Many quotes from KP -- the Eastern Power Markets Oracle.  On balance a good article.  Thanks for helping out.
 -----Original Message-----
From: 	Shelk, John  
Sent:	Thursday, August 23, 2001 8:52 AM
To:	Kean, Steven J.; Shapiro, Richard; Steffes, James D.; Palmer, Mark A. (PR); Robertson, Linda; Nicolay, Christi L.; Guerrero, Janel; Denne, Karen
Cc:	Shortridge, Pat
Subject:	FW: Wash. Post Article--Part Three Today



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From: 	Nersesian, Carin  
Sent:	Thursday, August 23, 2001 8:31 AM
To:	Shelk, John; Shortridge, Pat; Robertson, Linda; Long, Chris
Subject:	Wash. POst Article- Part Three


Traders, Old Utilities Tangle Over Wires 
By Dan Morgan
Washington Post Staff Writer
Thursday, August 23, 2001; Page A01 
Last of three articles
ATLANTA
Ever since steamboat captain W.P. Lay founded Alabama Power Co. in 1906 to develop electricity along the Coosa River, utility companies have been stringing wires throughout the South for one purpose: so southerners could have power and light.
Now a bunch of outsiders, who buy and sell electricity but don't have a single retail customer below the Mason-Dixon line, have their sights set on those wires, and they are getting a helping hand from some powerful allies in Congress and the Bush administration.
Aided by supercomputers, and operating out of trading rooms as big as hockey rinks, the new breed of traders buy blocks of electricity anywhere along the nation's power grid, then borrow transmission lines to ship it to the highest bidder. But to more effectively move power from where it is cheap to where it is in strong demand, they want to remove what they contend is a "wire curtain" around the South. That means forcing the southeastern utilities to relinquish control of the wires to a new, federally supervised regional authority.
"The monopoly is the wires, and that's where the battles occur," said Jeffrey K. Skilling, who was chief executive of Houston's Enron Corp., the largest of the power merchants, until he resigned last week.
The clash grows out of a huge federal gamble on electricity deregulation.
In 1992, with many utility behemoths staggering under debt from cost overruns on nuclear plants and the rapid spread of computer technology putting new demands on the grid, Congress opted for a competitive market. The plan was to dismantle long-standing utility monopolies and replace them with innovative electricity companies responsive to the laws of supply and demand.
Now these new merchants of power, along with restructured utilities that have shed their old ways and embraced the new competitive world, have become strong advocates for a free-flowing, national electricity market. But in a classic Washington lobbying confrontation, they are running into resistance from traditional utilities, exemplified by Atlanta's Southern Co., now the parent of Alabama Power and other southern utilities.
At issue is how fast the federal government, in the wake of the California electricity crisis, should push for yet more changes.
Last month, the Federal Energy Regulatory Commission (FERC), recently stocked with President Bush's pro-market appointees, ordered most utilities to negotiate with federal mediators on procedures for handing over control of their wires to a few big regional authorities. Those authorities, in turn, will build new transmission lines, do away with bottlenecks, set uniform rates and ensure equal access to all. Next month, the Senate will take up proposals to give FERC even more authority to restructure the electricity industry.
But what is good for Enron may not necessarily be good for utility customers in the South, according to executives at Southern Co., whose affiliates dominate power sales in Georgia, Alabama, Mississippi and north Florida. Southern Co., Chairman H. Allen Franklin said in a recent interview, "will not go blindly" into the system proposed by FERC.
Although unfettered access to Southern's 26,650 miles of lines might help long-distance sellers of wholesale power such as Enron, company officials say it could mean congestion, power outages and higher prices for their 3.9 million retail customers.
"When California was restructured, it was thought there would be massive savings," Franklin said. "Well, there haven't been."
Building the Power Trade
If the California energy crisis left doubts about the future of a competitive market in electricity, a visit to Houston dispels them.
In the city's energy alley, Enron Corp. -- with annual sales of more than $100 billion last year, double those of Texaco -- is finishing a new 40-floor office building adjacent to its 50-story tower. Enron's competitors, Dynegy Inc., Reliant Energy and El Paso Energy, are a few blocks away. Duke Energy North American, merchant arm of Charlotte-based Duke Power, has settled in as well. And Calpine Corp. plans to take over 12 floors of a new 32-story building near Enron.
These power merchants are at the center of a burgeoning unregulated wholesale market, which now handles about a quarter of U.S. electricity output. But it is still a work in progress, fluid and accommodating in the Northeast and parts of the Midwest but much less open in the South.
In exchange for utilities opening up their transmission lines to the new wholesale market, the 1992 Energy Policy Act law allowed them to buy or build unregulated power plants outside their service areas. Many did. Quickest to embrace competition were California and the Northeast, which had long endured high power costs. To spur competition, California and some northeastern states went further, requiring utilities to sell off their regulated plants and begin buying bulk power from wholesalers.
Many states went further still, ending their utilities' long monopoly over retail sales and allowing customers to pick their own electricity provider.
The Northeast already was something of a mecca for power traders because of its experiments with power pooling, in which groups of utilities merge their separate transmission systems and use a central manager to market and distribute their electricity.
Enron, formed in 1985 by the merger of two big gas-pipeline companies, was quick to seize the opportunities. Its chairman, Kenneth Lay, a former official at the Federal Power Commission, FERC's precursor, during the Nixon administration, had pioneered natural gas trading during the volatile period of pipeline deregulation in the 1980s.
As the electricity market began to develop in the early 1990s, Lay and Skilling, a weekend dirt biker with a degree from Harvard Business School, began applying some of the lessons learned in the natural gas markets.
Enron signed its first long-term power contract in 1989, Skilling recalls. Independent companies that wanted to install gas-fired generators and sell the power on the grid could buy the gas from Enron under long-term contract -- then sell the electricity back to Enron.
"We started creating forward and futures markets" using "a lot more financial engineering" than was required in other commodity businesses, Skilling said. By the late 1990s, Enron was buying the output of generating plants days, weeks, months and even years before it was produced, using sophisticated weather and economic data to predict a price at which it could be profitably sold.
During the past five years, Enron has been one of the nation's fastest-growing companies. Its net income rose 40 percent in the second quarter of this year, although the price of a share has sunk to less than half of its 2000 high of $90, mainly because of setbacks in businesses unrelated to electricity. Investors pushed the price still lower after Skilling's departure last week.
Southern Inhospitality
Like other merchants, Enron plunged into California after the legislature opened up that giant state to electricity competition. But the Southeast remained less-friendly territory.
Texas is the only southern state to adopt retail deregulation. Florida goes so far as to ban out-of-state companies from building almost any plant for the wholesale market.
The region is the domain of huge traditional utilities that control the wires from Louisiana to Florida and up into Appalachia and the Carolinas. The web of power lines, tied to the utilities' coal-, nuclear- and gas-fired generating plants, reaches across states via 500-kilovolt workhorses and down into neighborhoods served via single wires strung on wooden poles.
For Southern Co., its reputation as a traditional utility heavy is a badge of pride. In 1997, it displayed a picture of a gorilla on its annual report.
Clustered around its borders are Entergy, another huge holding company that serves Louisiana, Arkansas, and parts of Mississippi and Texas; Florida Power & Light; Carolina Power & Light; Duke Power; and the federal government's centralized power giant, the Tennessee Valley Authority.
Those utilities have been under little pressure from customers to share the lines with wholesale competitors in the interest of lower prices. Prices run 15 percent or more below the national average, thanks to a rich lode of coal and natural gas and general public acceptance of the high-tension lines that carry the power generated by those fuels.
FERC, in a series of orders from 1996 to 2000, required utilities to open their wires for power shipments by independent merchants and to post how much transmission capacity they have available at any given time. The message, a former official said, was "they couldn't use the wires to preclude others from getting their juice to market."
But merchants say it is difficult to ascertain the accuracy of the postings made by the southeastern utilities because they operate the transmission lines as part of their closed, plant-to-customer systems.
A November 2000 FERC staff investigation of bulk power markets in the Southeast concluded that the transmission monopoly enjoyed by the region's utilities has discouraged independent power producers from siting new plants in the region.
FERC investigators cited Southern Co.'s refusal to let SkyGen Energy Inc. connect to its transmission lines in Alabama. Southern said the added load "would cause an area-wide stability problem for electric supply."
In that case, FERC denied SkyGen's request for relief.
Enron Vice President Kevin Presto said that day-ahead sales to customers such as municipal utilities in Southern's territory have become possible. But he said Enron has trouble getting long-term transmission commitments from Southern that would enable it to sell such power regularly. Also, he said, Enron cannot easily move power long distances through Southern's grid. "If I tried to buy transmission across Southern Co. to Jacksonville Electric, there'd be zero available," Presto said.
Of the overall situation in the Southeast, he said that the utilities "give you 0 to 5 percent of their transmission capability because they preserve the rest of it for native load [retail customers]. So you have a huge highway that's supposed to promote the free sale of electrons that isn't available to the wholesalers."
Southern Co. Chairman Franklin dismissed as "unfounded" the complaints of the merchants, and officials representing Alabama and Georgia municipal utilities tied to Southern Co.'s lines say they generally have been treated well.
Robert Johnston, president of the Municipal Electric Authority of Georgia (MEAG), which supplies power to 48 towns, took issue with the notion of a wire curtain.
"The market is growing in Georgia," he said. MEAG has its own trading room and has done business with a hundred or so traders or independent power producers. It also has its own generators producing power at four sites, though Southern Co. has an interest in all of them.
"There's not a grass-roots interest" driving the reforms, Franklin said. "It's the wholesale players."
While it squares off against the newcomers in the Southeast, though, Southern itself has aggressively exploited the growing wholesale market. Until it was spun off as a separate company earlier this year, Mirant Corp., Southern Co.'s marketing subsidiary, competed in California, the Midwest and the North, supplementing leaner profits from Southern Co.'s regulated units.
"Southern's strategy has been clear: Compete elsewhere and run a monopoly at home," said Allen Mosher, director of policy analysis at the American Public Power Association.
Well Connected for Battle
The next move is up to the federal government.
Next month, Sen. Jeff Bingaman (D-N.M.), chairman of the Energy and Natural Resources Committee, plans to propose legislation giving FERC expanded powers over wholesale transactions and transmission, so that "vested interests" will not be able to "manipulate the use of the transmission system" to benefit their own plants, Bingaman's office said.
In the House, key players will be Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.), whose state is home to Southern Co.'s western neighbor, Entergy, and Rep. Joe Barton (R-Tex.), chairman of the energy and environment subcommittee, who has had close ties to the huge coal-dependent Texas utility TXU.
Last week, Entergy hired former FERC chairman Curt L. Hebert Jr., a Mississippi prot?g? of Senate Minority Leader Trent Lott (R-Miss.), to handle regulatory and government affairs.
Enron recently hired a former aide to House Majority Leader Richard K. Armey (R-Tex.), as well as a former senior spokesman in the Bush campaign, Edward Gillespie of Quinn Gillespie & Associates.
Enron officials are counting on support from House Majority Whip Tom DeLay (R-Tex.), the hometown Houston congressman, though it is uncertain how much influence DeLay, an enthusiast for electricity deregulation, can bring to bear.
Industry lobbyists who gathered on Capitol Hill in July for closed-door meetings that DeLay sponsored, but did not attend, could not reach consensus on electricity. As a result, the energy bill passed by the House on Aug. 2 skirted key issues involving greater accessibility to the grid and electricity reliability.
Bush's election, and the fact that many utilities have plunged enthusiastically into the competitive market, clearly has created a more favorable political climate for the power merchants. Bush's first two appointees to FERC, Pat Wood III and Nora Mead Brownell, moved quickly to fix what they viewed as the Washington electricity bottleneck.
Wood had worked with Enron during a six-year effort to create a more competitive energy market in Texas, where Wood headed the state's public utility commission. Brownell, a former Pennsylvania utility regulator, won praise from Enron in 1997 when she helped block a restructuring plan that Enron contended would keep it out of the Philadelphia market.
On July 11, with a majority in tow, Wood, Brownell and William L. Massey, a Clinton appointee who is an ardent supporter of competition, tossed out proposals by Southern Co. and other utilities and directed utilities throughout the country to commence negotiations with federal mediators on handing over control of their lines to four independent regional transmission organizations, or RTOs.
"It was about time [a bomb] was dropped," Wood said.
But FERC's action may only have been what power association's Mosher calls the "beginning of a long movie."
Among those opposing expanded FERC authority are environmentalists who are fearful that new federal powers could lead to an expansion of high-voltage power lines; western property-rights advocates; and state utility regulators. Politically well-connected groups not now regulated by FERC -- including the TVA, rural electric co-ops and municipal power systems -- are also wary of new federal powers.
"There are big questions about FERC's role, who will determine transmission-line charges, should there be federal [authority] to site power lines, should there be FERC jurisdiction over power generation and reliability," said Rep. Richard Burr (R-N.C.), vice chairman of the House Energy and Commerce Committee.
Idaho utility regulator Marsha Smith, who heads the electricity committee for the National Association of Regulatory Utility Commissioners, noted that her state's three investor-owned utilities cannot transfer ownership or control of their transmission lines "without our approval."
Such approval does not seem likely anytime soon. Smith noted that 60 percent of the state's power comes from hydroelectric dams. "That's public property," she said.
In Alabama, James Sullivan, a state utility regulator overseeing Southern Co.'s affiliate, said he was not happy about the way FERC was proceeding.
"I'm opposed to any [changes to] our electric system in Alabama until I know it's going to bring rates down and enhance reliability for us," he said.
In the view of Southern Co. Chairman Franklin, it is still an "open question" whether FERC has the legal authority to force utilities to surrender control of all their wires.
Nonetheless, the restructuring of the power markets may already have gone too far to "put the genie back in the bottle," according to a former FERC official.
The power merchants readily concur.
"Everybody's paying too much because you've got this huge conservatism built into this bureaucratic operation of the utilities," Enron's Presto said.
Staff researcher Richard Drezen contributed to this report.
? 2001 The Washington Post Company