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THE FRIDAY BURRITO
"...more fun than a fortune cookie, and at least as accurate." =0F"Are those folks smoking crack?=0F" he asked in an outrage. My friend, = Ol=0F' Dave in Houston, has trouble understanding the workings of our power business here in California. In fact, so do I. Yesterday=0F's Joint Senate/Assembly Committee on Energy and Natural Resources did nothing to improve either Dave=0F's or my understanding of the national embarrassment California is perpetrating with electricity deregulation. =0F"The next thing you know, they will be taking property, and forcing utilities to build power plants and transmission,=0F" he mused between sips of Dixie longneck beer and chomps of jalapeno peppers. =0F"Come to think of it, Dave, they did say something about that. Yeah,=0F" I recalled, =0F"Senator Peace was expounding on his favorite idea which is forcing the ISO or the utilities to build peakers, and not let the market build them. I can=0F't remember if that was before or after he suggested to EOB Chairman Kahn that the ISO and the PX should be folded into State agencies under the direction of the Electric Oversight Board.=0F" I know what you are thinking right now. The next thing you know California will have regulated retail rates. That recipe should be out of the PUC=0F's oven sometime next week. =0F"Well, the power marketers are jigging the system, bidding up to the ISO=0F's bid cap. There is no way you can tell me that a generator planned to make $750/MWH in its pro forma,=0F" Dave added. =0F"So you agree with Herr (Hair) Peace! You don=0F't believe in markets,=0F" I retorted. = =0F"Oh, I believe in them, but I remember when I was short on a 300 MW trade, and without any notice or advanced warning, the price in the Midwest market went against me,=0F" Dave recalled. =0F"I called everyone who I tra= ded with, and they had nothing. I finally called XXXXX, and I asked what will it cost for 50 MW?=0F" =0F"Why didn=0F't you ask for 300?=0F" I wondered. =0F"I didn=0F't want to= show him my position. You get hosed when you show the buyer your position. Ask for 50, first,=0F" Dave chided. =0F"What happened?=0F" =0F"Oh, they offered to sell for $150/MWH. I said I= =0F'd take it, and then said I needed another fifty. He asked $300. I took that, and he priced the next 50 MW at $600,=0F" lamented Dave. =0F"He just wanted to see how far he could push me. That=0F's what I mean when I say the traders are jigging it.=0F" =0F"But Dave, you old communist, your forgetting the trading function is what mitigates the risk. The traders are the in between people who guess at the price. Sometimes they guess right, and sometimes they guess wrong. But the damage, or the reward, is on their book, not passed on to the ultimate consumer. It has nothing to do with the marginal cost of a generating plant.=0F" And there you have it. Put in a price cap, and the traders have a target for which to shoot. I can=0F't prove the following, yet, but I=0F'l= l wager with any of you that as the price cap level dips down, the average trading price climbs even as the so-called =0F"dysfunctional=0F" price spik= es are eliminated. Consumers get hosed, and the fundamental economic principle is upheld, which is, one can never be made better off with the imposition of an additional constraint. I feel better already. Here is what is on our short agenda this week. <<< Things in the Mailbag <<< Things in the People=0F's Republic of California @@@ The ISO Replies to the EOB Report @@@ Reflections on a Day of Senate Hearings @@@ PUC Issues OII on Functioning of Wholesale Market <<< Odds & Ends (_!_) <<< Things in the Mailbag It has been awhile since we put the mail feedbag on and had a munch. Here is what my friends have been writing me. FPL Energy=0F's Steve Ponder was only too quick to tell me, =0F"Please Gary= , no more whining about your computer. How old are you?? Is this the year you get the AARP letter??? A very depressing moment. Do you really not know how to spell Morro Bay??? Please let us know what is going on with your son's hockey team?? Don't forget the cigars for Moron??? Bay!!!!=0F" It is good to have friends like Steve. They make the pain of separation so much easier. And Steve, when you FPL guys get that Entergy merger sorted out, in a dozen years or so, you let us know. I want to participate in the name selection for the new entity. How about Fentergy PLus? Next, from the PX=0F's Mark Hoppe, who writes, =0F"As you've heard from others, I don't know quite how you manage to knock out all this material each week. The burrito is informative, humorous and usually contains a sprinkle of irony, tragedy (ISO Drama). Though you are usually neutral regarding the PX, you are not unduly negative which I appreciate. I think we do a pretty good job over here and so often people in the industry forget the amount effort and challenge it took the PX to successfully open this market.=0F" Thanks, Mark. I just want you to know that my ability to write this stuff every week is not constrained by the facts or evidence. I have learned from watching Herr (Hair?) Peace, that as long as you can talk (write, too) fast, and have conviction in your statements, regardless of how groundless they may be, you will have a willing and eager audience. A few weeks ago, I received from the PX=0F's Jennifer Sherwood a note, which she wants you to know are her opinions, not necessarily the PX=0F's. It=0F's okay, Jennifer. I paid George,yesterday, the $20 I owed him for that sham Rose Bowl bet, (remember?, Stanford lost) and your opinions are cool with us. =0F"Just curious - has anyone been comparing high unleaded prices to high CA electricity prices? What I mean is, we are up in arms about how we should protect the unfortunate San Diego consumer who can't afford to keep the AC on. But what about the inflated unleaded gas prices the whole country has seen over the last few months? No effort is made by the government to shield the consumer from how much it costs to fill their gas tank. No mention is made of those who can't afford to drive to the grocery store because they can't afford the extra 15 or 20 cents a gallon. The costs are passed along to the consumer without pause. Granted there are differences between the unleaded market and the electricity market in terms of demand-side responsiveness, but then again is it that much different to say, =0F`I can't drive today because gas is too expensive=0F' vs. =0F`I can't turn up the AC today because it's too expensive.=0F'=0F" Finally, from one of our [secret] Washington readers, and I am not telling who, I received the following: =0F"I ... broke down and listened to the [ISO Governing Board] discussion and vote. Ugh! I too noted that the "speak fast" was applied to everyone but Herr Peace. My goodness, what a mess we have. I loved Jerry's picture in USA Today -- it spoke volumes. My sources at FERC tell me, though, that we should keep an eye out for {FERC Chairman] Hoecker to do something really ... [Censored] ... for political reasons. Given no Commission meetings til September, the only way to act is by unanimous consent, so I would hope he can't do all that much.=0F" <<< Things in the People=0F's Republic of California @@@ The ISO Replies to the EOB Report Several of you people commented to me that the ISO=0F's reply to the PUC/EOB report was very good. I decided to excerpt the best sections of it for the Burrito. The full document can be found on the ISO=0F's website. =0F"... the [PUC/EOB] Report asserts that the suspected activities of certain generators on June 13 created frequency instability leading to the Bay Area blackouts the following day. In fact, the events of June 13 and June 14 were completely independent of one another. The voltage instability on June 14 was caused by system conditions on that day alone -- exceptionally high loads, insufficient generation in the specific local area, and transmission constraints that prevented the import of generation from outside the area. =0F"The Report states that the ISO =0F"never tried=0F" to call upon consume= rs to reduce demand in order to avoid the Bay Area blackouts. In fact, the ISO had in place on June 14 a number of demand response programs designed to reduce load including the Summer 2000 Demand Response Program, under which customers have agreed, through a prior solicitation, to curtail energy use in exchange for a fee =0F"The Report makes a number of assertions concerning the prices paid by =0F`purchasers=0F' of energy as a result of the recent price spikes (e.g. $= 1.2 billion in the month of June alone). These assertions leave one with the mistaken impression that these prices reflect amounts actually paid by the UDCs and/or passed through to customers. However, in determining the total cost of energy, one must determine the impact of any forward contracts entered into by the UDCs in advance of the wholesale energy markets. These contracts, which are designed to =0F"lock-in=0F" a specific price in advance of real-time or near real-time market activities, are specifically designed to mitigate the impact of price volatility, and are standard in all commodities markets. We have reason to believe that some of the UDCs were substantially hedged during the period of the recent price spikes. =0F"In a similar vein, the reports asserts that California =0F"might well= =0F" have saved $110 million dollars had a $250 price cap been in place in May and June. This assertion assumes that all energy purchases would have been made at or below the $250 bid cap. In fact, during times of peak demand, when all of the state=0F's generation has been exhausted, the ISO competes with neighboring regions for available generation. In order to secure the necessary power, the ISO must purchase, on a bilateral basis, this energy from resources located outside of the ISO=0F's control area. =0F"The Report asserts that California power markets =0F"are not now competitive=0F" and implies, erroneously in our view, that this is the normal state of affairs. It is not. The Market Surveillance Committee has noted that =0F"market power in the California energy market appears to arise primarily during periods of peak demand,=0F" and warned that demand growth would increase the incidence of market power during the summer of 2000. =0F"The Report asserts that the ISO is answerable only to a self-interested board and not to the citizens of California. This simply is not the case. The ISO is subject to the provisions of the Federal Power Act and to the rules and regulations of FERC, which dictate, in part, that wholesale energy rates must be just and reasonable and in the public interest. The ISO further operates under a detailed tariff reviewed and approved by FERC. Every change to our market design and virtually every aspect of the ISO=0F's business is subject to review and scrutiny by FERC. The FERC process provides substantial opportunities for input by the state agencies and such agencies have, in fact, been active participants in the FERC proceedings. =0F"The Report asserts that California supply conditions have been affected by restructuring and that somehow the restructuring choices have made California more vulnerable to supply shortages. This assertion is unfounded. Significant load growth in California and neighboring states coupled with a lack of significant infrastructure investment in both generation and transmission have caused this vulnerability. Restructuring has increased proposed power plant applications many fold. Only by immediate and sustained attention to streamlining approval and siting processes for both of these critical infrastructure elements will this significant shortage be addressed.=0F" <<< Things in the People=0F's Republic of California @@@ Reflections on a Day of Senate Hearings If you want to imagine a scary sight, imagine, then, twelve California legislators gathering together in one hearing room to rectify the wrongs of electric restructuring. Also imagine, as if you are in the Twilight Zone, witnesses that are slow on their feet, and reckless in their facts. Then you get a glimpse of what yesterday=0F's Joint Senate/Assembly hearing was like. It started over two hours late. The Senate was busy congratulating one of their own who is term-limited out next session, and they wanted to heap on the glory. That said, the show began with CEC Commissioner Bill Keese. Mr. Keese has one story, and regardless how well he tells it, and he does, it is always the same story. It is the heat storm story. One can imagine in the heat storm story a lead character who is a single-mom, call her Lady-Bird Bowen, who travels across an angry land with her precocious pre-teen child, Stevie Wonderboy. They are searching for electric power plants in the dessert, which, by the grace of God have been shipped to other countries which have more liberal returns on investment. Being the first speaker, Mr. Keese took at least half the heat (storm) of the day. The rage of the Energy Fuhrer was palpable. Last week, San Diegans shed 350 MW of load last week to save the entire system, and did not receive one penny of compensation (I=0F'm not making that up ... He said it). He is sick of hearing about demand management as being a solution for the problem over the last five years, and he is about done listening. People in San Diego are depressed by the sudden price hikes. Yikes! Keese did mention that the California reserve margin has sunk to 7%, but in neighboring Arizona, the reserve margin is -1% or -2%!! Mr. Keese correctly pointed out that electric power is not solely a California problem, it is a regional problem. One member of the Committee asked what the legislature could do to speed up the power plant siting and construction process? Keese referred to Governor Gray Davis=0F' Executive Order issued last week to which the CEC plans to respond soon, date uncertain, that lays out a 6 month permitting time line. The six months are enough if the applicant has the land secured, zoning okayed, transmission access, and air offsets. Hmmmmmm. That alone might take six months before you get to the CEC. The next panel included Mr. Kahn of the EOB, and Ms. Lynch. I went too hard on her last week, calling her Let=0F's Do Lynch. That was a 0.8 TPC. Sorry. I promise to be nicer starting now. The Energy Fuhrer instructed Ms. Lynch to use her authority to order SDG&E to divert the pass through of funds from the customers to the PX until the dysfunction of the market is cured. Put it in an escrow account. Ms Lynch promised to review this option at her August 21 PUC Meeting where she will enact SDG&E rate caps (told you). The star of the day, I thought, was FERC General Counsel Doug Smith. Mr. Smith comes to Sacramento. Isn=0F't that a switch? Mr. Smith came in place of Mr. Hoecker, thank the Lord. Mr. Smith put into FERC-eese what these 12 legislators could not get through their heads any other way. The 12 angry legislators were looking for a way for FERC to declare the wholesale market as non-competitive, and then ask the generators to give back the money they over collected. When can we do that? Mr. Smith answered as only a FERC attorney can answer. There is a process. It takes time. You must have evidence. FERC uses a three-part criteria for assessing whether or not market based rates are allowable. It=0F's based on market concentration and dominance, not the existence of high prices. You would have to sue FERC in federal court, and the best you could hope for is for FERC to reconsider its decision upon remand from the US Court of Appeals. Slowly, the wind came out of the sails of the gang of 12. They were stumped. Herr (Hair?) Peace screamed, couldn=0F't you, Mr. Smith of FERC, today use your authority to declare the markets non-competitive, that generators who had market based rates have exercised market power, and retro-actively implement a $250 rate cap across the Western region? Like a wheezing accordion, Mr. Smith played back and forth the familiar strains of music, like a solo street musician on the corner. Back and forth: the process, the process, the process. There have been times in the past I hated the process at FERC. Today, I have a renewed respect for what process affords me and you ... Freedom from the tyranny of a mob. For the remainder of the hearing, they focused on remedies that could be undertaken by the PUC. <<< Things in the People=0F's Republic of California @@@ PUC Issues OII on Functioning of Wholesale Market Well, the official title is, =0F"Order Instituting Investigation into the Functioning of the Wholesale Electric Market and Associated Impact on Retail Electric Rates in the Services Territory of San Diego Gas & Electric Company=0F". I like my title better. This Order, or OII was issued at the last business meeting of the Commission, on August 3. It calls for an investigation of the wholesale markets, responses from the three UDCs, and a pre-hearing conference in San Diego on August 29 at the San Diego Convention Center. Here are the questions the PUC wishes us to address: =0F=07 What bill payment options should be provided to assist residential a= nd small commercial customers? (What does this have to do with the functioning of the wholesale market?) =0F=07 Should SDG&E be authorized to participate in bilateral contracts or other supply procurement activities? How should the Commission assess reasonableness? Are SDG&E=0F's purchasing activities serving its customers on just and reasonable terms? =0F=07 What is SDG&E=0F's obligation to minimize energy costs for its curre= nt customers? =0F=07 How should the Commission, Attorney General, EOB, ISO and PX coordinate to investigate wholesale market events, behaviors, and irregularities? How should state/federal concerns be addressed? =0F=07 What are the causes of the price increases? Are anticompeititve practices causing some of the price increases? Are there mechanisms the Commission can employ to make ratepayers whole? <<< Odds & Ends (_!_) As promised last week, I have a message from our event coordinator, Barb Ennis, regarding the upcoming WPTF General Meeting on October 5 and 6. Listen up! She writes: Hi Folks...... Well it is almost that time again....WPTF's October General Meeting will be held at the Inn at Morro Bay, Sixty State Park Road, Morro Bay, California 93442. Their phone numbers are: 800-321-9566 or 805 772-5651. The dates are October 5th and 6th, Thursday and Friday. The Inn at Morro Bay will also honor the same room prices if you choose to also stay Wednesday,Friday or Saturday. We have blocked 24 rooms for October 5th. Which range in prices: Petite Room with Queen Bed $89. (16 rooms) Pool and Garden View with King Bed and Private Hot Tub $152. (4 rooms) View of Bay rooms with two (2) Double Beds $152. (4 rooms) All these rooms are on a First come basis. SHUTTLE Information: The San Luis Obispo Airport is about 25 to 30 minutes by shuttle NOTE: FOG CAN BE THICK AT THIS AIRPORT..FLY IN THE AFTERNOON ....... Ride-On Shuttle (805) 541-8747 Rates Door to Door are $22.00 per person for the 1st person and ONLY $2.00 per person afterwards....SO if some planning can be done on the Airline Arrival times, through Barb, and one person books the Shuttle for a Group....the cost is substantially lower. Now, for(e) our Golfers....Tee times have been booked for Thursday, October 5th starting at 8.07am, 8.15am and 8.22am (space for 12 Golfers)..Sorry for the early morning start. The Golf Course has a Group going out from 8.30 am until 11.30am. The Golf Course is across the Inn at Morro Bay and your contact at the Course is Pat (805) 471-4360. For folks that may want to tour, Hearst Castle is located only 30 minutes from the Inn at Morro Bay. Within walking distance of the Inn is a Natural History Museum, a marina with kayak and canoe rentals. Shopping and dining along the Embarcadero, and some great hiking. World class wineries and tasting rooms numbering over 40 are located within a short drive from the Inn. If you choose to drive it is 3-hours from San Jose, American Eagle, Skywest and United Express all serve the local Airport in San Luis Obispo. Duke Energy is willing to conduct a Plant Tour (A woman=0F's only plant tour will be led by Duke=0F's Carolyn Baker) if some may wish to do so. The sooner we can do the booking, the better. So, bring the Family and we are looking forward to seeing you at WPTF's General Meeting. Agenda for October General Meeting Thursday, October 5 3:30 pm - 5:30 pm All Member=0F's Meeting 7:00 pm - Dinner Reception (We are still working on the details) Friday, October 6 9:00 am Opening Remarks and Program Irene Moosen - Distributed Generation Case at the PUC Bill Freddo - Confessions of a Merchant Plant Operator in New England ISO Dr.Frank Wolak - Topic of his choice Open Session - Everyone Gets a Chance to Speak Lunch provided at Noon. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D The object of humor notwithstanding, and seeing how the flow of new material has slowed a bit, my wife provided this week=0F's laughter. She didn=0F't have to attend the Senate hearing. Subject: The Brilliance of Women There were 11 people hanging onto a rope that came down from a helicopter. Ten were men and one was a woman. They all decided that one person should get off because if they didn't the rope would break and everyone would die. No one could decide who should go so finally the Woman gave a really touching speech saying how she would give up her life to save the others, because women were used to giving up things for their husbands and children and giving in to men. All of the men started clapping. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Have a great weekend, y=0F'all [applause] gba
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