Message-ID: <32871126.1075846360022.JavaMail.evans@thyme> Date: Wed, 6 Dec 2000 01:03:00 -0800 (PST) From: christi.nicolay@enron.com To: steven.kean@enron.com, richard.shapiro@enron.com, james.steffes@enron.com, linda.robertson@enron.com, david.delainey@enron.com, john.lavorato@enron.com, kevin.presto@enron.com, joe.hartsoe@enron.com, lloyd.will@enron.com, mitch.robinson@enron.com, donna.fulton@enron.com, sarah.novosel@enron.com, sherri.sera@enron.com, maureen.mcvicker@enron.com, kay.chapman@enron.com, kimberly.hillis@enron.com, ginger.dernehl@enron.com, bernadette.hawkins@enron.com, lora.sullivan@enron.com Subject: **For the FERC staff lunch 12/7--FERC Investigation summaries Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Christi L Nicolay X-To: Jeffrey K Skilling@Enron, Steven J Kean, Richard Shapiro, James D Steffes, Linda Robertson, David W Delainey, John J Lavorato, Kevin M Presto, Joe Hartsoe, Lloyd Will, Mitch Robinson, Donna Fulton, Sarah Novosel, sherri.sera@enron.com, Maureen McVicker, Kay Chapman, Kimberly Hillis, Ginger Dernehl, Bernadette Hawkins, Lora Sullivan X-cc: X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Notes inbox X-Origin: KEAN-S X-FileName: skean.nsf ***BELOW ARE SUMMARIES OF THE HELPFUL FERC STAFF INVESTIGATIONS LEAD BY SCO= TT=20 MILLER (WHO REPORTS TO DAN LARCAMP) -- BOTH WILL JOIN THE ENRON EXECUTIVES = AT=20 LUNCH THURS. 12/7. - MIDWEST AND SOUTHEAST SUMMARIES On 11/1/00, FERC Staff issued reports on its Investigation of Bulk Power=20 Markets in the Eastern Interconnection. These reports were the result of a= =20 Commission order earlier this summer. Enron's Federal regulatory staff=20 (Christi, Charles Yeung, and Sarah Novosel) provided a great deal of=20 information for this investigation and Joe Hartsoe and Donna Fulton discuss= ed=20 many of the problems with the grid with the new head of Staff, Scott Miller= =20 (who recently joined FERC from PG&E Gen). While the Commission is under = no=20 obligation to take any of Staff's recommendations, the Commission typically= =20 looks to Staff for guidance on transmission and market issues. Importantly= ,=20 Staff concludes that the Commission should consider these options for the= =20 Southeast and Midwest -- all of which Enron has been asking FERC to impleme= nt=20 for several years: Reduce the advantages of network service over point to point service by=20 requiring that native load be served under the same tariff as other=20 transmission services to eliminate the current incentives that VIUs have to= =20 favor their native load through the calculation of ATC and handling of=20 interconnection requests. While the Staff Hotline is used productively, the Commission can direct Sta= ff=20 to conduct formal investigations into entities that have a pattern of=20 complaints. The Commission could require TPs to submit tariff provisions containing a p= ro=20 forma interconnection process specific to interconnection, rather than simp= ly=20 relying on the Tennessee Power order that utilizes the OATT timelines and= =20 procedures. Require TPs to retain real-time transmission data on market functions=20 pertaining to daily load, internal generation to meet that load, and import= s=20 and exports. RTOs should submit the basis and methods for calculating ATC and TTC, as we= ll=20 as standardized criteria for curtailment. In addition, since even such=20 standardized criteria might not "get to the root of the problem" -- that=20 control area still control generation -- the Commission could require that= =20 each RTO set a date certain by which it will create one control area. =20 Regardless of the implementation of these two options, the Commission could= =20 standardize ATC and TTC methodology. Staff finds that while electricity is a commodity with market characteristi= cs=20 similar to many other commodities, it is still viewed as "different," with = a=20 reaction of price caps. Staff encourages that basic decisions about the=20 regulatory model be made in order to complete the transition from a=20 traditional cost-of-service model to a model that uses markets to price the= =20 commodity and services. =20 DETAILS (Also, the reports contain good summaries of the generation,=20 transmission, state retail, federal reg. and other issues for the region): Midwest: The Midwest is dominated by vertically integrated Transmission=20 Providers ("TPs") that control transmission, generation and load. "As such= ,=20 they have weak economic incentives to provide access to transmission servic= e=20 to third-parties and strong incentives to favor their own services." Staff= =20 received numerous complaints; however, due to the lack of information=20 available from TPs, Staff cannot conclude whether these are isolated=20 incidents or wide-spread. At the very least, the complaints indicate a lac= k=20 of confidence in the bulk power market and the ability of market participan= ts=20 to rely on transmission access, thus harming the liquidity of the market. = =20 TLRs are the most important transmission issue in the Midwest, with an=20 "enormous" increase in 2000. The region showed a decline in peak load from= =20 1999 to 2000 and a growth in new generation since the 1998 price spikes. = =20 Even though there was an increase in generation and mild weather with=20 virtually no price spikes, TLRs climbed to record numbers. The TLRs were= =20 highly concentrated: only 5 flowgates account for 41% of ECAR TLRs and=20 another 5 flowgates in MAIN account for 42% in that region. Notably, even= =20 though the NERC procedures for Level 3 TLRs mandate transaction curtailment= ,=20 78 of the 191 TLRs in the Midwest do not show any curtailment amount. The= =20 total amount of relief that these curtailments are intended to produce are= =20 not posted. Staff notes that TLR rules are established by NERC, whose=20 procedures are voluntary and not enforced by penalties. While the Commissi= on=20 has required certain NERC standards and procedures to be placed in Open=20 Access Transmission Tariffs ("OATT") where the Commission has the power to= =20 enforce provisions under the Federal Power Act, in practice the Commission= =20 has generally deferred to NERC on transmission reliability questions,=20 including the propriety of TLRs. TLRs inhibit optimal functioning of the transmission system and market=20 because load is not served by the least cost supplier. TLR procedure is an= =20 inefficient instrument in mitigating constraints -- curtailment by fiat. I= n=20 addition, the NERC IDC can result in inappropriate curtailments or increase= d=20 loading on the affected flowgate. The impact could be mitigated by one=20 control area per RTO. Staff notes that the Midwest state commissions did not petition FERC for=20 price caps following the 1998 price spikes. Some market participants belie= ve=20 that the absence of price spikes is the single reason that NUG construction= =20 increased in the Midwest. =20 Market participants must keep track of, and follow, a plethora of informati= on=20 in order to make energy deals, submit reservations and provide schedules fo= r=20 service. Staff received many complaints about barriers to transmission=20 access, including TLR curtailments and a lack of standardized information a= nd=20 protocols, particularly for ATC and interconnection requests, and=20 discriminatory conduct. Unbelievably, key data was unavailable to Staff,= =20 such coincident peak load data, system-wide snap shots for days when TLRs= =20 were called, and import/export data. This lack of data creates a market=20 inefficiency, because neither market participants nor regulators can fully= =20 analyze market conditions in real time. As such, the market is risk advers= e,=20 eschewing long-term deals for short-term transactions. Staff also noted th= at=20 because the Security Coordinators often work for the IOU, there is a mixed= =20 incentive to enforce reliability on the grid and maximize profit for the=20 IOU. (Staff cites Richard Tabors' paper, "Transmission Markets, Stretching= =20 the Rules for Fun and Profit.") Staff cites the lack of information on OASIS or on the NERC web site,=20 particularly about real time TLRs and curtailments. Examples were provided= =20 to Staff of transmission refusals when there were no TLRs posted and improp= er=20 implementation of TLRs causing substantial financial loss. The currently proposed Midwest RTOs may mitigate some problems; however, al= l=20 three retain existing control areas with the favortism for generation and= =20 native load. These incentives will continue to remain until the RTO=20 exercises complete autonomy over transmission control and security=20 coordinator functions. Staff notes that the Midwest is a balkanized region= =20 of 61 control areas with no uniform method for calculating ATC and CBM. Th= e=20 result is that ATCs can be different on 2 different sides of an interface. = =20 Staff notes examples in inaccurate ATCs and states that Staff's own ATC aud= it=20 this summer was consistent with market participant complaints. Staff is=20 weighing follow-up options. The result of these problems is a lack of=20 liquidity. Staff next noted the problems with unfiled "business practices," especially= =20 on the next hour market. Staff's audit of OASIS sites revealed several are= as=20 of non-compliance. =20 Information transparency is necessary for a market to function efficiently,= =20 with equal and timely access to data, including ATC, CBM, TRM, and load flo= w=20 input data. TPs have incentives to resist efforts to make this information= =20 transparent because of native load. This incentive will still exist under= =20 RTOs if utilities are allowed to calculate their own ATC. *** "As a=20 consequence, the Commission may wish to eliminate the native load exemption= =20 and have all transactions under the same tariff." *** The Commission coul= d=20 benefit by having access to existing transmission data and should require t= he=20 TPs to retain data, including current real-time network status. Interconnection Issues: IPPs need to be compensated for VAR support. Also= ,=20 Staff cites a number of Hotline complaints about TPs seeking large deposits= =20 or failing to complete System Impact Studies timely. One solution is to ha= ve=20 the RTO handle this function to eliminate the disincentive the utilities ha= ve=20 against IPPs. The current practice of requiring IPPs to deal with a wide= =20 variety of procedures inhibits the free flow of transactions within the=20 region. Network service has inherent advantages over point-to-point, citing the=20 Entergy source and sink order. The Commission has relied on "passively"=20 receiving informal and formal complaints to determine if discriminatory=20 behavior has occurred rather than actively canvassing market participants. = =20 While Staff cannot conclude that discriminatory practices are widespread,= =20 there is evidence of discriminatory instances. Southeast: The traditional vertically integrated utility ("VIU") model has= =20 largely persisted in the SE. This continued control has vastly reduced the= =20 economic incentives to facilitate IPP activities. In many cases, the VIUs= =20 have dampened IPP involvement without violating any Commission regulation d= ue=20 to the inherent flexibility of the current rules. Staff cites examples of delays in performing system impact studies,=20 transmission hoarding in the name of serving native load growth and=20 manipulation of ATC. TPs have shown little inclination to improve the=20 transmission system and use many TLRs. There is also a lack of market information that has stymied the development= =20 of markets in the SE. ATCs change constantly that leads to uncertainty and= =20 there is no clearinghouse for electric power prices. TVA, despite having taken steps to participate in reformed markets, has act= ed=20 as a bulwark against the development of competitive energy markets in the= =20 SE. This is significant because of TVA's size and location. IPPs have=20 reported TVA's discouragement of siting in TVA through excessive time to=20 perform studies, excessive fees, and rejection of requests to perform=20 interconnection studies. In addition, Staff cites the Florida Sup. Ct. decision against merchant=20 plants as significantly impeding the competitive market in Florida. Staff discusses the significant flow of power from the Midwest to the SE th= is=20 summer. Much of this resulted from the import of cheaper coal power, than= =20 the use of gas fired peakers due to higher gas prices. Peak prices were=20 radically lower this summer because utilities appear to have been better=20 prepared for peak events through the use of forward contracts, increased=20 generation capacity on line and reduced number of forced outages. =20 SE utilities reported that they have not used market-based rates to=20 extensively increase sales. (Less used than in the midwest.) The SE region lacks information, which has retarded the Staff's efforts to= =20 discern the truth about the numerous complaints about transmission in the S= E=20 (including ATC and TLRs). Market participants seem to have less confidence= =20 in the SE market than in any other market region. This appears to be=20 justified based on Staff's investigations. This lack of confidence=20 discourages investment and participation in the markets. Staff concludes= =20 that the Commission may need to be more prescriptive in terms of how=20 transmission is allocated in the SE RTOs, since there are market concerns= =20 that the incumbents will continue to dominate operations. The investigatio= n=20 found numerous problems in bad ATCs and TTCs and poor OASIS postings. In= =20 addition, several OASIS audit logs actually erased historical data. Staff= =20 thinks that additional affiliate transaction information should be posted. = =20 Staff could not obtain summer demand data and the Commission's lack of=20 jurisdiction over TVA made it difficult to obtain transmission access=20 information. The Staff investigation revealed unclear interconnection procedures and lac= k=20 of adherence to schedules and arbitrary cost estimates and deposits. In=20 addition, the TPs have reserved a huge amount of network transmission=20 capacity, much of it reserved shortly after the IPP approached the TP to=20 interconnect. Staff cites the recent Skygen order in which Southern denied= =20 Skygen's request for transmission stating that the only option was the=20 construction of an 80 mile 500 kv line that would take 8 years to complete.= =20 Staff solutions include allowing network requests by IPPs and limiting=20 self-build capacity in the incumbent's territory. ATC variations are a big problem in the SE. SERC coordination of a=20 standardized ATC is a long process and may not be resolved soon without=20 direction from the Commission. An improved method and improved communicati= on=20 are needed. The SE experienced a 354% increase in TLRs this summer. This increase rais= es=20 the issue of whether curtailment has become an impediment to the competitiv= e=20 operation of the market in the SE. Staff cites information provided by=20 Charles Y. that an Ameren TLR was not implemented according to NERC=20 criteria. Staff also wonders if transmission is being oversold since TPs d= o=20 not generally refund transmission revenues when TLRs are implemented. RTOs= =20 must have a broad geographic area to internalize much of the constraints. = In=20 addition, RTOs will adopt pricing mechanisms that obviate recourse to TLRs.= =20 However, if control areas are retained, VIUs will retain mixed incentives. *** As noted in the Midwest report, the manner in which load is calculated= =20 weighs heavily on the value of this information. This is an issue that the= =20 formation of RTOs may not resolve. Eliminating native load exceptions -- i= e,=20 treating all load equally -- and placing all transactions under the same=20 tariff may be an option that provides the right incentives for the provisio= n=20 of transparent and standardized information. Finally, Staff describes specific problems with TVA and FP&L, TVA is a=20 "problem area" for the Eastern Interconnect grid. TVA is a transmission=20 bottleneck due to the many TLRs called this summer. The current federal la= w=20 and lack of Commission jurisdiction are impediments to the development of= =20 deep and robust power markets in this area. TVA simply has no strong=20 incentive to provide effective and efficient transmission service. In=20 addition, the Commission does not have full information on TVA. Staff list= s=20 a number of complaints against TVA, including unjustifiably increasing the= =20 tag deadline and allowing TVA Marketing, but not others, to sink and park= =20 power. Staff concludes that recent proposals by TVA to enhance the=20 development of markets and its system do not appear to have great potential= . A Staff audit of FP&L revealed violations of standards of conduct, includin= g=20 confidential information on FP&L's transmission system (including interchan= ge=20 information for other entities) posted on EMS systems that were available t= o=20 FPL's merchant function. Staff's report found that FP&L does not have an= =20 established procedure for review of EMS to ensure that information is not= =20 displayed in error. It is "up to individual Managers discretion." ((FRCC= =20 web site report dated 9/8/00)). Violations such as these undermine=20 competition. The reports are attached below. - southeast.pdf - midwest.pdf NORTHEAST SUMMARY Attached is a summary of FERC Staff=01,s November 1, 2000 report on its=20 investigation of the Northeast region. The report is very encouraging=20 because it is comprehensive and recommends many of the changes and solution= s=20 that Enron has been advocating for years. The report is also encouraging= =20 because it indicates a significant level of understanding of the northeast= =20 markets (and the problems in these markets) by the FERC people who worked o= n=20 this report. Because this is only a brief summary, the entire report=20 (particularly sections 4 and 5) should be read in detail. A copy of the=20 report is attached. Please let us know if you have any questions or comments. Sarah =20