Dan Douglass summarized this.  This really puts CA and the ISO on notice that 
they cannot confiscate the power as they seem ready to do -- FERC reiterates 
that the generators can sell power wherever they want because the cap is a 
cap on ISO purchases.  ANd if the ISO want to set a sale price cap it has to 
file with FERC, wait 60 days and amend its contract
---------------------- Forwarded by Susan J Mara/SFO/EES on 08/01/2000 01:01 
AM ---------------------------


"Daniel Douglass" <douglass@ArterHadden.com> on 07/31/2000 07:27:24 PM
To: <peter.bray@att.net>, <JBarthrop@electric.com>, <mnelson@electric.com>, 
<rschlanert@electric.com>, <Bruno_Gaillard@enron.com>, <kmagrude@enron.com>, 
<mpetroch@enron.com>, <susan_j_mara@enron.com>, <athomas@newenergy.com>, 
<bchen@newenergy.com>, <Jeff.Hanson@phaser.com>, <anchau@shellus.com>, 
<andrew.madden@utility.com>, <ben.reyes@utility.com>, 
<chris.king@utility.com>, <david.bayless@utility.com>
cc:  
Subject: FERC Order on Morgan Stanley Complaint Against ISO


We have good news on the ISO price caps front.  The FERC has made it
clear that ISO does not have the ability to mandate that generators sell to 
ISO at its price caps and that the proper response to inadequate supply is to 
lift the price caps.

On Friday, the FERC issued its Order on Complaint in connection with the July 
10 complaint filed by Morgan Stanley Capital Group Inc. ("MS").  As you may 
recall, MS requested FERC to issue a stay of the ISO's maximum purchase price 
authority and to direct the ISO to reverse any price cap reductions.  MS 
sought Fast Track processing pursuant to Rule 206(h), which was granted by 
FERC on the grounds that the complaint "warrants expeditious action."

As a quick background summary for you, last November, FERC issued an order 
approving Tariff Amendment 21 which extended ISO's price cap authority 
through 11/15/00.  That order stated that the ISO "maximum purchase price was 
not a cap on what the seller may charge the ISO, but a cap on what the ISO 
was willing to pay."  The Commission said that sellers dissatisfied with the 
price cap could "choose to sell those services into the California Power 
Exchange or bilateral markets."

FERC notes in Friday's Order that the 6/28 the ISO's Board resolution lowered 
the caps to $500 and ISO further directed that, "To the extent permitted by 
law, regulation and pre-existing contract, Management shall direct generators 
to bid in all their capacity when system load exceeds 38,000 MW."

The MS complaint alleged that the cap reduction was unlawful and would, 
"threaten the stability and integroty of the marketplace."  MS also requested 
an emergency technical conference to examine ISO's justification for the 
price cap reduction.

FERC denied the MS stay request, as well as its request that the $750 maximum 
purchase price be reinstated.  The Commission reiterates that it is not 
approving a cap on sellers' prices, because they can sell at whatever price 
they want.  Rather ISO has simply stated the maximum price it is willing to 
pay.  "Because sellers are not required to sell to the ISO, the ISO cannot 
dictate their price."

Importantly, however, FERC also states that, "ISO has no more or less ability 
to procure capacity and energy than any other buyer of these services....if 
the ISO is unable to elicit sufficient supplies at or below its announced 
purchase price ceiling (because generators are free to sell elsewhere if they 
choose), it will have to raise its purchase price to the level necessary to 
meet its needs."  [Emphasis added]  FERC then notes that this may lead to an 
increase in Out of Market ("OOM") calls and that OOM calls are not subject to 
a maximum purchase price.

Also, with regard to the ISO's resolution stating that generators must bid 
their capacity into the ISO markets when system load exceeds 38,000 MW, FERC 
states clearly that, "such a requirement is not permitted by our November  12 
Order and the ISO tariff."  [Emphasis added]

FERC goes on to say that any requirement to sell to ISO in conjunction with a 
maximum purchase price would require significant revisions to ISO's market 
rules, which could not be made effective without a corresponding amendment to 
ISO's tariff.  This would require 60 days' advance notice, "and could not be 
implemented prior to Commission approval.  As stated above, our November 12 
Order was clearly based on the premise that the proper response to inadequate 
supply (due to a low maximum purchase price) is to raise the maximum purchase 
price."

ISO is then "put on notice that any amendment to mandate sales must be 
accompanied by a demonstration that this extreme measure is the proper 
response to low supplies in the ISO markets."

Concurrences were filed by Commissioners Massey and Hebert.  Massey suggests 
that the state has to facilitate solutions to market issues, such as risk 
management tools, removing constraints on hedging opportunities, introducing 
real time pricing through real time metering and expediting approval of new 
generation and transmission projects in California.  Hebert says that the 
previous November Order tried to "straddle the fence" and that, "Today, the 
Commission at least starts to lean slightly in the right direction of 
recognizing that we have a role."  He then reiterates his preference for 
removing all price caps.  He also suggests that, "Getting to the bottom of 
the problem, in my view, requires us to begin a proceeding to rescind our 
approval of the ISO as operator of the California grid.  The record supports 
such a move."  He refers approvingly to the Collins resignation letter, 
stating that it, "thoughtfully outlines consequences to the market of a 
return to 'command and control.' "  Hebert states that, "The independence of 
the ISO's governing structure stands threatened.  We should 'stand up,' to 
quote the resignation letter."  Hebert advocates opening a section 206 
proceeding now, as part of the recently announced inquiry into bulk power 
markets, "including the California markets."

This decision makes it clear that ISO cannot lower the caps at tomorrow's 
meeting and expect that sellers will be required to sell to it at that 
price.  This is an important development and very good news in our ongoing 
efforts to seek economic sanity at the ISO.

Please call if you have any questions.

Dan