Subject: Market structure group
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 18 Feb 2000 06:27:00 -0800 (PST)

My apologies for not kicking things off earlier, but the regulator here has 
conspired to make the last few weeks a bit mad.  Consequently, it's taken me 
a while to set down some thoughts on how we might get the best out of the 
market structure group.  Attached below is an initial stab at some "terms of 
reference" to describe the scope and objectives of the group.  I thought this 
might help us to come to a common understanding of what we are trying to 
achieve.   I'm conscious that the one area that is a bit lacking is 
"Deliverables", ie, what will we come up with as the output from this 
process?  This needn't be a formal "report" - indeed I suspect that 
establishing a regular process of information exchange and discussion is 
likely to provide more durable benefits.

I'd very much welcome your views on our scope and objective over the next few 
days.  I'd also welcome a brief update on which issues you are all working as 
a way introducing our interest in the topic of market structure.  This should 
also help to kick-start the process of exchanging ideas.  My own contribution 
is below.

I've also attached a couple of documents that I think may be useful.  One I 
prepared for the Federal Energy Commission in Russia as a statement of "What 
is a foreign investor looking for in a liberalised market?"  It was written 
for an audience for whom a competitive electricity market is an alien 
concept.  For example, we were attempting to change the FEC's mindset that 
power marketers were an unnecessary layer of costs - because their "tariff" 
added to other participants tariffs would increase prices.  As a result it is 
very high level and conceptual.  However, it has some value as a basic 
delineation of where the key market structure issues lie.  The other 
documents relate to the proposals for New Trading Arrangements in England and 
Wales  (further information on these reforms can be obtained from the 
regulator's website at http://www.ofgas.gov.uk/).  While far from perfect, 
these reforms provide a good example of wholesale trading arrangement reform 
for use elsewhere (for good or bad).

I'll be on vacation next week, but on my return I'd like to set up a video 
conference/conference call to discuss how we can take things further.  Any 
suggestions for agenda items for that would be most welcome.

Regards

Paul

------------------------------------------

UK Electricity

The regulators - Ofgem and the DTI are is undertaking a massive programme of 
reforming the electricity market in England and Wales.  These reforms have 
followed the UK government's moratorium on new gas plant in late 1997 and are 
designed to remove perceived "distortions" in the market.  The reforms centre 
on:

New Electricity Trading Arrangements (NETA) to replace the Pool from October 
this year.  We have had a significant input into the this process.  While 
generally supportive of the proposals, we have opposed several undue 
restrictions on managing risk.
Plant divestment by major mid-merit generators to increase competition in the 
price-setting part of the market.  We were instrumental in this process, 
following our analysis late in 1997 of the costs of generator market power to 
electricity consumers.  Divestment has since significantly increased the 
liquidity and competition in the wholesale market.  Despite this the 
regulator is seeking greater powers to intervene in the wholesale market to 
prevent market "manipulation".  We think this represents an unacceptable 
extension of regulatory power and are therefore likely to oppose the 
regulator at the Competition Commission enquiry into this.
New transmission access and pricing arrangements.  While these reforms may 
have limited merit, in general we think they're a waste of time and our 
existing asset positions are significantly exposed.  The regulator has just 
started consulting on this and this is one area that I suspect your 
experiences in the US and elsewhere might be useful to me.