THE FRIDAY BURRITO
"...more fun than a fortune cookie, and at least as accurate."

&Are those folks smoking crack?8 he asked in an outrage.  My friend, Ol,
Dave in Houston, has trouble understanding the workings of our power
business here in California.  In fact, so do I.  Yesterday,s Joint
Senate/Assembly Committee on Energy and Natural Resources did nothing to
improve either Dave,s or my understanding of the national embarrassment
California is perpetrating with electricity deregulation.

&The next thing you know, they will be taking property, and forcing
utilities to build power plants and transmission,8 he mused between sips
of Dixie longneck beer and chomps of jalapeno peppers.  &Come to think
of it, Dave, they did say something about that. Yeah,8 I recalled,
&Senator Peace was expounding on his favorite idea which is forcing the
ISO or the utilities to build peakers, and not let the market build
them.  I can,t remember if that was before or after he suggested to EOB
Chairman Kahn that the ISO and the PX should be folded into State
agencies under the direction of the Electric Oversight Board.8

I know what you are thinking right now.  The next thing you know
California will have regulated retail rates.  That recipe should be out
of the PUC,s oven sometime next week.

&Well, the power marketers are jigging the system, bidding up to the
ISO,s bid cap.   There is no way you can tell me that a generator
planned to make $750/MWH in its pro forma,8 Dave added. &So you agree
with Herr (Hair) Peace!  You don,t believe in markets,8 I retorted. &Oh,
I believe in them, but I remember when I was short on a 300 MW trade,
and without any notice or advanced warning, the price in the Midwest
market went against me,8 Dave recalled.  &I called everyone who I traded
with, and they had nothing.  I finally called XXXXX, and I asked what
will it cost for 50 MW?8

&Why didn,t you ask for 300?8 I wondered.  &I didn,t want to show him my
position.  You get hosed when you show the buyer your position.  Ask for
50, first,8 Dave chided.

&What happened?8 &Oh, they offered to sell for $150/MWH.  I said I,d
take it, and then said I needed another fifty.  He asked $300.  I took
that, and he priced the next 50 MW at $600,8 lamented Dave.  &He just
wanted to see how far he could push me. That,s what I mean when I say
the traders are jigging it.8

&But Dave, you old communist, your forgetting the trading function is
what mitigates the risk. The traders are the in between people who guess
at the price.  Sometimes they guess right, and sometimes they guess
wrong.  But the damage, or the reward, is on their book, not passed on
to the ultimate consumer. It has nothing to do with the marginal cost of
a generating plant.8

And there you have it.  Put in a price cap, and the traders have a
target for which to shoot.  I can,t prove the following, yet, but I,ll
wager with any of you that as the price cap level dips down, the average
trading price climbs even as the so-called &dysfunctional8 price spikes
are eliminated.  Consumers get hosed, and the fundamental economic
principle is upheld, which is, one can never be made better off with the
imposition of an additional constraint.

I feel better already.  Here is what is on our short agenda this week.

>>> Things in the Mailbag

>>> Things in the People,s Republic of California
 @@@ The ISO Replies to the EOB Report
 @@@ Reflections on a Day of Senate Hearings
 @@@ PUC Issues OII on Functioning of Wholesale Market

>>> Odds & Ends (_!_)

>>> Things in the Mailbag

It has been awhile since we put the mail feedbag on and had a munch.
Here is what my friends have been writing me.

FPL Energy,s Steve Ponder was only too quick to tell me, &Please Gary,
no more whining about your computer.   How old are you?? Is this the
year you get the AARP letter??? A very depressing moment.  Do you really
not know how to spell Morro Bay???  Please let us know what is going on
with your son's hockey team?? Don't forget the cigars for Moron???
Bay!!!!8

It is good to have friends like Steve.  They make the pain of separation
so much easier. And Steve, when you FPL guys get that Entergy merger
sorted out, in a dozen years or so, you let us know. I want to
participate in the name selection for the new entity.  How about
Fentergy PLus?

Next, from the PX,s Mark Hoppe, who writes, &As you've heard from
others, I don't know quite how you manage to knock out all this material
each week. The burrito is informative, humorous and usually contains a
sprinkle of irony, tragedy (ISO Drama).  Though you are usually neutral
regarding the PX, you are not unduly negative which I appreciate.  I
think we do a pretty good job over here and so often people in the
industry forget the amount effort and challenge it took the PX to
successfully open this market.8

Thanks, Mark.  I just want you to know that my ability to write this
stuff every week is not constrained by the facts or evidence.  I have
learned from watching Herr (Hair?) Peace, that as long as you can talk
(write, too) fast, and have conviction in your statements, regardless of
how groundless they may be, you will have a willing and eager audience.

A few weeks ago, I received from the PX,s Jennifer Sherwood a note,
which she wants you to know are her opinions, not necessarily the PX,s.
It,s okay, Jennifer.  I paid George,yesterday, the $20 I owed him for
that sham Rose Bowl bet, (remember?, Stanford lost) and your opinions
are cool with us.  &Just curious - has anyone been comparing high
unleaded prices to high CA electricity prices?  What I mean is, we are
up in arms about how we should protect the unfortunate San Diego
consumer who can't afford to keep the AC on. But what about the inflated
unleaded gas prices the whole country has seen over the last few
months?  No effort is made by the government to shield the consumer from
how much it costs to fill their gas tank.  No mention is made of those
who can't afford to drive to the grocery store because they can't afford
the extra 15 or 20 cents a gallon.  The costs are passed along to the
consumer without pause.  Granted there are differences between the
unleaded market and the electricity market in terms of demand-side
responsiveness, but then again is it that much different to say, +I
can't drive today because gas is too expensive,
vs. +I can't turn up the AC today because it's too expensive.,8

Finally, from one of our [secret] Washington readers, and I am not
telling who, I received the following: &I ... broke down and listened to
the [ISO Governing Board] discussion and vote.  Ugh!  I too noted that
the "speak fast" was applied to everyone but Herr Peace.  My goodness,
what a mess we have.  I loved Jerry's picture in USA Today -- it spoke
volumes.  My sources at FERC tell me, though, that we should keep an eye
out for {FERC Chairman] Hoecker to do something really ... [Censored]
... for political reasons.  Given no Commission meetings til September,
the only way to act is by unanimous consent, so I would hope he can't do
all that much.8

>>> Things in the People,s Republic of California
 @@@ The ISO Replies to the EOB Report

Several of you people commented to me that the ISO,s reply to the
PUC/EOB report was very good.  I decided to excerpt the best sections of
it for the Burrito.  The full document can be found on the ISO,s
website.

&... the [PUC/EOB] Report asserts that the suspected activities of
certain generators on June 13 created frequency instability leading to
the Bay Area blackouts the following day. In fact, the events of June 13
and June 14 were completely independent of one another. The voltage
instability on June 14 was caused by system conditions on that day alone
-- exceptionally high loads, insufficient generation in the specific
local area, and transmission constraints that prevented the import of
generation from outside the area.

&The Report states that the ISO &never tried8 to call upon consumers to
reduce demand in order to avoid the Bay Area blackouts. In fact, the ISO
had in place on June 14 a number of demand response programs designed to
reduce load including the Summer 2000 Demand Response Program, under
which customers have agreed, through a prior solicitation, to curtail
energy use in exchange for a fee

&The Report makes a number of assertions concerning the prices paid by
+purchasers, of energy as a result of the recent price spikes (e.g. $1.2
billion in the month of June alone). These assertions leave one with the
mistaken impression that these prices reflect amounts actually paid by
the UDCs and/or passed through to customers. However, in determining the
total cost of energy, one must determine the impact of any forward
contracts entered into by the UDCs in advance of the wholesale energy
markets. These contracts, which are designed to &lock-in8 a specific
price in advance of real-time or near real-time market activities, are
specifically designed to mitigate the impact of price volatility, and
are standard in all commodities markets. We have reason to believe that
some of the UDCs were substantially hedged during the period of the
recent price spikes.

&In a similar vein, the reports asserts that California &might well8
have saved $110 million dollars had a $250 price cap been in place in
May and June. This assertion assumes that all energy purchases would
have been made at or below the $250 bid cap. In fact, during times of
peak demand, when all of the state,s generation has been exhausted, the
ISO competes with neighboring regions for available generation. In order
to secure the necessary power, the ISO must purchase, on a bilateral
basis, this energy from resources located outside of the ISO,s control
area.

&The Report asserts that California power markets &are not now
competitive8 and implies, erroneously in our view, that this is the
normal state of affairs. It is not. The Market Surveillance Committee
has noted that &market power in the California energy market appears to
arise
primarily during periods of peak demand,8 and warned that demand growth
would increase the incidence of market power during the summer of 2000.

&The Report asserts that the ISO is answerable only to a self-interested
board and not to the citizens of California. This simply is not the
case. The ISO is subject to the provisions of the Federal Power Act and
to the rules and regulations of FERC, which dictate, in part, that
wholesale energy rates must be just and reasonable and in the public
interest. The ISO further operates under a detailed tariff reviewed and
approved by FERC. Every change to our market design and virtually every
aspect of the ISO,s business is subject to review and scrutiny by FERC.
The FERC process provides substantial opportunities for input by the
state agencies and such agencies have, in fact, been active participants
in the FERC proceedings.

&The Report asserts that California supply conditions have been affected
by restructuring and that somehow the restructuring choices have made
California more vulnerable to supply shortages. This assertion is
unfounded. Significant load growth in California and neighboring states
coupled with a lack of significant infrastructure investment in both
generation and transmission have caused this vulnerability.
Restructuring has increased proposed power plant applications many fold.
Only by immediate and sustained attention to streamlining approval and
siting processes for both of these critical infrastructure elements will
this significant shortage be addressed.8

>>> Things in the People,s Republic of California
 @@@ Reflections on a Day of Senate Hearings

If you want to imagine a scary sight, imagine, then, twelve California
legislators gathering together in one hearing room to rectify the wrongs
of electric restructuring.  Also imagine, as if you are in the Twilight
Zone, witnesses that are slow on their feet, and reckless in their
facts.  Then you get a glimpse of what yesterday,s Joint Senate/Assembly
hearing was like.

It started over two hours late.  The Senate was busy congratulating one
of their own who is term-limited out next session, and they wanted to
heap on the glory.  That said, the show began with CEC Commissioner Bill
Keese.  Mr. Keese has one story, and regardless how well he tells it,
and he does, it is always the same story.  It is the heat storm story.
One can imagine in the heat storm story a lead character who is a
single-mom, call her Lady-Bird Bowen, who travels across an angry land
with her precocious pre-teen child, Stevie Wonderboy.  They are
searching for electric power plants in the dessert, which, by the grace
of God have been shipped to other countries which have more liberal
returns on investment.

Being the first speaker, Mr. Keese took at least half the heat (storm)
of the day.  The rage of the Energy Fuhrer was palpable.  Last week, San
Diegans shed 350 MW of load last week to save the entire system, and did
not receive one penny of compensation (I,m not making that up ... He
said it).  He is sick of hearing about demand management as being a
solution for the problem over the last five years, and he is about done
listening.  People in San Diego are depressed by the sudden price
hikes.  Yikes!

Keese did mention that the California reserve margin has sunk to 7%, but
in neighboring Arizona, the reserve margin is -1% or -2%!!  Mr. Keese
correctly pointed out that electric power is not solely a California
problem, it is a regional problem.  One member of the Committee asked
what the legislature could do to speed up the power plant siting and
construction process?

Keese referred to Governor Gray Davis, Executive Order issued last week
to which the CEC plans to respond soon, date uncertain, that lays out a
6 month permitting time line.  The six months are enough if the
applicant has the land secured, zoning okayed, transmission access, and
air offsets.  Hmmmmmm.  That alone might take six months before you get
to the CEC.

The next panel included Mr. Kahn of the EOB, and Ms. Lynch.  I went too
hard on her last week, calling her Let,s Do Lynch.  That was a 0.8 TPC.
Sorry.  I promise to be nicer starting now.  The Energy Fuhrer
instructed Ms. Lynch to use her authority to order SDG&E to divert the
pass through of funds from the customers to the PX until the dysfunction
of the market is cured.  Put it in an escrow account.  Ms Lynch promised
to review this option at her August 21 PUC Meeting where she will enact
SDG&E rate caps (told you).

The star of the day, I thought, was FERC General Counsel Doug Smith.
Mr. Smith comes to Sacramento.  Isn,t that a switch?  Mr. Smith came in
place of Mr. Hoecker, thank the Lord.  Mr. Smith put into FERC-eese what
these 12 legislators could not get through their heads any other way.
The 12 angry legislators were looking for a way for FERC to declare the
wholesale market as non-competitive, and then ask the generators to give
back the money they over collected.  When can we do that?  Mr. Smith
answered as only a FERC attorney can answer.  There is a process.  It
takes time.  You must have evidence.  FERC uses a three-part criteria
for assessing whether or not market based rates are allowable.  It,s
based on market concentration and dominance, not the existence of high
prices.  You would have to sue FERC in federal court, and the best you
could hope for is for FERC to reconsider its decision upon remand from
the US Court of Appeals.

Slowly, the wind came out of the sails of the gang of 12.  They were
stumped.  Herr (Hair?) Peace screamed, couldn,t you, Mr. Smith of FERC,
today use your authority to declare the markets non-competitive, that
generators who had market based rates have exercised market power, and
retro-actively implement a $250 rate cap across the Western region?
Like a wheezing accordion, Mr. Smith played back and forth the familiar
strains of music, like a solo street musician on the corner.  Back and
forth: the process, the process, the process.  There have been times in
the past I hated the process at FERC.  Today, I have a renewed respect
for what process affords me and you ... Freedom from the tyranny of a
mob.

For the remainder of the hearing, they focused on remedies that could be
undertaken by the PUC.

>>> Things in the People,s Republic of California
 @@@ PUC Issues OII on Functioning of Wholesale Market

Well, the official title is, &Order Instituting Investigation into the
Functioning of the Wholesale Electric Market and Associated Impact on
Retail Electric Rates in the Services Territory of San Diego Gas &
Electric Company8.  I like my title better.

This Order, or OII was issued at the last business meeting of the
Commission, on August 3.  It calls for an investigation of the wholesale
markets, responses from the three UDCs, and a pre-hearing conference in
San Diego on August 29 at the San Diego Convention Center.

Here are the questions the PUC wishes us to address:

 What bill payment options should be provided to assist residential and
small commercial customers? (What does this have to do with the
functioning of the wholesale market?)

 Should SDG&E be authorized to participate in bilateral contracts or
other supply procurement activities? How should the Commission assess
reasonableness?  Are SDG&E,s purchasing activities serving its customers
on just and reasonable terms?

 What is SDG&E,s obligation to minimize energy costs for its current
customers?

 How should the Commission, Attorney General, EOB, ISO and PX
coordinate to investigate wholesale market events, behaviors, and
irregularities?  How should state/federal concerns be addressed?

 What are the causes of the price increases?  Are anticompeititve
practices causing some of the price increases?  Are there mechanisms the
Commission can employ to make ratepayers whole?

>>> Odds & Ends (_!_)

As promised last week, I have a message from our event coordinator, Barb
Ennis, regarding the upcoming WPTF General Meeting on October 5 and 6.
Listen up!

She writes:

Hi Folks......

Well it is almost that time again....WPTF's October General Meeting will
be held at the Inn at Morro Bay, Sixty State Park Road, Morro Bay,
California 93442. Their phone numbers are: 800-321-9566 or 805 772-5651.

The dates are October 5th and 6th, Thursday and Friday.
The Inn at Morro Bay will also honor the same room prices if you choose
to also stay Wednesday,Friday or Saturday. We have blocked 24 rooms for
October 5th. Which range in prices: Petite Room with Queen Bed $89. (16
rooms) Pool and Garden View with King Bed and Private Hot Tub $152. (4
rooms) View of Bay rooms with two (2) Double Beds $152. (4 rooms) All
these rooms are on a First come basis.

SHUTTLE Information: The San Luis Obispo Airport is about 25 to 30
minutes by shuttle NOTE: FOG CAN BE THICK AT THIS AIRPORT..FLY IN THE
AFTERNOON .......

Ride-On Shuttle (805) 541-8747 Rates Door to Door are $22.00 per person
for the 1st person and ONLY $2.00 per person afterwards....SO if some
planning can be done on the Airline Arrival times, through Barb, and one
person books the Shuttle for a Group....the cost is substantially lower.

Now, for(e) our Golfers....Tee times have been booked for Thursday,
October 5th starting at 8.07am, 8.15am and 8.22am (space for 12
Golfers)..Sorry for the early morning start. The Golf Course has a Group
going out from 8.30 am until 11.30am.

The Golf Course is across the Inn at Morro Bay and your contact at the
Course is Pat (805) 471-4360.

For folks that may want to tour, Hearst Castle is located only 30
minutes from the Inn at Morro Bay. Within walking distance of the Inn is
a Natural History Museum, a marina with kayak and canoe rentals.
Shopping and dining along the Embarcadero, and some great hiking.

World class wineries and tasting rooms numbering over 40 are located
within a short drive from the Inn.

If you choose to drive it is 3-hours from San Jose, American Eagle,
Skywest and United Express all serve the local Airport in San Luis
Obispo.

Duke Energy is willing to conduct a Plant Tour (A woman,s only plant
tour will be led by Duke,s Carolyn Baker) if some may wish to do so.
The sooner we can do the booking, the better.  So, bring the Family and
we are looking forward to seeing you at WPTF's General Meeting.

Agenda for October General Meeting

Thursday, October 5
3:30 pm - 5:30 pm All Member,s Meeting
7:00 pm - Dinner Reception (We are still working on the details)

Friday, October 6

9:00 am Opening Remarks and Program
Irene Moosen - Distributed Generation Case at the PUC
Bill Freddo - Confessions of a Merchant Plant Operator in New England
ISO
Dr.Frank Wolak - Topic of his choice
Open Session - Everyone Gets a Chance to Speak

Lunch provided at Noon.
=======================
The object of humor notwithstanding, and seeing how the flow of new
material has slowed a bit, my wife provided this week,s laughter.  She
didn,t have to attend the Senate hearing.

Subject: The Brilliance of Women

There were 11 people hanging onto a rope that came down from a
helicopter.  Ten were men and one was a woman. They all decided that one
person should get off because if they didn't the rope would break and
everyone would die.

No one could decide who should go so finally the Woman gave a really
touching speech saying how she would give up her life to save the
others, because women were used to giving up things for their husbands
and children and giving in to men.

All of the men started clapping.
===============
Have a great weekend, y,all [applause]

gba