o Richardson orders listed entities to supply excess power to California ISO
o Order is effective as soon as ISO certifies shortage, but ends 12/21/00, 
unless extended
o Prices to be agreed to by supplier and ISO, or FERC will set rate later
o FPA emergency power authority transferred to DOE in 1977

As he said he would on December 13, U.S. Department of Energy Secretary Bill 
Richardson found "an emergency exists in California by reason of the shortage 
of electric energy" and issued an emergency order under section 202 (c) of 
the Federal Power Act (FPA) requiring listed generators and marketers to 
provide any power in excess of the needs of their firm customers to the 
California ISO.  In a statement, Richardson said the threat to the 
reliability of the California grid requires a long-term solution, but that in 
the short-term power must keep flowing to the state to avert blackouts.

The 76 listed suppliers have 12 hours after the ISO certifies to DOE that it 
has been unable to acquire adequate supplies in the market to begin providing 
requested service to the ISO.  The ISO must inform each supplier subject to 
the order of the amount and type of energy or services required by 9:00 PM, 
Eastern Standard Time, the day before the services are needed.  The order 
directs the ISO to allocate, to the extent feasible, requested services among 
subject entities in proportion to each supplier's available excess power.  
The order is effective immediately and will terminate at 3:00 AM, Eastern 
Time, December 21, 2000, unless extended.  To continue to obtain supplies 
under this emergency authority, the ISO must re-certify the shortage to DOE 
headquarters every 24 hours.

The terms of the provision of electric energy and other services by suppliers 
to the ISO "are to be agreed to by the parties."  If no agreement is reached, 
then under the FPA's emergency authority Secretary Richardson "will 
immediately prescribe the conditions of service and refer the rate issue to 
the Federal Energy Regulatory Commission for a determination at a later date 
by that agency in accordance with its standards and procedures, and will 
prescribe by supplemental order such rates as it finds to be just and 
reasonable."  The authority of FERC to set rates for power supplied under 
emergency order at just and reasonable levels where the parties themselves do 
not agree to a rate is explicitly included in FPA Section 202(c).  The DOE 
Organization Act of 1997 transferred the emergency powers of this section 
from FERC to DOE.

The 76 entities identified in the order's attachment are all the entities 
that have provided power to the ISO over the last 30 days.  Those entities 
are ordered "to make arrangements to generate, deliver, interchange, and 
transmit electric energy when, as, and in such amounts as may be requested by 
the" ISO, "acting as agent for and on behalf of Scheduling Coordinators."



[Source: DOE Secretary Richardson's December 14, 2000 statement and order; 
Electric Power Daily, December 15, 2000]



             FERC De-Federalizes California Markets, Adopts Other Structural 
Reforms
                  A summary of the December 15 Order and Commission Discussion

At its special meeting today, FERC unanimously approved its eagerly awaited 
final order reforming the California wholesale markets, adopting the major 
outlines of its November 1 proposed order and sending back to California the 
responsibility for addressing state-related matters, as discussed below.  At 
the same time, FERC deferred consideration of retroactive refund issues as 
well as the imposition of region-wide price caps.

FERC reiterated the November 1 conclusions that under certain circumstances, 
California ratepayers were subjected to unjust and unreasonable power rates 
due to California's "seriously flawed" market structure and rules in 
conjunction with tight demand and supply conditions throughout the West.

While all four commissioners supported the order as a consensus-based outcome 
that appropriately balanced all competing interests, each commissioner 
expressed reservations with particular aspects of the order.  Chairman 
Hoecker and Comm. Breathitt expressed the strongest endorsement, while Comms. 
Hebert and Massey laid out their positions where they believed the Commission 
had either "over-reached" or not gone far enough, just as they did on 
November 1, as discussed below.

Highlights of key actions:

(1) FERC adopted the November 1 proposal to eliminate, effective immediately, 
the state's mandatory requirement that the state's investor-owned utilities 
buy and sell electricity through the PX, and allow these utilities to 
purchase electricity through forward contracts and other alternative 
mechanisms to manage supply risks.  FERC terminated the PX's rate schedules 
effective at the close of business on April 30, 2001.  In effect, as Chairman 
Hoecker stated, the order de-federalizes 60 percent of the California 
wholesale market established under the state's restructuring law, returning 
ratemaking authority over company-owned generation to the California Public 
Utilities Commission (CPUC).

(2) FERC modified the effective period of the November 1 $150/MWh "soft cap" 
proposal, limiting its application through April 2001, whereupon a 
"comprehensive and systematic monitoring and mitigation program which 
incorporates appropriate thresholds, screen and mitigation measures" must be 
in place.  In a related move, FERC ordered a technical conference early next 
year to develop such a program by March 1, 2001, so that these measures can 
be place by the May 1, deadline.

In a major modification, FERC revised the refund conditions to clarify that 
while certain refund conditions will continue to apply, unless FERC issues 
written notification to the seller that its transaction is still under 
review, refund potential on a transaction will close after 60 days.

As proposed, however, supply bids in excess of $150 will be prohibited from 
setting the market-clearing price for all bidders and sellers bidding above 
$150/MWh will be required to report their bids to FERC on a confidential, 
weekly basis and provide certain cost support.

(3) FERC adopted the November 1 proposal to require the establishment of 
independent, non-stakeholder governing board for the ISO.  The ISO Governing 
Board must relinquish their decision-making power and operating control to 
the ISO management on January 29, 2001.  A future order will set procedures 
for discussion with state representatives on the board selection process.

(4) In a major modification, FERC adopted a $74/MWh "price benchmark" for 
assessing prices of five-year energy supply contracts.  This benchmark will 
be used in assessing any complaints regarding justness and reasonableness of 
pricing long-term contracts.

To facilitate prompt negotiation of longer term power contracts at reasonable 
rates, FERC announced that it will hold a settlement conference with market 
participants.

(5) FERC adopted the November 1 proposal to require market participants to 
schedule 95 percent of their transactions in the day-ahead market and 
instituting a penalty charge for under-scheduling (in excess of five percent 
of hourly load requirements), in order to discourage over-reliance on the 
real-time spot market.

(6) FERC directed the ISO and the three investor-owned utilities to file 
generation interconnection standards.

(7) FERC affirmed the longer-term measures proposed in the November 1 order, 
including submission of a congestion management design proposal by April 2, 
2001.

(8) FERC deferred resolving key issues, including establishing new ISO board 
selection procedures, developing appropriate market monitoring measures and 
negotiating protective orders associated with data collection.

(9) FERC reiterated its November 1 call to California policy makers there to 
resolve state issues, such as: (1) immediately implementing the availability 
of day ahead markets for power purchases; (2) development of demand 
responses; (3) siting of generation and transmission; and (4) assurance of 
sufficient reserve requirements.

Commissioner Responses

Comm. Hebert reluctantly concurred, calling the final order a "missed 
opportunity" to, among other things, send appropriate signals for new 
generation siting and conservation.  Reiterating his November 1 concerns, 
Hebert recounted the remedial remedies that he maintained the Commission 
should and should not have adopted.  While expressing pleasure at the tone of 
the order ("balanced and considerate"), the bid certainly reversal, and the 
role reserved for the state in the selection of the new ISO board, Hebert 
nonetheless objected to the benchmark prices established in the order, which 
he maintained appeared to be unreasonably low.  Hebert faulted the Commission 
for not attempting to reconcile the instant order with the November 8 order 
approving the CA ISO's emergency $250/MWh "soft cap" proposal.  Hebert ended 
by challenging the CPUC to do what it can to encourage utilities there to 
forward contract, including easing the existing prudence review requirements.

Comm. Breathitt endorsed the Order, reiterating her support for progress 
towards open and competitive markets.  She noted that the Order properly 
"walked the line" by taking all of the competing interests into account, 
calling it less than ideal, but a step in the right direction.  She also 
concentrated her remarks on the importance of creating stability which will 
be accomplished by encouraging long term contracts and the implementation of 
the $150/MWh breakpoint.  Additionally she mentioned that any price below the 
$74/MWh benchmark will be presumed just and reasonable.

Comm. Massey concurred, but prefaced his remarks by expressing sympathy for 
California ratepayers, stating that he felt that market power had been 
exercised, that prices were not just and reasonable and that the marketers 
had profited too much at the expense of others in the market.  He warned 
that, as he understood the legal precedents, the Federal Courts were poised 
to grant cost recovery relief to the retailers which would then be passed on 
to consumers.  On the positive side, he approved of the de-federalization of 
60% of the market and the creation of long term contracts.  However, he 
emphasized that California regulators must now take the responsibility of 
creating more generation and transmission.  In the long term, Comm. Massey 
hoped that solutions could be reached starting with a technical conference 
and that the market would have rules more like PJM.

Finally, Comm. Massey articulated what he would have liked to have done 
differently.  He stated that he disagreed with the fact that there is not 
enough evidence to show that market power existed and he pointed to the 
on-going investigation.  He also disagreed with the $150/MWh breakpoint, 
preferring instead a hard price per generator.  The Commissioner said he 
would have set the long term benchmark for only two years instead of five and 
that he would have opened a section 206 investigation in the West.  Finally, 
he stated that he would have liked to address the issue of refunds.

Chairman Hoecker began his comments by saying that the Commission was forced 
to act  and act quickly because the stakes are so high.  He feels that it is 
now time for the state regulators and markets to act.  He noted that by 
shrinking the Cal PX, the responsibility is now with the CPUC to fashion the 
long term contracts and that hopefully we will exit this situation with the 
least amount of damage to the utilities.  In regards to suggestions for a 
regional price cap, the Chairman stated that this would not work due to the 
fact that the Commission has no jurisdiction over Bonneville, WAPA and the 
public power producers and that there is no spot market in the Northwest.  
However, he did urge Secretary Richardson to convene a conference in order to 
address regional issues.  Finally, in conceptually addressing the California 
situation, the Chairman stated that competition or "deregulation" did not 
fail in California, but that there never was competition in California.