-----Original Message-----
From: 	Foster, Chris H.  
Sent:	Friday, July 13, 2001 12:48 PM
To:	Rawson, Lester
Subject:	FW: POWER POINTS:Generators, Here's To Better Luck In Brazil



 -----Original Message-----
From: 	"Onukogu, Ernest" <Ernest.Onukogu@dowjones.com>@ENRON [mailto:IMCEANOTES-+22Onukogu+2C+20Ernest+22+20+3CErnest+2EOnukogu+40dowjones+2Ecom+3E+40ENRON@ENRON.com] 
Sent:	Friday, July 13, 2001 12:23 PM
To:	undisclosed-recipients:;@ENRON
Subject:	POWER POINTS:Generators, Here's To Better Luck In Brazil



>   NEW YORK (Dow Jones)--Less than a month after the Federal Energy
> Regulatory
> Commission shot the messenger, it's looking for new volunteers.
>   On June 19, the FERC totally trashed U.S. wholesale electricity markets
> with
> price controls and an order for refunds dating back to October or to May
> 2000 or
> to whenever they later decide. What is the FERC price cap on electricity
> throughout the western U.S.? Well, it's whatever the California
> Independent
> System Operator decides it is.
>   Nevertheless, on Wednesday the FERC made a sharp U-turn in the direction
> of
> free markets for power. With unquestioning confidence, it ordered all U.S.
> utilities to consolidate their transmission lines into a few independent
> transmission operators in order to foster free trade and movement of
> electricity.
>   Surely, some might say, the FERC didn't give the California ISO total
> price
> discretion over the western U.S., did it? After all, the ISO is simply the
> administrator of the FERC's very precise formulas, like this one for
> non-emergencies: the cost of burning natural gas (assuming a power plant
> is
> located both in northern California and southern California) at the least
> efficient generator that was called on in the most expensive hour of the
> most
> recent Stage 1 emergency that wasn't a Stage 2 at any point during the
> hour,
> plus $6 for operation and maintenance multiplied by 0.85 (then add 10% if
> the
> buyer is the California Department of Water Resources).
>   What could be more clear? More "market-based," as the FERC trumpeted its
> own
> ingenuity? How could the ISO possibly manipulate that?
>   The ISO's initial cap of $92 a megawatt-hour was based on a gas price of
> $9.
> After inputting the other elements, that cap turns out to be based on a
> quite
> efficient heat rate of 11.4. Surely, the heat rate of the least efficient
> unit
> used in the most recent emergency, etc., was 20 or higher.
>   But the ISO decided it didn't want to pay more than $100/MWh. Who
> confirms
> that the ISO really used the correct heat rate? Nobody.
>   Now, after gas prices crashed to $4, the ISO had full discretion - based
> on a
> technicality - to avoid resetting the cap. At all four opportunities, the
> ISO
> declined to reset the cap because the ISO staff know they can't get the
> power
> California needs for $43, which is where the cap would have come out using
> the
> old 11.4 heat rate. That's way below the costs of the marginal generators
> needed
> when things get even a little tight.
>   Sierra Pacific Resources' (SRP) Nevada Power couldn't get all the power
> it
> needed July 2 for $92 even.
>   So, what is the FERC price cap on western power? Whatever the California
> ISO says it
> is.
>   Not surprisingly, Nevada Power and others western utilities are furious
> with
> California for successfully using its political muscle to export its
> problem to
> the rest of the West.
>   "Before the FERC price caps, the market definitely was working. When you
> had
> prices of $300 a megawatt-hour, people were mortgaging their restaurants
> to buy
> a diesel generator to sell power into the grid," said Chelan County Public
> Utility District's Chuck Berrie, one of a handful of utility veterans in
> the
> U.S. who thrived in the deregulated wholesale market. Unlike those of most
> other
> western utilities, Chelan's customers haven't seen a rate increase and
> won't for
> the next five years, because Berrie and his coworkers have maximized the
> utility's assets and market opportunities.
>   "People were coming out of the woodwork to get generators on line. I've
> never
> seen anything like it. But the FERC order killed them," Berrie said.
>   Orders for hundreds of small diesel-fired generators that could have
> helped
> get the West through the next 18 months or so were canceled immediately
> after
> the FERC order, because the generators cost more than $92/MWh to operate.
> They
> are expensive to run, but could have patched over the shortage until big,
> permanent power plants are finished in 2003. But who wanted to bet in late
> June
> that the California ISO would pass up the opportunity for a $44 price cap?
> So
> the orders were canceled.
>   In fact, even with the cap stuck at $92, at least 100 megawatts of
> installed
> generators are being taken off line and sent back to the rental companies.
> When
> the blackouts come, hundreds of thousands of homes and businesses will be
> without power that the generators could have provided.
>   The biggest manufacturer of such generators, Caterpillar Inc. (CAT),
> said it
> is redirecting the units to Brazil, which like the western U.S. is highly
> dependent on hydroelectricity. And Brazil, like the West, is enduring a
> drought
> this year. Brazil, however, isn't under FERC jurisdiction.
>   But surely the generators must not be needed if we are sending them down
> to
> poor old Brazil.
>   Not so, according to utility employees like Berrie, as well as the
> quasi-governmental Northwest Power Planning Council. The chances of
> blackouts
> this summer and winter is still much higher than acceptable, and, of
> course,
> higher still without those temporary generators.
>   Price controls kill the messenger. High prices say that supply should be
> increased and usage reduced. Really high prices, like those the West has
> endured
> for the past year, say "Hurry!"
>   But the administration of George W. Bush, after getting a good ol'
> political
> whuppin' at the hands of California Gov. Gray Davis, agreed to shoot the
> messenger.
>   "Why would anybody get into this industry with all the uncertainty of
> this
> ridiculousness? It's the price caps, as well as the rebates. Or you're
> going to
> get sued. Regular people were practically turning over their couches to
> get the
> nickels together to invest in a generator, and they have lost their
> investment,"
> Berrie says.
>   "I think the horse is dead. Even if you removed the regulations and
> prices did
> come back up, people still won't come back. What certainty would you have
> that
> they won't change the rules again? Who can take that risk?" he added.
>   Yet the FERC just ordered the restructuring of many billions of dollars
> of
> transmission lines as the foundation of a free market.
>   In the East, they must be wondering what that messenger said before the
> FERC
> shot him. Apparently it was: "Brazil's economy can afford to pay more for
> electricity than the U.S. economy can."
>   -By Mark Golden, Dow Jones Newswires; 201-938-4604;
> mark.golden@dowjones.com
>
>   (END) Dow Jones Newswires  13-07-01
>   1821GMT(AP-DJ-07-13-01 1821GMT)
>