Tim,
This kind of information is very helpful for those of us who will be trying 
to make our way through the Market Monitoring investigation.  Please keep 
forwarding everything like it that you come upon.  Elizabeth said by voice 
mail Thursday, that she is going to be lining up our outside counsel to work 
on this and would be calling you soon.  I am going to be out of the office 
from June 30 -July 14.  

 Some of what is expressed in the conversation about the incident is 
consistent  with one of my own instincts about the matter, which is that  
nobody, including the PX Compliance folks,  should be surprised to learn 
that   the competitive market forces that  everybody seems to agree are very 
positive are going to be applied directly to the electronic system qua 
system.  Dynamic electronic commerce is going to include a rigorous testing 
of the very media by which it is conducted.  The politicians whose supposed 
wisdom  created this mode of commerce and imposed it upon the California 
energy market   can't expect to channel the enormous brawling competitive  
energy of a big sector of the American economy into  a  computer software 
system and then throw up their hands and interpret certain kind of 
commercial  results from the perspective of the  good old days of 
pre-electronic commerce.   Certain kinds of distortions are going to happen 
in electronic commerce which would not happen in the absence of this mode of 
conducting business, and these new  kinds of distortions are going to warp 
and twist the system.  Presumably those devoted to keeping the system will 
try to repair it and improve it,  but in doing so,  they need to procede very 
carefully down any path that  might lead to pointing an accusing figure at 
any one particular market participant.  Arguably a big finger might be 
pointed at those that created this market distorting  mess in the first 
place. --cgy



To: Elizabeth Sager/HOU/ECT@ECT, Christian Yoder/HOU/ECT@ECT
cc:  
Subject: PX Investigation

I am forwarding a weekly "gossip column" put out by the Executive Director of 
the Western Power Trading Forum.  There are a couple of interesting comments 
relating to the Silver Peak overscheduling event.  I think that Ken Lackey's 
comments are at the core of the argument that we are trying to make.
---------------------- Forwarded by Tim Belden/HOU/ECT on 06/25/99 09:13 AM 
---------------------------
   
	Enron Capital & Trade Resources Corp.
	
	From:  "Gary B. Ackerman" <foothi19@idt.net>                           
06/24/99 04:56 PM
	

Please respond to gackerman@wptf.org
To: Barb Ennis <baennis@ix.netcom.com>, "Becky A. Kilbourne" 
<bakilbourne@calpx.com>, Bill Metcalfe <w.metcalfe@usa.net>, Bob Anderson 
<Robert_Anderson@apses.com>, Bob Hoffman <bhoffman@newenergy.com>, Bob 
Reilley <rreilley@tejasenergy.com>, Brian Mock <bmock@coral-energy.com>, 
Curtis Kebler <Curtis_L_Kebler@reliantenergy.com>, David Bobo 
<david-bobo@hlp.com>, David Parquet/SF/ECT, Dennis Benevides 
<dbenevid@enron.com>, Dennis Flaherty <dcfl@dynegy.com>, Frank Rierson 
<fgrierson@aol.com>, George Sladoje <gsladoje@calpx.com>, Greg Blue 
<gtbl@dynegy.com>, Gregg Cordell <gcordell@enron.com>, John Flory 
<jeflory@calpx.com>, Ken Czarnecki <Ken_J_Czarnecki@calpx.com>, Ken Lackey 
<Kenneth_Lackey@EdisonMission.com>, "Lisa G. Urick" <lgurick@calpx.com>, Mona 
Petrochko <mpetroch@enron.com>, Nancy Day <nday@newenergy.com>, Paul 
Mead/PDX/ECT, Peter Bray <peter.bray@pgees.com>, Roger Pelote 
<rpelote@energy.twc.com>, Romula Barreno <rfbarreno@calpx.com>, "Ross\"Mother 
Pie\"Clark" <rclark@coral-energy.com>, Sheryl Lambertson <slamb@mtpower.com>, 
Sue Mara <smara@enron.com>, Tim Belden/HOU/ECT, Tom Delaney 
<tom_delaney@enron.com>, Vicki Sandler <Vicki_Sandler@apses.com>, Al Parsons 
<alp@ncpa.com>, Anne Bertolet <abbertol@newwestenergy.com>, Barry Bell 
<barry.bell@pacificorp.com>, Brian Jobson <bjobson@smud.org>, Chris Hawkins 
<chris.hawkins@lgeenergy.com>, Daniel Kirshner <dank@edf.org>, Dave Nuttall 
<dn@ui.com>, Denice Cazalet <dcazalet@apx.com>, Edmond Chang 
<echang@wapa.gov>, Edward Cazalet <ed@cazalet.com>, Jack Ellis 
<jack@apx.com>, Jeanne Higgins <jeanneh@citizenspower.com>, Jerry Toenyes 
<toenyes@wapa.gov>, Jim Kritikson <jgkritikson@calpx.com>, John Stremel 
<jstremel@energy-exchange.com>, julie blunden <blunden@greenmountain.com>, 
Ken Nichols <ken@hetrading.com>, Kendra Heinicke <klheinicke@calpx.com>, 
Linda Hamilton <lhamilton@avistaenergy.com>, Marcie Milner 
<marcie_milner@enron.com>, Mark Tallman <mark.tallman@pacificorp.com>, 
"Nichols, Lauren - PGS" <lnichols@bpa.gov>, Paul Kroger 
<paul.kroger@pacificorp.com>, Peggy Olds <paolds@bpa.gov>, Randy Young 
<RYoung05@apsc.com>, "Richard H. Counihan" <counihan@greenmountain.com>, Rob 
Nichol <rsnichol@newwestenergy.com>, Steve Fisher 
<svfisher@avistaenergy.com>, Tom Breckon <tom@ncpa.com>, webmaster 
<charlotte@wptf.org>
cc:  
Subject: WPTF Friday Thin Quality Burrito



Hey Burrito Heads!  It's just another fascinating week in Burrito land.
I spent the better part of this week learning something new, which at my
age is not easy.  In fact, just about everything at my age is getting
more difficult.  But I wont  bore you with the details.  The new thing I
learned was how to be an Examiner on the Board of Examiners for this
year's California Governor's Quality Education and Development Award
(CalQED).  Its an annual shindig for companies, health care
institutions, and schools to compete for the honor of shaking the Gov's
hand, and hearing that your (pick one: company, non-profit, school,
health care institution) are world class.  Being an examiner of the
written applications, and working with a team of peer examiners is all
pro bono on my part.  I am wondering what the hell I got myself into.
I'll tell you more about it some other time.

Speaking of world class, I got two top notch letters this week that I
want to share with you.  One from Ken Lackey of Edison Mission Marketing
and Trading, regarding the May 25 overscheduling on the Silver Peak
intertie by 2900 MW (see Lori Eckman's note to me in last week's
Burrito), and a reply to Ken's letter from George Sladoje, CEO of the
PX.

Ken, who I have known for several years, is a person who doesn't speak
out unless something really bothers him. Ken wrote:

"Since Day 1, I've always wondered what mechanism was in place to
protect against this scenario [overscheduling on an intertie], or if
this scenario would be regarded as a market implementation flaw or
"feature".  I always figured it was a feature, simply because I didn't
think that a hole this large would be unintentionally overlooked.  I
also figured that this feature was available for use by market
participants and that if it became overused, that it would eventually
come under scrutiny by the market compliance police.  I also wondered if
people could use this to change spreads in such a way as to improve
their overall positions.  I also figured that for the most part there is
no such thing as "artificially" high prices since  in my opinion the
market design itself is somewhat artificial.   But now I know the
truth..it's a flaw, it was overlooked and there is no
protection...amazing.

"I certainly do not agree with [George] Sladoje's interpretation of the
PX tariff (that overscheduling across a path constitutes improper
implementation of a generator schedule, which therefore constitutes a
violation of the tariff).   Also I believe that it is completely
inappropriate for the burden of proper functioning of the market to rest
on the shoulders of the market participants (i.e. if someone types in an
incorrect schedule in their PX Trade Application, the market should not
blowup) .  The responsibility of a properly functioning market lies with
the market operator (PX) itself.  PX software should validate that the
proper mechanics have been used by the market participants.

"By the way, it wasn't us who caused this situation, and of course we
would prefer to pay low PX energy prices rather than high, but if we
review this situation and retroactively recreate prices, then perhaps
all other cases in which congestion at tie-points caused high prices
should also be reviewed to see if they are "real".

"By the way, typically, I would not respond to this sort of thing due to
time constraints, however, some of our recent involvement in other
ISO/PXs has highlighted the contrasts between California and other
ISO/PXs.  Each of them, including California, has its strengths and
weaknesses, however, it's in California where the unusual is the norm."

I sent Ken's letter to George, and his staff at the PX, and George wrote
back the following:

"Because the incident of May 25 is the subject of an official
investigation by the PX Compliance unit, I cannot comment on the
specifics of this matter at this time.  It is likely that the CalPX
Market Monitoring Committee will be involved in the investigation and
the results will likely be presented to the CalPX Board of Governors.
As to the issue of a design flow in the overall California marketplace
--- we are currently reviewing this issue and have requested that the
ISO do the same.

"I disagree with the assertion that CalPX Tariff provision 3.3.2 does
not apply here.  In all major exchange operations the institution not
only provides a forum for trading, but also monitors the activities of
its members, both currently and after the fact.  The participants are
expected to follow the rules.  At one of my previous employers, as an
example, (the Chicago Board of Trade), a suspected abuse or a compliant
from another member or customer results in an investigation by the
Office of Investigations and Audits (the counterpart of CalPX's
Compliance unit).  Depending on the nature of the issue, the
investigation results are presented to the Floor Governors Committee,
Business Conduct Committee or the Financial Compliance Committee.  These
bodies then determine if additional investigation is warranted and if
the issue requires Board of Director action.

"Similarly, the CalPX has the obligation to investigate and take actions
against participants who violate tariff provisions.  Our recently filed
sanction's protocol formalizes the process further and describes a
series of penalties which can be imposed.  Therefore, we believe our
tariff does provide adequate protection.

"Finally, as to whether a comparable event has occurred in the past ---
this will be part of the investigation process and a review of market
design.  Obviously, impact schedule submissions above ATC limits have
happened as a result of free and open markets.  Congestion has become an
almost regular occurrence.  The real issues under investigation in this
incident are magnitude, intent and materiality of impact on our
marketplace."

Thank you, both Ken and George for those comments.  I am sure we will
hear from other members on the issue.  Lori, don't be silent.  You
started this thing.

====================================

Speaking of market design (segues, I am very big on segues this week),
old warrior, dear friend,  and defender of the just, Carl Imparato had a
few things to say about the ISO's proposed utilization of ex post GMMs.
Carl wrote:

"Yesterday, [the ISO Market Analysis Unit] stated that not implementing
after-the-fact GMMs would be a departure from the original vision of the
California market structure.

"Ex post GMMs were NOT a part of the market structure.  When I was at
PG&E and we were developing the tariff in early 1997, no one (not at
PG&E, SCE or any other market participant, to my knowledge) ever
advocated ex post GMMs, and they were NOT included in the tariff.   I
don't recall the words "state estimator" (for calculation such GMMs)
ever being uttered by anyone in a WEPEX stakeholder meeting.

"It was only somewhere in mid-1997, when Alex was working on UFE
equations, that Alex (I believe) suddenly came up with the proposal for
ex post GMMs, and the proposal was taken by ISO very quickly (before it
had ANY discussion in SCUG or any other forum), and was adopted by the
ISO Board (or whatever group passed for the Board at that time).
Immediately thereafter, virtually everyone in SCUG .  We were ignored.

"But even in early 1998, we informally agreed that, in light of the
facts (that after-the-fact GMMs were not part of the original "deal"),
after-the-fact GMM implementation would be given low priority and we
would be given opportunity to discuss this issue before ISO moved
forward."

I remember those discussions, Carl.  I wonder if deals made in 1998 have
any meaning today?

==================

The SCE Pilot Forwards Program, a continuing saga for WPTF,  popped up
again this week.  I visited with Commissioner Bilas on Monday to
encourage him to stay the course, and support the ALJ's preliminary
decision to reject SCE's Application, and cancel the hearings on legal
and procedural grounds.  Dick said that he supported that notion, but he
couldn't guarantee that all his colleagues would.

Alas, two days later, Commissioner Joe Neeper, who clearly had too much
time on his hands this week, issued a public statement which is long,
but here is a taste:

"ALJ Hale's Proposed Decision (PD) is structured so that a "Yes" vote
will terminate the proceeding and a "No" vote will continue the
proceeding to hearings and ultimate resolution.;; I have concerns with
the PD.; However, I do not intend to issue an alternate because, should
my concerns not be addressed, I have the option to vote "No" which would
have the same effect as the alternate I otherwise would have written....

"If we vote to allow this application to move to hearings, we can later
determine whether the Application should be approved on overall policy
grounds.  The PD dismisses the Application on the grounds that does not
comply with what is known as the buy/sell requirement for utilities to
sell all of their generation into, and purchase all of their energy
needs for their bundled customers out of, the PX.; I agree with the ALJ
and the Assigned Commissioner that the Application also must be
compatible with the buy-sell requirement in order to be approved, and
that this threshold decision is therefore necessary.....

"The PD concludes that the Application makes SCE's customers more
vulnerable to market power abuse.;In viewing the comments of parties, I
find the concern about market power abuse to be expressed best by
Western Power Trading Forum (WPTF) in its opening brief.; WPTF states on
page 7 that, under SCE's proposal, "ESPs will no longer be able to
compete with utilities on the basis of short-run incremental costs in an
open setting" as envisioned by the PPD.;Thus, "ESPs would find it
increasingly more difficult to compete with an Edison price which was
neither derived from a transparent PX price nor reflective of the retail
market in which ESPs must participate."  ... The PX price is determined
in an open setting, and would continue to be determined in an open
setting under SCE's proposal....I cannot find that the proposal would
violate the PPD by necessarily leading to abuse of market power.  Market
power concerns should be considered, and weighed against consumer and
other interests.; These issues certainly can be explored in greater
depth as policy matters in hearings.

"I do not believe the Application by SCE is in violation of the
Commission's Preferred Policy Decision.; The merits of the Application
should be considered through the hearing process and voted upon by the
Commissioners. "

Well, Mr Neeper, justice isn't free.  A hearing is expensive, and what
your are doing is raising the ante of staying in the
game,unnecessarily.  That supports the incumbents (UDCs), and hurts us.

At the time I am writing this Burrito, I do not know if the Commission
took action on this matter today, or punted it to the July 8 meeting.
I'll keep you posted, next week.

==================

I am sure most of you have seen the press releases which came out last
week.  First, Dynegy and Illinova are merging, and, second, NEV is being
purchased by AES.  Both Dynegy and NEV are Voting members of WPTF.  I
was going to send Illinova a solicitation letter to join WPTF, but now I
think I'll take that off my "to do"list.

In the NEV deal, the AES Corporation announced that it  has entered into
a definitive agreement to acquire New Energy Ventures  in a transaction
valued at approximately $90 million. AES will acquire all of the
outstanding shares of New  Energy Ventures from its current owners,
UniSource Energy Corporation. and New Energy Holdings, L.L.C. (which is
owned by senior  management of New Energy Ventures).

This is an incredible coincidence.  I was just telling someone, I think
it was Dan Douglass, that we ought to give a special award to Nancy Day
of NEV, who is a big fan of the Burrito, and quite possibly, although I
am not certain, one of the senior managers of that lucky corporation.
Well, heck, she has been at NEV from the beginning, so she deserves all
the financial success in the world, and we wish her well.   I just want
to share with all our Burrito readers that WPTF, a tax-exempt,
non-profit corporation, Tax ID 94-3296987, right here in the State of
California, soon to be a CalQED award winner, is looking for donors for
the soon-to-be-announced Executive Director's fund.  Some of you might
not know about this new [slush] fund. It is intended to provide all the
necessary tools and ancillary needs of late night policy pow wows
attended by the usual wonks and otherwise homeless lobbyists who invade
my private hotel room during the WPTF general meeting, and who want to
discuss high level stuff all through the night.  What's an executive
director to do?  So, Nancy, I was just thinking, we could launch this
program in your honor, with your name all over the thing, and get this
very important and much needed program in place.  At least it will pay
for a hotel room for Curtis who consistently falls asleep during these
meetings on my hotel-room couch while Beth Emery is lecturing him.

By the way, if, God forbid, the deal falls through, then forget I wrote
all this.

Have a great weekend.  Think quality.

gba