Utilities Biweekly Report 	
 A news service for energy professionals   	 November 20,  2001 	


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Electricity Restructuring Gets Push  From Republicans
Republican members of the Energy and Air  Quality Subcommittee of the House Energy and Commerce Committee have agreed with  Subcommittee Chairman Joe Barton, R-Texas, that restructuring legislation should  move forward now that Congress has a few more weeks in session. In an 8-2 vote  last week, Republican Committee members decided to continue drafting electricity  restructuring legislation. Electricity restructuring provisions were excluded  from the energy bill approved by the House earlier this year. The issue was to  be readdressed in the fall but was delayed due to the events on September 11th.  No action has been taken to date in the Senate.
Green Mountain Energy Expands Into  Ohio's Restructured Market
Green Mountain Energy Company has  entered into an agreement with the Northeast Ohio Public Energy Council (NOPEC)  to service northeastern Ohio with solar and wind-generated electricity. NOPEC  was formed last year under Ohio's utility deregulation statute Senate Bill 3,  which allows local governments to serve as aggregators for electricity  customers. NOPEC consists of 100 local communities with approximately 500,000  energy customers. Under the agreement, Green Mountain Energy will construct a  25-kilowatt solar array at Lake Farmpark in Kirtland, Ohio, and will conduct a  study to determine the feasibility of siting a wind generating facility in Ohio.  The Green Mountain Energy solar array will be the largest in the state and the  first commercial solar array in Ohio built for the competitive market. The  proposed wind study will be the first commercial wind analysis executed solely  for the competitive market.
Debate Over Deregulation Impacts in  Oklahoma
Oak Ridge National Laboratory (ORNL) has reported, in a  first-of-its kind study, that restructuring Oklahoma's electric industry can  benefit consumers, but problems and potential pitfalls do exist. The report has  been met with some opposition however. Pete Churchwell, president of Oklahoma's  second largest electric utility AEP/PSO, stated on November 16th that he does  not support the study's findings, one of which indicates that Oklahoma's energy  costs could rise between 5 and 25 percent if the retail electricity market is  opened to competition. The study results indicate that lower electric prices may  be available in the short term, but restructuring will ultimately bring higher  prices. Under the state's restructuring plan, existing generating plants will  have a competitive advantage over new plants. This advantage will result in  higher prices in the long term because newer, higher-cost plants may be forced  out of the marketplace. Churchwell contests that it is too early to know for  certain how consumer rates will react in a deregulated market. While admitting  that the nation's grid was not designed for retail competition, Churchwell said  that improvements in state transmission systems would allow a successful retail  competitive market.
Utility still looks to be freed of  generators
Clark Public Utilities has been trying in vain for  two months to unload some of the 50 portable generators that have become a  multimillion-dollar white elephant.  The units, wired in rows near the  River Road Generating Plant, were leased for a year for $19.5 million. The deal  was signed with General Electric early this year, at a time when there were dire  predictions about this summer's power supply.  In addition to the equipment  lease, there is a $15 million natural gas contract to power the generators and a  roughly $12 million expense to transport the gas. While Clark has been able to  resell some of the gas at a loss, the transportation costs can't be  recouped.  For weeks, electricity on the open market has been much cheaper  than that produced by the generators.  In place since July, the generators,  each producing 1 megawatt of power, have run for just 39 days.  Electricity  prices have plunged, from a high of $325 per megawatt-hour this summer to less  than $30 today. The price has to be about $95 to make operating the generators  feasible. So utility officials have had no choice but to let them sit  idle.  In September, the net expense for the generator farm gas, generator  lease and so on was $3.5 million. For no electricity.  Utility officials  have tried to get GE to find customers for at least some of the  generators.  Tuesday morning, Andy Huck, Clark's operations director, said  he had heard from GE about a "pretty serious inquiry" for two generators for two  months. And that, he said, "is the best inquiry they've had so far."  Now,  utility officials are trying to decide whether to keep spending $62,000 a month  for three GE employees and other expenses associated with maintaining the  generators.  The theory is that the equipment should be tested, a few at a  time, to ensure they will be ready if needed.  "They told me the generators  need to be 'exercised,'" said Huck. "I told them they spent two months on a ship  without being started." The units were built in Austria.  GE, with a signed  one-year lease in hand, has little incentive to find customers for the  equipment, particularly when the company could presumably lease other generators  from its inventory.  "They say it's because we're such good client" that an  effort has been made to find other users for the generators, said Huck. Clark's  $120 million River Road generating plant features a giant GE turbine.   Clark officials don't hold out much hope of getting out from under the generator  lease expense, which runs about $1.3 million per month. "Where would they go?"  asked Jim Sanders, Clark's director of energy resources.  Meanwhile, the  natural gas supply for the equipment is being resold at about half what it cost  the utility. Gas prices also have fallen since the supply deal was inked.   At their regular Tuesday meeting, utility commissioners decided to proceed with  a $100 million bond sale that includes money to pay for the generator  lease.  In March, Rick Dyer, Clark's finance director, recommended that the  utility cut a deal for a one-year, $100 million "bond anticipation note." The  arrangement was made on the assumption that interest rates would fall in a few  months, which they have to 1961 levels.  The move Tuesday gave Dyer and  utility General Manager Wayne Nelson the OK to approve a bond sale of up to 15  years at 6 percent interest although 5 percent or less is more likely, and the  goal is a 10-year term, officials said.  The bond sale likely will occur in  the first week of December. The bulk of the $100 million borrowing is to cover a  $63 million power purchase from Kaiser Aluminum. The deal, like the generator  lease, was for power to cover an August-September gap in Clark's power supply,  before the start of a Bonneville Power Administration contract.  That  Kaiser purchase was at $325 a megawatt-hour. The utility lost a bid to have a  federal judge declare the price exorbitant and order a partial refund.     
AEP, Reliant Named as Last Resort  Providers in Texas
The Texas Public Utility Commission (PUC) has  named American Electric Power (AEP) and Reliant Resources affiliates "providers  of last resort" (POLR) for residential and small-commercial customers in all or  part of 96 counties within TXU Electric's service area. The POLR becomes the  electricity provider for customers who have been dropped by their past provider  due to payment problems or if their provider has discontinued service in their s  area. AEP and Reliant will offer a retail price that is expected to be 30-34  percent higher than base rates in the area taking effect January 1, 2002. By  becoming the POLR, AEP and Reliant will acquire an additional 2 million  Dallas-area customers and an expected 1-20 percent load increase. Due to the  higher costs associated with such an increased load the PUC was agreeable to the  higher rate. Consumer groups are opposing the higher rates, saying that  low-income consumers will be unfairly hurt. Although many low-income consumers  will qualify for a 10 percent discount advocates are arguing that POLR rates  should equal the regular rates.
Studies Show Changing Consumer Views  Towards Deregulation
A recent study by Deloitte and Touche  Energy Resources Group finds that consumers are less aware of deregulation in  the electric industry and more wary of its potential benefits. The survey  considered the opinions of 657 consumers nationwide and found that the number of  consumers who are aware of changes in retail electric markets has dropped to  39.7 percent, compared with 50.5 percent in 2000. This is a reversal in a  five-year trend of increasing consumer awareness on deregulation. Analysts cited  the terrorist attacks and the lack of federal legislation or debate on  deregulation as reasons for the change. The survey also found that more  consumers expect electric rates to increase with deregulation. Deloitte and  Touche's Brank Terzi reports that a third of consumers expect no benefit from  competition, while 26 percent expect prices to go down, 9 percent expect  improved service, and 15 percent simply "don't know." Another study completed by  RKS Research and Consulting similarly found that many consumers feel that  "deregulation has been a colossal failure." Their study found that many  consumers who have switched to new service providers have been disappointed  because their service expectations were not met. RKS Senior Vice President  Carmine Grastataro said, "customers of public power are more satisfied with the  job their utility is doing than are customers of the IOUs. Although this finding  has historically remained true, the difference in performance scores between  public power and IOUs is exacerbated in states where competition is under way."  The study also found that consumers are more interested in purchasing power  through buying groups, voluntary energy curtailment programs, and on-site  generation.
FERC Postpones December 15 RTO  Deadline
The Federal Energy Regulatory Commission (FERC) has  officially decided to postpone the December 15, 2001, deadline for utilities to  create four regional transmission organizations (RTO). FERC Chairman Pat Wood  said of the decision, "RTO development is in very different stages in various  parts of the country, and it is not possible for all RTOs to be in operation by  the December 15, 2001, deadline established in Order 2000." The commission has  approved a rulemaking order, RM01-12, that addresses the development of RTOs in  several steps. First, the Commission will develop a broader definition of the  expected functions of an RTO and how they can be achieved. Second, FERC will  seek improved input and communication from both state and federal agencies on  RTO development. Third, FERC will conduct a formal cost benefit analysis of RTO  systems. This comes in response to two conflicting studies: NY ISO reports that  a large Northeast RTO could cause power rates to increase by $90 million, while  Mirant contends that a Northeast RTO could save consumers $440 million. The  rulemaking also calls for FERC to determine areas in which standardization can  be improved. Lastly, a new "progressive" timeline will be developed that  addresses RTO development in a region-by-region approach. While Chairman Wood  said that the commission is holding to its original concept of four RTOs, he  also noted that the new order suggests that three smaller RTOs may be developed  within the Western region. These transmission groups would include RTO West,  Desert Star RTO, and one based on the California ISO. The rulemaking also makes  a call for comments in what Commissioner Nora Brownell noted as possibly the  last opportunity for market participants and state regulators to make  suggestions and raise concerns before final orders are issued.
Ontario deregulation in  doubt 
The planned  deregulation of the $35-billion Ontario electricity sector has been thrown in  doubt by a radical proposal that would shackle the province's electricity  transmission company, preventing it from becoming a significant player in an  open North American power market. The plan, known only to Ontario Premier Mike  Harris and a few government and Bay Street insiders, would turn Hydro One into a  not-for-profit entity instead of a fully commercial, privatized company. If this  happens, Hydro One would lack the flexibility to raise equity capital, make  acquisitions and form partnerships in an effort to become one of continent's  premier transmission companies -- a goal plainly set out by chief executive  officer Eleanor Clitheroe. David Lindsay, the president and chief executive  officer of Ontario SuperBuild Corp., the government's privatization adviser,  confirmed that turning Hydro One into a not-for-profit organization, similar to  Nav Canada, the civil air navigation service, is under serious consideration.  "We've been asked to evaluate all options for Hydro One's future, including this  one," he said yesterday. He would not provide details, though it is thought that  the government wants to make a decision on Hydro One's future ownership  structure by the conclusion of the year. A senior official in the Ontario  government, who did not want to be identified, said the proposal "is a step  backward to the old days of Ontario Hydro." He was referring to the debt-laden  utility that was split into Ontario Power Generation, the electricity generating  arm, and Hydro One, whose network of high-voltage transmission lines spans  30,000 kilometres. The Premier's office would not comment. A spokeswoman for  Energy Minister Jim Wilson would say only that "there are a number of options on  the table." Sources on Bay Street and at Queen's Park said the idea of turning  Hydro One into a not-for-profit entity is being propelled by Anthony Fell, the  chairman of Royal Bank-owned RBC Dominion Securities, Bay Street's largest  dealer. If the new Hydro One took this shape, it would raise about $10-billion  through the sale of bonds to investors. The dealers' commission on the sale of  the bonds, which would rank among the biggest debt issues in history, would  range from $25-million to $40-million, one Bay Street executive said. Mr. Harris  is said to be keen on the concept partly because all the money would go back to  the government to help pay down the $21-billion in "stranded debt" racked up by  the old Ontario Hydro. The generating and transmission giant's decades-long  spending spree on nuclear plants and other assets tore a huge hole in the  province's balance sheet. Hydro One's cash flow, derived from sales to  electricity users, would be used to pay the interest on the $10-billion of  bonds. Presumably, consumers would face higher electricity charges if Hydro One  lacked sufficient cash to pay the interest. If Hydro One were a private company  instead, its financial risk would be borne by shareholders, not ratepayers. The  United States has embraced deregulation partly because it shifts the financial  risk of the electricity market from taxpayers to shareholders. Executives at RBC  Dominion declined to comment on the plan, citing client confidentiality  concerns. Mr. Fell first proposed it to the government in the spring. The  government wants to open up the Ontario electricity market, in which buyers and  sellers can negotiate prices, by next spring. The market overhaul contemplated  turning Ontario Power Generation and Hydro One, both of which are 100 per cent  owned by the government, into commercial companies. In Hydro One's case, the  leading options were thought to be an outright sale, in which the utility would  be bought by another company (presumably a rival utility), or an initial public  offering, where the shares would be owned by private investors and traded on the  stock exchange. The third option -- converting Hydro One into a not-for-profit  organization -- has come as a surprise. There has been no debate on this option,  though rumours of its existence have jolted Bay Street and Hydro One, both of  which were working on the assumption that the transmission business would  eventually become a commercial enterprise. Sources said that Hydro One  management opposes the not-for-profit structure because it would deny Hydro One  the flexibility and discipline of a typical commercial business. The  not-for-profit structure would mean it would not have to pay taxes, which raises  potential trade issues with the United States. American transmission companies  might argue that Hydro One's non-taxable status gives it an unfair competitive  advantage. It would also deny Hydro One management the benefit of potentially  lucrative share options.  Rod Taylor, Hydro One's executive vice-president,  would not comment on the not-for-profitoption being contemplated by the  government. He said, however, that the company's strategy hinges on its ability  to become a major player in the deregulated North American electricity market.  "Our vision of the company is to become a fully commercial entity, and become in  the transmission sector what Canadian National is to the rail sector," he said  in a phone interview. Stanley Hartt, the chairman of the Canadian office of Wall  Street's Salomon Smith Barney, is among the Bay Street executives who opposes a  not-for-profit structure for Hydro One (Salomon has a small role as an adviser  to Hydro One's strategic business plan). In a three-page letter sent this week  to the top executives of several large power-using Ontario companies, he said  that "this idea is short-sighted and bad for Ontario." He argued that "the  absence of an equity component in the capital structure of the not-for-profit  corporation essentially transfers the equity risk to the ratepayers." He also  said that, without financial flexibility, Hydro One would lack the resources to  invest in "new bottleneck-eliminating connections" that would allow the company  to become a significant electricity exporter. "Ontario would lose the prospect  of becoming a true hub for North American Energy transmission," he said. In a  recent report on the power industry, TD Newcrest analyst David McCracken wrote,  "With its operating expertise and strong balance sheet, Hydro One is well  positioned to act as a consolidator of transmission grids in the northern United  States, where ownership tends to be fragmented." He noted that Hydro One is  expected to be privatized in the next few years, and he said the utility has  "the opportunity to lever strengths from traditional wires businesses into  competitive high-growth initiatives." According to sources familiar with the  not-for-profit proposal, Hydro One would be governed in the best interests of  all electricity users by stocking the board of directors with appointees from  corporations that are heavy power users, such as auto and steel makers and paper  companies. Such a structure exists at Nav Canada, with airline executives on the  board, and the company has been able to cut the fees it charges customers.  Restructuring Hydro One with debt, rather than equity, is also presented as the  most efficient way to capitalize the company. "The problem with a Canadian  National Rail-style IPO is that equity is much more expensive than debt," said  one financier familiar with the proposal. "With a debt-based structure, every  dollar earned is available to pay interest, while an equity-based structure  means you pay federal taxes, provide a return to shareholders and make debt  payments." Dofasco Inc., the big Ontario steel producer that consumes about  $100-million of electricity a year, supports the not-for-profit proposal. Gord  Forstner, head of communications, said a bond sale would reduce Ontario Hydro's  stranded debt by $10-billion immediately, paving the way for lower electricity  charges. Currently, a special levy on all electricity bills is being used to  whittle down the debt. The charge costs Dofasco alone about $15-million a year.  "We want to see the stranded debt paid down first," Mr. Forstner said. "Until  that happens, we don't favour Hydro One going to the expense of expanding  outside of Ontario's boundaries."
Retail Access Requested in  California
The Alliance for Retail Energy Markets (AReM) has  asked the California Supreme Court to overturn the state Public Utilities  Commission's September 20th decision that suspended direct retail access across  the state. The consumer group, comprised of American Utility Network, the  Alliance for Retail Energy Markets, California League of Food Processors,  Western Power Trading Forum, Strategic Energy, AB&I Foundry, Tricon Global  Restaurants and School Project for Utility Rate Reduction, has argued that the  ruling was made without due process and that the Court had no right to abrogate  contracts retroactively. "It is our hope that the Supreme Court recognizes the  PUC has acted in complete disregard of our constitutional rights and has rushed  to judgment on this issue, without hearings and without creating a proper  evidentiary record," said AReM Attorney Dan Douglass. PUC Commissioner Carl Wood  has maintained that the PUC issued the order because it believed that consumers  have hastily signed contracts with competitive suppliers, leaving fewer  customers to pay for the state's wholesale power costs. AReM is disputing the  claim, saying that only a limited number of customers switched suppliers during  the summer of 2001.
Plant Construction Influences  Florida's Wholesale Market
California based Calpine Corporation  announced that it has begun construction of a 530 megawatt power plant in  Auburndale, Florida. The construction brings Florida closer to deregulation, as  Calpine is one of the few out-of-state generating companies to successfully  penetrate Florida's wholesale electricity market. Other companies, such as  Enron, have attempted to construct new power plants in the state, but have been  unsuccessful due to community and regulatory resistance. Florida's stringent  Power Plant Siting Act makes it very difficult for out-of-state companies to  enter the market. Calpine has succeeded by agreeing to sell the output from the  Auburndale plant under a long-term contract to one of Florida's existing  utilities, Seminole Electric Cooperative. In addition, Calpine has been working  with the Florida Partnership for Affordable Competitive Electricity to persuade  lawmakers and Governor Bush to deregulate Florida's wholesale market. Florida's  Energy 2020 Study Commission, which is responsible for the state's competition  plan, has endorsed a proposal to allow out-of-state companies to enter Florida's  wholesale market by building new plants and selling power to the state's  incumbent utilities. The Commission has also suggested eliminating the power of  state government to approve power plant development and limiting the ability of  local governments to block projects. The Commission is expected to issue a final  report on December 1, 2001.
Florida PSC Approves Independent  Power Line Operations
The Florida Public Service Commission  (PSC) has approved the transfer of the state's power lines from utility  jurisdiction to an independent company. The PSC has asked Florida's three main  utilities, Florida Power and Light (FPL), Florida and Power Corporation, and  Tampa Electric, to devise a proposal within 90 days that will turn over  operation of the power lines to an independent system operator. Commissioner  Michael A. Palecki said that the decision was made in the best interest for  ratepayers, utility companies and independent power companies seeking a  competitive market. Under an earlier proposal submitted to the PSC, the  utilities proposed a statewide regional transmission organization, GridFlorida,  that would have owned and managed the power lines. The PSC did not approve the  plan, as it would have moved jurisdiction of retail rates to the Federal Energy  Regulatory Commission.
New England Congressmen Seek Equal  Representation on RTO Board
Twenty-three U.S. congressmen from  New England requested that their states be given adequate representation on the  governance of the Northeast Regional Transmission Organization (RTO.) In an  effort organized by Representative Edward Markey (D-Mass), the bipartisan  delegation of congressmen wrote a letter to the Federal Energy Regulatory  Commission (FERC) asking the regulators to create a governing board comprised of  equal numbers of representatives from New England, New York, and the  Mid-Atlantic. "We view an equally balanced governance structure as the only way  in which a single market design can be implemented which would truly benefit the  consumers of all the regions," Markey said. FERC has been considering several  options for structuring the board that will oversee the unified Northeast  wholesale power market. One proposal gives five seats for representatives from  the Mid-Atlantic, three seats to New York, and two to New England. ISO New  England and New York Independent System Operator joined the congressman in  opposing that plan and requesting equal representation.
California Wants Consumers to See  Real Power Costs
In a move that may prevent a repeat meltdown of  the wholesale electricity market in California, the California Consumer Power  and Financing Authority wants to install electricity meters that charge  consumers the real cost of power. Currently consumers pay the same price for  electricity throughout the day even though the wholesale price varies every  hour. Therefore, consumers have no incentive to conserve during peak times. The  meters will charge residential consumers more for power used during peak hours,  when demand is highest and less during off peak times. The authority issued  requests for proposals, due by November 15, for a minimum of 10,000 real-time  meters, the cost of which varies between $200 and $1,000. The power authority  plans to finance the purchase of the meters and will market them to customers of  Pacific Gas & Electric, Southern California Edison, San Diego Gas &  Electric and dozens of municipal utilities. As consumers have shown to be  responsive to price signals in a pilot program in Washington, Californians too  can expect to reduce their energy consumption. Project manger, Kevin Wood of  Southern California Edison hopes his company will install meters for 11,000  customers by next summer. He said that if these customers, who represent 20 to  30 percent of the load, respond to price signals during peak hours, this may in  turn drive down wholesale prices for all users. While consumers may benefit, the  decrease in consumption may cost power generators millions of dollars in  revenue.
Environmentalists and Union Coalition  Oppose Deregulation in Indiana
A coalition of union members from  several groups showed their opposition to electric utility deregulation in  Indiana during a peaceful demonstration on November 7. The coalition, know as  People's Energy Campaign, includes members from UNITE Local 399, formerly the  Ladies Garment Workers Union, the Central Labor Council, Valley Watch  environmental group, and the Citizens Action Coalition. Denny Owen, an executive  board member of UNITE Local 399, expressed the general concern of the coalition  that deregulation should be discouraged. "We don't think it'll make prices  lower, it'll make them go higher," Owen said. Indiana is considered to have low  utility rates compared to other states. Indiana lawmakers are considering  deregulation as newly introduced legislation proposes to create an Energy Policy  Commission that would craft a comprehensive energy plan for the state. Senator  Gard and other General Assembly members created the bill to address the state's  need for a true energy policy and as a means to address future electric load  growth. "Merchant power plants have been a divisive issue in the past year and a  half," Gard said. "There are many people who feel if the state has a  comprehensive energy policy, it might be better able to deal with this issue.  And we also have to pay attention to what's happened in California." The bill  would set up a temporary commission with appointed members representing various  stakeholder groups including state government, industry, labor, and  environmental groups. The commission is scheduled to present a final report to  the governor in December 2002. While electric deregulation would not be a prime  focus of the commission, the "specter of deregulation" would have to be examined  in some fashion, Senator Gard said. SB 233 has been sent to the Senate Rules and  Legislative Procedures Committee. Senator Gard predicts it will pass the Senate,  although chances in the House of Representatives are less favorable.
Debate Over Oklahoma Transmission  System's Readiness to Serve Future Load
The Electric  Restructuring Advisory Committee met with industry officials on November 7 to  discuss the future capabilities of Oklahoma's transmission system. The committee  is responsible for researching the capabilities of the system, determining  whether upgrades are necessary, and delegating the responsibility for paying for  such upgrades. With new power plants being developed and proposals to open the  state to a competitive electric market in progress, concern has risen as to  whether the transmission system can handle the increased load. Stanton Hadley of  Oak Ridge National Laboratory reported that electricity demand in Oklahoma is  expected to grow 26 percent, to 14,350 megawatts by 2010. The transmission  system currently is able to handle only 13,300 megawatts. Nevertheless, power  companies are planning 13,500 megawatts of new power generation. Calpine  Corporation is spending about $20 million on transmission improvements between  its power plant near Coweta, Oklahoma, and the outlying region. Also, Public  Service Company of Oklahoma plans to spend $40 million on transmission upgrades  over the next few years. With the new power plants and a supply surplus  expected, Hadley also said that consumers could expect lower costs. John Wright,  one of the committee members questioning this assumption, said that in a  deregulated market, the utilities are likely to sell their power out of state.  If this were to occur, lower power prices would be unlikely. The Electric  Restructuring Advisory Committee will deliver a report to the Legislature at the  end of the year.
Thirty New Power Plants Proposed for  Virginia
The latest news out of the deregulation of Virginia's  electric power industry centers around thirty proposals for new power plants in  the state. While the surge in supply is expected to prevent a California-like  energy crisis, health and environmentalists argue that the air pollution and  smog from the plants could damage the state's parks and forests. Since 1998,  when the state announced its plans to open its energy markets to competition, 30  companies and utilities have asked for state approval to build new plants.  Activists complain that the new power would not even benefit Virginia's  customers, as the energy is intended for delivery in northeastern states. By  building plants in Virginia, utilities avoid the Northeast's stringent  environmental regulations. An advisory group composed of utility and industry  representatives argues that new plants pose no significant risk. They stated  that 28 of the new plants would run on cleaner-burning natural gas and that  other federal regulations would require older plants to reduce harmful emissions  by 65 percent by 2004. The representatives also expect that only a few of the  plants will actually be built due to market conditions and cooling-water  shortages.

Copyright ? 2001 Egnatia Research &  Management. All rights  reserved