Message-ID: <17161188.1075862243125.JavaMail.evans@thyme> Date: Thu, 8 Nov 2001 21:55:21 -0800 (PST) From: luiz.maurer@enron.com To: steve.walton@enron.com, sarah.novosel@enron.com, l..nicolay@enron.com, michael.roan@enron.com Subject: RE: RTO Week Comments -- ICAP Cc: richard.shapiro@enron.com, jose.bestard@enron.com, d..steffes@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable Bcc: richard.shapiro@enron.com, jose.bestard@enron.com, d..steffes@enron.com X-From: Maurer, Luiz X-To: Walton, Steve , Novosel, Sarah , Nicolay, Christi L. , Roan, Michael X-cc: Shapiro, Richard , Bestard, Jose , Steffes, James D. X-bcc: X-Folder: \RSHAPIRO (Non-Privileged)\Shapiro, Richard\Deleted Items X-Origin: Shapiro-R X-FileName: RSHAPIRO (Non-Privileged).pst Sarah =20 1) Fully agree with Steve. Only large industrials are assumed to bring elas= ticity to demand in the absence of full retail competition. (or under emerg= ency situations, such as rationing, when the regulator may establish that a= ll customers recieve price signals above a certain baseline consumption). I= would dare to say that even less than 20% of load being price sensitive (= on a time interval basis) would have a significant impact on price spikes (= and therefore on the entire logic for payment for capacity/reserves). CERA = has just produced an interesting report. In the Northeast US, NY has had th= e best demand response - despite being a few thousand MW they may have alli= viated significant curtailment. One may hypothesize why customer response h= as been so modest in genera;. One possible explanation is that, under the t= hreat of rolling black-outs, customers do not want to face the inconvenien= ce (and investments) or responding to demand. Situation may change in the f= uture as they get used and perceive the real benefits of participating in t= his game. That is why our ICAP paper relies heavily on demand response to m= ake sure that the market will always clear. =20 2) As far as the LSE holding forward call options, (as an intermediary solu= tion). I think this is an idea originally developed by Oren, from Berkeley.= He basically states that LSEs (or large industries) should decide their de= sired exposure to the spot price, by holding more or less of those options.= Options should be backed by real generation (in this case reserves). In Or= en's view, this avoids the syndrome of one size fits all. Instead of all pl= ayers buying for the same reliability level, the scheme would allow each pa= rticipant to customize their risk preferences. This idea only makes sense i= f you impose a contracting requirement on LSEs (otherwise, the free-ride pr= oblem would still be there and because of the risk of curtailment the marke= t would not be able to clear). In earlier versions of our Icap paper, we dr= afted this idea as a possible alternative (I can send you older versions, i= f you want to go further into the subject). However, Larry Ruff and some of= our trading guys disliked the concept of any kind of mandatory contract re= quirement (which I understand goes hand in hand with the call option propos= al). If we had to choose, Larry would rather go for the British LOLP x VLL = model instead of the mandatory contract requirement.=20 =20 To be fully consistent with our paper, you should state our interim proposa= l, and explain why it is superior to the former UK model (LOLP) or the Oren= 's proposal (mandatory requirement). Or, alternatively, you should stress t= hat Oren's idea only works if you impose a mandatory contracting requiremen= t (over and above your forecasted load).=20 =20 LM -----Original Message-----=20 From: Walton, Steve=20 Sent: Thu 11/8/2001 12:34 PM=20 To: Novosel, Sarah; Roan, Michael; Perrino, Dave; Maurer, Luiz; Hueter, Bar= bara A.; Landwehr, Susan M.; Hoatson, Tom; Nicolay, Christi L.; Steffes, Ja= mes D.; Alvarez, Ray; Shelk, John; Rodriquez, Andy=20 Cc:=20 Subject: RE: RTO Week Comments -- ICAP Sarah,=20 =20 I don't know of a way that small customers could respond to real ti= me prices in a price freeze/non-retail access state, however, there could b= e demand bidding schemes put in place for larger industrials to forgo consu= mption through a tariff rider in a retail tariff. We talked about this ear= lier in the year. PGE put a program in place earlier in the year that is s= imilar to what we proposed. Even if only 1/3 of the load is responsive, yo= u still get substantial benefit. In response to you second question, I like the forward contracting = requirement better than an ICAP requirement because it can be applied in th= e NW. The NW has more than enough capacity for any hour, but it cannot mee= t annual energy requirements without the base load energy produced in MT an= d WY. An ICAP market would be meaningless in an energy constrained system.= The focus, in any event, needs to be on the LSEs meeting their load, whet= her aggregators or vertically integrated utilities. It would seem that nat= ural place to occur is at the State level where adequacy of supply would be= a requirement in licensing people to serve at retail. =20 Steve=20 -----Original Message-----=20 From: Novosel, Sarah =20 Sent: Tuesday, November 06, 2001 4:59 PM=20 To: Novosel, Sarah; Walton, Steve; Roan, Michael; Perrino, Dave; Maurer= , Luiz; Hueter, Barbara A.; Landwehr, Susan M.; Hoatson, Tom; Nicolay, Chri= sti L.; Steffes, James D.; Alvarez, Ray; Shelk, John; Rodriquez, Andy Subject: RE: RTO Week Comments -- ICAP=20 The FERC Staff report on RTO Week states that most panelists agree that so= me type of long term capacity obligation is needed, as long as demand is no= t very price responsive, in order to allow generation to recover its fixed = costs and support investment. =20 The report also notes that some panelists support: =20 - a recent staff proposal supporting an LSE holding foward ca= ll options on energy, and=20 - a capacity obligation being a transitional obligation until= demand become price responsive=20 I have cut and pasted our Executive Summary from the ICAP comments as our r= esponse (see below), but I have a couple of questions for this group: 1. We say in our comments that a real time energy market, thro= ugh an RTO, will give consumers the means to adjust their demand curve beca= use they will see real time prices. However, if a state ha= s a rate freeze in effect and/or if retail access is not permitted in a sta= te, how can retail load respond to the RTO's real time spot marke= t prices? We need to include this response in our comments. 2. What do we think of a proposal where LSEs hold forward call= options on energy as a way to achieve a capacity requirement? Your thoughts are greatly appreciated. Also, any thoughts you have on othe= r parts of the Staff report would be greatly appreciated (thanks Dave Perin= o for sending you comments). Thanks Everyone=20 Sarah=20 EPMI opposes the continuation or implementation of installed capacity requi= rements. Four appropriately sized Regional Transmission Organizations ("RT= Os") that encompass robust, competitive spot markets for energy and operati= ng reserve products (including demand side management products) will provid= e an efficient and timely solution for the construction of adequate generat= ion, the siting of appropriate transmission and efficient use of demand sid= e management products to ensure that demand is met in real time. Spot mark= ets reveal the cost of procuring (or not using) electricity based on actua= l supply and demand conditions and, thus, signal the need for new generatio= n capacity. They also ensure that consumers 'see' the cost of procurement = decisions through transparent spot market processes and adjust demand based= on discovered prices. These markets will keep supply and demand in balanc= e in both the long and short run without the use of artificial planning cri= teria. Therefore, there is no need to continue separate installed capacity= requirements in an RTO environment. The use of the spot market to establish pricing for all energy products is = new to the electricity industry. Regulated consumers have historically pai= d utility tariffs that reflect regulatory decisions. These regulated tarif= fs provide little, if any, meaningful supply/demand price information to th= e consumer so the response has been to consume even during times when the u= nderlying "cost" of doing so has been high. As a result, demand curves hav= e been categorized as 'inelastic' or 'vertical' suggesting the need for 'ca= pacity' related products to meet any unexpected price insensitive demand. = The creation of RTOs and the resulting spot markets they include will, for = the first time, give consumers the means and incentive to change the shape = of their demand curve as a result of direct real time pricing information. = Changes in the shape of the demand curve will in turn eliminate the need f= or specific capacity related payments as supply/demand interaction, and cur= tailment, will be based on economic choices.