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From: 	bounce-alliance_info-90961@listserver.eei.org@ENRON   On Behalf Of "The Alliance of Energy Suppliers" <alliance@eei.org>
Sent:	Friday, December 28, 2001 12:33 PM
To:	Alliance Information
Subject:	ALLIANCE FERC BEAT: Generators/Power Marketers December 19 FERC     Post-Meeting Memo


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Generators/Power Marketers December 19  FERC Post-Meeting Memo
 
Introduction  
At the last Commission meeting of the year, FERC approved  the first RTO in the Midwest and issued some critical orders on RTO development,  announced plans to defer action and the effects of its November market power  orders, modified mitigation measures for the Western Systems Coordinating  Council, reaffirmed price mitigation measures for the California ISO markets,  and challenged industry to develop a "single" industry consensus organization by  March 15, 2002 to be the standards-setting body for commercial business and  communications protocol standards. 
To that end , the Alliance of  Energy Suppliers and EEI encourages industry to actively participate in its  national meetings being held in four regions of the country to advance the  development of principles for which to form this organization. The  first of the four regional meetings will be held on January 15, 2002 in  Phoenix, AZ with the remaining meeting in Cincinnati, OH, New  York City, and Atlanta, GA .  An e-mail with all of the necessary  logistical information has been circulated.  If you are interested in  attending or sending a company representative and did not receive the earlier  e-mail, please let us know. 
In addition, FERC announced  a series of technical conferences on standard market design and structure,  market based rate /market power, and energy infrastructure. 
 
If you would like copies of any orders, please do not hesitate to  contact us.
Midwest ISO Receives FERC's  Approval as an RTO 
In a series of inter-related RTO  decisions, FERC approved the nations first RTO, granting the Midwest ISOs  proposal to become an RTO, while rejecting a similar plan from the Alliance  Companies to form the Alliance RTO. In reversing prior policy, FERC concluded  that the ARTO proposal lacked sufficient scope and size to exist as a  stand-alone RTO and told the Alliance Companies to explore how their business  plan can be accommodated within the [MISO] structure. Allowing two RTOs in the  Midwest would be a second-best solution that would compromise customers'  interests, FERC stated. 
In related developments, FERC also approved  International Transmission Company's request to transfer operational control of  its transmission facilities to MISO and accepted an agreement between MISO and  International Transmission that would allow the company to be an independent  transmission company that would share certain RTO functions with MISO. Finally,  in a related docket FERC granted in part National Grids request for a  declaratory order that it is not a market participant, but dismissed the  Alliance Companies business plan without prejudice as unneeded given the other  Alliance order, thus nullifying Grids proposal to manage ARTO. (More  detailed RTO summary provided below) 
FERC Delays Implementation of New Market Power Rules  
FERC announced that it would delay the effects of its November 20 market  power orders. In FERC's December 19 order, it recognized the Alliance of  Energy Suppliers' filing requesting FERC to vacate or stay the effects  of its market power orders and initiate a rulemaking proceeding to allow for  comments by affected industry participants, as basis for its change in policy  action. We should claim this as a victory--for FERC has announced an upcoming  technical conference to discuss said orders and allow industry to voice its  concerns over the implications of such measures on the competitive wholesale  markets. Although a date for this technical conference has not been announced,  Chairman Wood said that details of the conference will be released in a  notational order. FERC has also delayed implementation of certain aspects of the  new Supply Margin Assessment (SMA) market power screen test.  
FERC Sets Schedule for Electric Market Design;  Industry Told to Select Wholesale Market Standards Body or FERC Will Do  So. 
FERC outlined a schedule for a rulemaking in the  Electric Market Design docket and announced the release of a staff white paper  to serve as a strawman piece for continued collaboration with interested parties  on standardized electric market design. FERC stated it expected to host industry  workshops in early 2002, tentatively set for January 22 -25 and February 4- 8,  to further develop ideas on market standardization and issue a NOPR in March  2002. The NOPR would be followed by additional workshops in April and May to  discuss NOPR inclusions and workshop developments. Written comments on the NOPR  and workshop progress will also be due in May. A final rule is expected to be  issued in July 2002. Although FERC staff recognized that this was a very  ambitious schedule, the FERC presenter said they wanted to "get done before  summer break" (2002). 
Meanwhile, FERC said, interested parties should  evaluate NAESB, NERC and alternative proposals for an organization to develop  wholesale electric industry business practice and communication standards, and  agree on a single consensus, industry-wide organization to develop these  standards by March 15, 2002. The Order indicated that should industry not agree  on a single organization by that date, FERC would either choose an organization  or institute a proceeding to develop the necessary standards.  
Commissioner Brownell reiterated her dismay and disbelief with  industry's lag in progress: "[l]et's get this done.".. " I can't believe we're  still debating the "who". The other three Commissioners indicated their general  support for the Order. Commissioner Breathitt believes that this ANOPR process  is working well because it "gives industry something to coalesce around."  Breathitt was also in favor of industry answering the question of how much  standardization do we need and how much do we need to leave to creativity and  innovation?  Chairman Wood concluded his remarks, saying, "[t]he GIGA-NOPR  is on its way." 
The staff white paper covering these issues is available  from the FERC website at: http://www.ferc.gov/electric/rto/mrkt-strct-comments/mrkt-strct-concept.PDF   . 
FERC Largely Reaffirms Prior Western  Market Price Mitigation Orders, Modifies Price Cap to Account for NW Winter  Peaking Concerns 
In a broad rehearing order that addresses a  wide range of issues related to California and the western energy markets, FERC  generally denied rehearing requests and reaffirmed earlier decisions on pricing  and price mitigation measures. The order addresses rehearing and clarification  requests for the Commission's August 23, November 1, December 8 and December 15,  2000 orders along with its March 9, June 19, and July 25, 2001 refund and price  mitigation orders. Among adjustments made to previous orders, FERC modified the  scope of price mitigation and must-offer requirements, especially as applied to  governmental sellers and cooperatives, eliminated the underscheduling penalty  established in the December 15 Order, and provided an opportunity for certain  entities to submit evidence that the refund methodology results in a revenue  shortfall. FERC also modified and provided clarifications on setting of the  mitigated market-clearing price. 
In particular, FERC clarified that:  
government sellers and cooperatives are excluded from price mitigation as  its applies to bilateral transactions outside the ISO spot market and also  with the must-run requirement outside of California; 
units operating outside of California may set the mitigated  market-clearing price; 
the mitigated market-clearing price is to be set by the proxy price of the  last unit dispatched, rather than the lower of the proxy price or the actual  bid of the marginal unit; 
and generators subject to the must-offer requirement should be able to  recover their costs for complying with the ISO's instructions to keep their  units at minimum load status, and that the ISO must pay these costs,  regardless of whether the ISO buys the power. 

Modification to Western-Wide Price Mitigation  Measures 
In a separate order, FERC responded to industry  recommendation from its October 29 technical conference and modified the price  mitigation methodology for spot market transactions for the west-wide market for  the winter season. FERC stated that changes would support continued price  stability and balance in the western markets. The changes were called for in  part, FERC said, since the area the California ISO serves is a summer peaking  system and a large portion of the 11-state Western Systems Coordinating Council,  consists of winter peaking systems. The changes extend from the date of the  order through April 30, 2002, at which time the summer mitigation measures will  be reinstated. Most notably, the new cap levels take into account fluctuation in  natural gas prices. 
Modifications to previous mitigation measures  are;
raises cap level from $98 to $108
continues to apply 10 percent credit worthiness adder
sets February 2002 as date that final outstanding payments be made to  Western sellers of power

FERC's objective through these order was to allow  FERC and affected parties in the West to move forward on calculating  any refunds owed and to provide greater rate certainty and stability to the  market, according to the commissioners. 
More information on the  California and western market changes is available in FERC's press release:  http://www.ferc.gov/news/pressreleases/calif1-dec192001.PDF   and the full order: http://www.ferc.gov/electric/bulkpower/el00-95-001-12-19-01.PDF   , both available in "pdf" format from FERC's website.  
RTO Developments  
MISO Approved As Nations First RTO  
In approving MISOs RTO application as the nations first RTO, FERC  said that it complies with the vision and requirements of Order No. 2000, in  particular the requirement that an RTO be of sufficient scope. FERC cited  favorably MISOs announced merger with the Southwest Power Pool and said that it  was particularly encouraged by MISO's planned accommodation of flexible business  plans and innovation as well as its considerable geographic span. 
For the most part, FERC found that MISO satisfied the four characteristics  for an RTO independence, scope and configuration, operational authority, and  short-term reliability, as well as key functions. FERC did, however, direct MISO  to submit a number of revisions. FERC found MISO's independence satisfactory in  most respects, but said that transmission owners cannot be permitted to have  veto privileges on filings that affect pricing. FERC conditioned MISO's RTO  status on modification of the MISO Agreement to give it the authority to propose  rates, terms and conditions of transmission service under the MISO tariff. On  the scope and regional configuration characteristic, FERC told MISO to present  recommendations within 60 days addressing the question of its eastern seam prior  to the integration of the Alliance Companies into MISO. FERC also indicated that  MISO should participate in its recently announced rulemaking proceeding to  standardize market design rules. However, FERC said, MISO should also address  certain congestion management issues prior to implementation of standardized  market rules. FERC also directed additional changes to ensure the independence  of the market monitor and required modification of the planning framework to  reflect that it will consider all market perspectives and to accommodate  third-party investment, construction and ownership of transmission  facilities.
 
Alliance Companies Told to Work Under MISO; FERC Finds  IRCA Efforts Insufficient 
Citing in part strong support from a majority of the Midwest state  regulators for a single Midwest RTO and Alliance RTO (ARTO)s failure to achieve  the necessary close coordination with MISO, FERC concluded that the ARTO lacked  sufficient scope to exist as a stand-alone RTO. FERC expressed confidence,  however, that the Alliance Companies' desire to be a viable, for-profit  transmission business can be accommodated under the MISO Appendix I structure.  FERC emphasized the importance of fostering RTO development designed to provide  a seamless and robust market for millions of customers. Allowing two RTOs in the  Midwest would be a second-best solution that would compromise customers'  interests, concluded FERC. The Commission ordered the Alliance Companies to file  a status report on their efforts to join MISO within 60 days. In the Order, FERC  acknowledged the significant time and expense incurred by the Alliance Companies  to date, adding that it would consider proposals for recovery of all prudently  incurred costs. 
 
International Transmission Approved As ITC Under  MISO
In a related order, FERC said that International Transmission Company  (International Transmission), a subsidiary of DTE Energy, could join the new RTO  as an independent transmission company that will be able to pursue innovative  business strategies. International Transmission proposes to maintain and develop  transmission while turning over to the RTO such functions as congestion  management and curtailments, tariff administration, and security coordination.  DTE Energy has indicated its intention to sell International Transmission to a  third party. FERC gave preliminarily approval for the divestiture of the  transmission facilities. FERC, however, deferred ruling on several contested  RTO/transco function issues until International Transmission becomes truly  independent.
 
National Grid Meets Independence Criterion, as FERC  Dismisses Alliance Companies ARTO Business Plan
FERC granted in part and deferred in part a National Grid proposal to  manage the RTO transmission system. FERC found that National Grid is not a  market participant by virtue of its retail obligations in New York and New  England. FERC directed the Alliance Companies to explore how their business  plan, including National Grid's proposal, could be accommodated within the MISO  RTO. FERC expressed its intent to provide more guidance on this matter in future  proceedings.
 
General Discussion
Signaling a deference to Midwestern state commissions, Chairman Wood said,  "[w]e have brought order out of an array of various and sundry efforts in the  middle of the country. . . . Its a good Christmas gift to the nation. Wood  cautioned that the orders findings are based on what best serves the public  interest in the Midwest, and that FERCs actions should not be construed to  prejudge other types of RTOs in other parts of the country, including a  structure in which a for-profit transmission company could be an umbrella RTO.  For her part, Commissioner Breathitt dissented on the Alliance Order, stating  that after the Alliance Companies have already spent over $75 million in  start-up costs and its plans were given tentative approval by FERC over the past  two and a half years, she saw no reason to abruptly change direction and deny  Alliance Companies an opportunity to implement their business model. The  Commission has not done all it could or should do to allow Alliance to develop,  Breathitt said.  Addressing the near-unanimous support among Midwest  regulators for a single Midwest RTO, Commissioner Massey stated, we are heeding  that advice and moving forward accordingly. For his part, the Alliance Order did  not represent a change of position, he said, noting that he has long favored  forcing a consolidation of the two RTO proposals. Additional details on these  orders can be found in the FERC press release which is available from FERCs  website at: http://www.ferc.gov/news/pressreleases/mwestxpressrel.PDF   . 
 
PJM - PJM West Denied on a Procedural  Basis 
Chairman Wood, in meeting discussion stated that the  rejection was on a procedural issue only, with a delay required only because of  provisions pending in other dockets. In a two-page letter order, FERC rejected  the request of PJM and PJM West to integrate, but Chairman Wood assured the  parties that FERC remained committed to the expansion effort and wants to see it  move forward very quickly. All indications are that once the other provisions  have been addressed, FERC would be ready to move forward on the PJM West effort.  
FERC Directs PJM To amend Tariffs to Include New  Oversight Measures 
FERC terminated its investigation into allegations that PECO Energy Company  had operated its transmission system in a manner that illegally advantaged a  corporate affiliate. FERC staff indicated that the record in the proceeding did  not establish a violation of the Federal Power Act or FERC's Standards of  Conduct sufficient to warrant further enforcement proceedings and that further  investigations into the matter were not warranted or necessary. Simultaneously,  FERC accepted a report from PJM outlining a series of improvements to its  current procedures for reporting of transmission outages and the rating of  transmission facilities. FERC directed PJM to file amendments to its tariffs to  reflect the new procedures. Commenting on the swift resolution of the matter,  Chairman Wood noted the importance of lifting the cloud of an investigation  promptly when the evidence warrants it. 
Staff  Reports High Cost of Congestion; Need RTO Congestion Management, More  Investment 
A presentation of a FERC staff report on electric  transmission constraints detailed the high costs of congestion and suggested  that building more transmission would likely lower overall consumer costs. The  report, which FERC staff acknowledged suffered from certain data limitations,  found that bottlenecks in the transmission system cost consumers more than $1  billion over the past two summers. The report also demonstrates the need for  strong congestion management systems at RTOs, FERC staff said. FERC  commissioners commended staff on the presentation and seemed supportive of the  conclusion that building additional infrastructure would bring benefits to  energy consumers. FERC staff also noted that a parallel DOE National Grid Study  should be completed and released before the end of the year. 
The staff  presentation is available in MS PowerPoint on the FERC "Discussion Papers" page  at: http://www.ferc.gov/calendar/commissionmeetings/Discussion_papers.htm   . 
Additional Commission  Action 
FERC Issues Accounting NOPR  with Question to Industry 
FERC issued an accounting NOPR  (Docket No. RM02-3) seeking comment on whether to require unregulated energy  marketers and traders to disclose holdings in derivative financial contracts  used to limit risks of volatile price swings in energy purchases and sales.  Chairman Wood said he looks to industry to answer the question and tell FERC  that the current exemption and blanket waivers and authorizations should remain  or not. Commissioner Breathitt pointed out that the current entities that must  comply with reporting requirements of derivative activity are not major players  in the derivative markets, but the open-ended question, if answered in the  affirmative, would place burdensome requirements on a sector of the market, i.e  power marketers, that most delve in that arena. Chairman Wood said that he might  be in agreement with possible responses from industry that say that "maybe these  processes are for another agency to do, e.g. SEC, CFTC, etc. ." 
Separately, the NOPR proposes changes to the Uniform System of Accounts  (USA) to record transactions required under Financial Accounting Standards Board  (FASB) Statement 115, Accounting for Certain Investments in Debt and Equity  Securities, FASB Statement 130, Reporting Comprehensive Income, and Statement  133, Accounting for Derivative Instruments and Hedging Activities. The NOPR also  proposes changes in the annual reports to the Commission, including the Form 1,  to conform to recent actions by FASB to tighten disclosure rules. The proposal  follows up Commission guidance issued in August 2001 for using the existing USA  for recording transactions covered by these FASB Statements. 
All four  commissioners endorsed the NOPR. Chairman Wood said the new rules would focus  more on providing transparency to investors than broadening FERC's regulatory  authority. Commissioner Breathitt commented that the new rule would seek to  collect annual data, not give FERC the ability to "actively monitor" the  complicated transactions. "We would be obtaining a yearly snapshot of derivative  positions," Breathitt said. "I think this is a good step."  
FERC Staff Provides Update on Development  of Standardized Interconnection Policy 
FERC staff reviewed  the process and progress of the collaborative efforts to develop a standardized  generation interconnection policy. While interconnection documents were filed on  December 14th as required by the ANOPR, participants noted that the documents  remain a work in progress. Participants had requested, and FERC granted on  December 14, an extension of time to file the consensus documents to January 11  and to January 25 to file final comments in the docket. The collaborative  process remains on schedule to take up the "money side" of the issue in April  2002. 
Technical Conference On Energy  Infrastructure in the Northeast 
FERC  will hold a conference in Energy Infrastructure issues in the Northeastern  states on Thursday, January 31, 2002 at the Helmsley Park Lane Hotel in New  York City, New York. 
 
Tonja Wicks 
Manager, Energy Supply Policy  
Alliance of Energy Suppliers 
Edison Electric Institute 
Phone: (202)  508-5098 
Fax: (202) 508-5600 
Fax: (202) 508-5445  
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