see below.

Federal price limits backfire 
Some generators withhold power rather than abide by rate caps 
David Lazarus, Chronicle Staff Writer 
Wednesday, July 4, 2001 
?2001 San Francisco Chronicle  
URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/04/MN186091.DTL  
Officials in California and Nevada, after months of lobbying for federal regulators to cap Western power prices, warned yesterday that the newly imposed limits have had the unintended consequence of increasing a threat of blackouts in the two states. 
The warnings were issued as California came within minutes of rolling blackouts yesterday afternoon, and one day after the first-ever rolling blackouts in Las Vegas forced energy-hungry casinos to shut off fountains and reduce air conditioning. 
The two states are asking the Federal Energy Regulatory Commission to take a closer look at the so-called price mitigation plan and come up with revisions that would deter power companies from withholding electricity during shortages. 
"We need some clarity to this order," said Oscar Hidalgo, a spokesman for the California Department of Water Resources, which is spending billions of dollars to keep the state's lights on. 
"Generators need to be held accountable," he said. 
The crux of the problem is that price limits kick in during shortages, yet power companies say these caps force them to sell power at below-market rates during periods of high demand. 
Some companies have responded by holding back power rather than face the expense of shipping electricity from state to state. Each mile that electricity must be transmitted adds to the overall cost. 
"No one's going to pay for transmission if the cost is near the caps," said Gary Ackerman, executive director of the Western Power Trading Forum, an energy-industry association in Menlo Park. 
Ackerman said several companies in his organization decided that there was no economic advantage to offering power in regional markets when price controls are in effect. 
"This means individual regions like California or Las Vegas could end up not having enough," Ackerman said. "It increases the threat of blackouts." 
BLACKOUT ALERT CANCELED
California authorities issued a blackout alert at 1:45 p.m. yesterday when power reserves dipped to dangerously low levels. They canceled the alert about an hour later, after finding additional supplies. 
"Everyone in the West is fighting for megawatts," said Stephanie McCorkle, a spokeswoman for the California Independent System Operator, which oversees the state's power network. 
The Golden State's latest brush with lights-out conditions came a day after Nevada experienced its own rolling blackouts for the first time, prompting heavy power users such as the MGM Grand and Caesars Palace to dim their lights. 
Don Soderberg, chairman of the Nevada Public Utilities Commission, said that the sudden power emergency took state authorities by surprise and that they are investigating to see what role the federal price limits may have had in exacerbating Monday's shortage. 
"We're looking very closely at this," he said. "There seems to be a potential for unintended consequences." 
Specifically, Soderberg said Nevada is focusing on operators of older, less- efficient plants who would find profit margins shrinking, if not vanishing, under capped prices. 
"We're going to see how the caps might have played into this," he said. 
The federal ceiling in 10 Western states, excluding California, is about $92 per megawatt hour. In California, a 10 percent surcharge is added because of the state's credit risk, bringing the price to just over $101. 
Ackerman at the Western Power Trading Forum said regional price controls have extended California's power crisis to neighboring states. 
"California sneezed and the rest of the region caught the virus," he said. 
'LAWYERS LOOKING FOR LOOPHOLES' 
California and Nevada officials, however, said that they still have faith that price limits can stabilize Western electricity markets but that federal regulators may have to tweak the system so that power companies cannot withhold output. 
"The generators have banks of lawyers looking for loopholes (in the plan)," said Hidalgo at the Department of Water Resources. 
Unfortunately, it may take some time for the regulators to revisit an issue that they took up only with the greatest reluctance. For months, federal regulators refused to impose price controls, preferring instead to let supply and demand determine costs. 
Hidalgo said that when it appeared that power companies were throttling back on output Monday, California officials immediately dialed the hot line number provided by the Federal Energy Regulatory Commission in case of emergencies. 
"No one answered," he said. "They were closed." 
State officials tried again yesterday, and this time were told that the commission would look into the matter. They were not given a time frame for when the commission might come up with a response. 
E-mail David Lazarus at dlazarus@sfchronicle.com . 
?2001 San Francisco Chronicle    Page A - 1 





Out-of-state generators pull plug over uncertainty on price controls
By Dale Kasler
Bee Staff Writer
(Published July 3, 2001) 
Confused by the federal government's new controls on electricity prices, generators withheld so much power from California on Monday that the state was nearly plunged into rolling blackouts, state officials said. 
The confusion began when the state's electric grid operators declared a Stage 1 power alert in the early afternoon, triggering the price caps for the first time since they went into effect June 21. 
Out-of-state generators pulled about 1,500 megawatts of electricity off the table at midafternoon, enough to power about 1.1 million homes, because of uncertainty about how much they could charge under the new Federal Energy Regulatory Commission pricing system, said Oscar Hidalgo, spokesperson for the state Department of Water Resources. The department buys electricity for the state's financially distressed utilities. 
"They didn't understand what they were going to be paid; there was confusion over the FERC order," Hidalgo said. "We saw 1,500 megawatts disappear." 
The problem was exacerbated by a heat wave across the West, which forced California to compete with other states for scarce electricity, he said. Rolling blackouts hit southern Nevada. 
Most California officials credit the FERC system, which is based on a variable price cap, with reining in what had been a runaway wholesale power market. But power generators have complained that the price caps, by limiting profits, could discourage the production of critically needed electricity. And as Monday's episode suggested, even the uncertainty about where the cap will fall could lead to unexpected shortages. 
"That's the risk that you run (with price controls)," said Arthur O'Donnell, editor of the newsletter California Energy Markets. "People want any kind of certainty at all." 
Hidalgo said the state avoided blackouts only because of last-minute imports from the Bonneville Power Administration, the federal agency that markets government-produced hydroelectric power in the Pacific Northwest. The state went into a Stage 2 power alert, the next-to-last level before blackouts are ordered. The alert was canceled in late afternoon. 
The blackouts would have been the first in California since May 8. 
FERC imposed a round-the-clock ceiling on power throughout the West. The price fluctuates and is tied to the production costs of the least-efficient plant operating in California during a "power alert" declared by the Independent System Operator, which runs the state's power-transmission grid. When there's no alert, prices can't exceed 85 percent of the cap that was established during the latest alert. 
Until Monday, the maximum price held steady at about $101 a megawatt-hour in California. But when the ISO declared a Stage 1 power alert in early afternoon, signifying that reserve supplies had dwindled to less than 7 percent of demand, confusion set in, Hidalgo and others said. 
Because of a steep drop in the price of natural gas, which fuels many California power plants, suppliers knew the cap would fall. But no one knew by how much until the price was posted by the ISO. 
The ceiling for California fell to about $77 at 3 p.m. but was back up to $98 in two hours, according to the ISO. Those prices include the 10 percent premium that sellers can charge California because FERC said there's a credit risk in selling to the state. 
O'Donnell said it's likely suppliers will pull back from the market every time the ISO declares a power alert. 
In-state generators have to operate their plants if summoned by the ISO. But out-of-state suppliers can withhold supplies, and on Monday it was the out-of-staters that were pulling back, Hidalgo said. 

The Bee's Dale Kasler can be reached at (916) 321-1066 or dkasler@sacbee.com . 





Power Sales Halted by New Pricing Curbs 
Electricity: Confused suppliers, unsure what they will be paid, refuse to sell to state, which asks FERC for a ruling but doesn't get it. 

By NANCY VOGEL, Times Staff Writer 

     SACRAMENTO--Confusion over new federal price restrictions prompted several electricity sellers to back away from sales to California on Monday afternoon, pushing the state closer to blackouts, energy officials said.
     The state lost sales that would have provided enough electricity to supply more than 1 million homes, said Ray Hart, deputy director of the California Department of Water Resources, which has been buying much of the state's electricity since January.
     At least five companies producing or marketing power "are telling us that since they don't know what they're going to get paid, they're not going to take the risk, and so they're not going to sell the energy," Hart said.
     The electricity sales fell through after power consumption soared in summer heat and grid operators were forced to declare a Stage 1 emergency, meaning reserves had dipped below 7%. It was the first such emergency since May 31.
     Under a June 19 order by the Federal Energy Regulatory Commission intended to bring down wholesale electricity markets across the West, a power emergency in California triggers the setting of a new price limit that applies to power plant owners from Washington to Arizona. 
     The new price is supposed to be based upon whatever it costs to run the most inefficient, expensive power plant selling electricity to California grid operators during the first full hour of a Stage 1 emergency.
     But much uncertainty remains about exactly how and when the new price is supposed to be established under the commission's order, and that apparently drove away sellers, Hart said.
     Shortly after the state issued the Stage 1 alert at 1:30 p.m., putting the old price limit of $90 per megawatt-hour in question, companies that had committed to provide the state electricity hour by hour Monday afternoon backed out, Hart said. The companies include TransAlta Energy Marketing of Oregon, Constellation Power of Baltimore and Sempra Energy Trading, a unit of the San Diego-based energy conglomerate.
     Forced to dip even deeper into the state's power reserves and declare a Stage 2 emergency, water agency officials called the federal energy commission's hotline for clarification about what the new price should be and when it should take effect. They got no answer.
     Hart said commission officials reached at home promised to try to clarify their order today. One outstanding question is what obligations power suppliers have to deliver electricity to California in an emergency.
     Both buyers and sellers in the market agree that the new price, when it is set, will probably be lower than $90 per megawatt-hour because the price of natural gas, the main fuel in California power plants, has dropped lately.
     Temperatures soared several degrees higher Monday than grid operators had anticipated. But they said they expected to avoid rolling blackouts in part because the Bonneville Power Administration in Portland, Ore., had agreed to provide several hundred megawatts of Pacific Northwest hydropower each hour in exchange for a return of electricity from California later this summer.
     "Bonneville is giving us emergency power to get us through," Hart said. 

Copyright 2001 Los Angeles Times 





James D Steffes
07/06/2001 10:04 PM
To:	Jeffrey T Hodge/Enron@EnronXGate, Robert C Williams/Enron@EnronXGate
cc:	Steven J Kean/NA/Enron@Enron, Richard Shapiro/NA/Enron@Enron, Linda Robertson/NA/Enron@ENRON, Alan Comnes/Enron@EnronXGate, Jeff Dasovich/NA/Enron@Enron, Susan J Mara/NA/Enron, Robert Frank/NA/Enron@Enron, Ray Alvarez/NA/Enron@ENRON, Sarah Novosel/Corp/Enron@ENRON, dwatkiss@bracepatt.com 

Subject:	ATTORNEY CLIENT PRIVILEGDE - Draft FERC Brief on Settlement Process

The attached is a rough draft of a potential filing Enron would make in to Judge Wagner in the Settlement process (it is unclear if this would remain confidential per the gag order).

Please provide Ray Alvarez your comments.  This would be filed as early as Monday am.

Jim