Subject: [Fwd: Fun on Fridays, part 2: POWER POINTS: How To Raise Electricity Prices, ISO-Style]
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 2 Mar 2001 05:29:00 -0800 (PST)

Mark,

This is fantastic stuff.  Great work!

Sue

Sue Mara
Enron Corp.
Tel: (415) 782-7802
Fax:(415) 782-7854
----- Forwarded by Susan J Mara/NA/Enron on 03/02/2001 01:26 PM -----

	Gary Ackerman <[email-masked]>
	03/02/2001 11:42 AM
	Please respond to foothill
		 
		 To: Bill Ross <[email-masked]>, Bob Anderson <[email-masked]>, 
Carolyn Baker <[email-masked]>, CHARLES A MIESSNER 
<[email-masked]>, Corby Gardin <[email-masked]>, curt 
hatton <[email-masked]>, Curtis Kebler 
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"Richard H. Counihan" <[email-masked]>, Sheryl Lambertson 
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		 cc: Dan Douglass <[email-masked]>
		 Subject: [Fwd: Fun on Fridays, part 2:     POWER POINTS: How To Raise 
Electricity  Prices, ISO-Style]

Mark Golden of Dow Jones Wire didn't hold back, at all.  Great stuff

gba

----- Message from "Golden, Mark" <[email-masked]> on Fri, 2 Mar 
2001 13:52:55 -0500 -----
To:	"Onukogu, Ernest" <[email-masked]>
Subject:	Fun on Fridays, part 2: POWER POINTS: How To Raise Electricit y 
Prices, ISO-Style 
POWER POINTS: How To Raise Electricity Prices, ISO-Style 
   By Mark Golden 
   A Dow Jones Newswires Column 
 
  NEW YORK (Dow Jones)--There they go again. The California Independent
System
Operator has initiated another attempt to suppress wholesale electricity
prices
rather than deal with the fundamental reasons of why prices are high. 
  Like past anti-market moves, Thursday's request that the Federal Energy
Regulatory Commission slash suppliers' unpaid invoices for December and
January
power will fail in its stated aim. Also as with past attempts, the ISO's
action
this week will likely result in higher costs for Edison International (EIX)
unit
Southern California Edison, PG&E Corp. (PCG) unit Pacific Gas & Electric,
Sempra
Energy (SRE) unit San Diego Gas & Electric Co. and the state's Department of
Water Resources. 
  The ISO, which is responsible for maintaining the balance of power supply
and
demand on most of the state's power grid, has suffered the unintended
consequences of its actions many times before. When the ISO passed a
$250/MWh
price cap in the summer, the cap became a target and caused prices to rise,
just
as the ISO had been warned it would. When the ISO exercised its ability to
buy
power above its cap only from out-of-state utilities, California generators
sold
power to the out-of-state utilities, which in turn sold the power back to
California at a markup. 
  The latest attempt to suppress the market is mind-numbingly stupid. The
ISO
wants the FERC to order retroactive discounts for power it says was sold at
unreasonably high prices. Merchant generators, other western utilities and
power
marketers sold about $3 billion worth of bulk power to the ISO in December
and
January. The ISO says overcharging accounts for $560 million of that total.
Suppliers' prices, which the ISO agreed to pay at the time, exceeded
hypothetical generating costs by more than 10% and are therefore
unreasonable,
the grid manager says. 
  Actual refunds might greatly exceed $560 million, according to the ISO,
once
the FERC looks at the suppliers' actual costs. Power from a generating
company
that bought natural gas before the spot market ran up, for example, should
be
discounted the most. Generators that waited and paid the most for gas would
make
the bigger profit per megawatt hour. What a great idea: punish the smart and
reward the stupid. 
  Staffers lead by Anjali Sheffrin, the ISO's director of market analysis,
and
Eric Hildebrandt, manager of market monitoring, spent a fair amount of time
and
money to establish this shocker: In a supply-short commodity market, prices
exceed producers' costs. 
  Where they vary from well-established economic principles is that they
find
this "unreasonable." 
  Sheffrin and Hildebrandt want the FERC to obtain extensive cost data from
all
suppliers - including government-owned utilities Los Angeles Department of
Water
& Power and Canada's BC Hydro - and begin hearings on refunds. This would
cover
the vast majority of sales to the ISO during December and January because
almost
every seller to the ISO exceeded the $150 per megawatt-hour "soft" price
cap,
above which transactions must be reported to the FERC for possible review. 
  There is no question the ISO has been paying prices that exceed even the
already high market prices. On Tuesday, for example, the ISO paid an average
price of $337/MWh for power that other western utilities had bought and sold
for
$175-$200/MWh. On that one day, the ISO paid almost $25 million for power
that
was worth about $14 million. 
  The reason: The ISO has had to pay a premium to the rest of the market
since
the middle of December, when suppliers correctly figured out that the
utilities
were running out of cash and wouldn't be able to pay their ISO bills. Once
northwestern utilities stopped selling to the ISO at any price, the ISO
asked
some of the in-state generating companies like Williams Cos. (WMB) to step
into
the middle on its behalf. Williams did so for what it has called a
reasonable
profit. 
  Let's say that Williams bought from some other generator at $450/MWh and
sold
to the ISO at $500/MWh. That would be reasonable based on Williams' costs,
according to the ISO's view. 
  But if the generator sold directly to the ISO in the first place at
$450/MWh,
it would be ordered to provide a refund, because its generating costs are
assuredly nowhere near $450/MWh. 
  So, according to the ISO, $500/MWh is reasonable, but $450/MWh is too
high. 
  If the FERC were to order refunds as the ISO has requested, no company
that
generates power would ever again sell to the ISO. It would always sell to
some
third party, which in turn would sell the electricity to the ISO at a
markup. 
  Does the ISO ever stop and think through the impact of what it tries to
do? 
  "We certainly recognize that's a problem, and it's something FERC needs to
grapple with," Hildebrandt said in an interview. 
  What the FERC will do is save the ISO from itself. "We reject proposals to
return to cost-based regulation," the FERC said in its Dec. 15 California
ruling. 
  The FERC will review some of the high prices, as required. But refunds
will be
ordered only if the FERC finds that a particular seller to California - or a
colluding group of sellers - withheld supplies in order to increase prices,
according to the FERC ruling. 
  But collusion won't likely be found. There have been many investigations
into
whether sellers have created a "false scarcity." None have found it. 
  In December, Republican FERC Commissioner Curt Hebert, now chairman,
applauded
the commission's decision to "reserve 'price mitigation' for real exercises
of
market power rather than focusing on the price level itself." 
  The issue of the ISO and utilities having to pay a credit-risk premium
arose
after the FERC had decided what it would do about California. But, according
to
a source knowledgeable about FERC operations under Hebert's leadership, the
commission will recognize the credit-risk premium as reasonable. 
  In the meantime, however, the specter of retroactive price controls and
the
increased hassle of dealing with the ISO makes suppliers even more reluctant
to
sell to the ISO. The ISO will have to overcome that reluctance by offering
to
pay an even higher premium. 
  Good move. 
  -By Mark Golden, Dow Jones Newswires; 201-938-4604;
[email-masked] 
 
  (END) Dow Jones Newswires 02-03-01
  1844GMT(AP-DJ-03-02-01 1844GMT)