POWER POINTS:Nevada Suffers FERC Unintended Consequences

----- Forwarded by Jeff Dasovich/NA/Enron on 07/06/2001 07:15 PM -----

< POWER POINTS:Nevada Suffers FERC Unintended Consequences
<
< By Mark Golden
< A Dow Jones Newswires Column
<
< NEW YORK (Dow Jones)--Those who have opposed wholesale electricity price
< controls have been labeled as extreme free-market ideologues who are
< insensitive
< to the practical impacts on peoples' lives of high electricity prices.
< But the most common argument against price caps has been logical, not
< ideological: Price controls have never worked. Market participants always
< find a
< way around the rules.
< This week the Federal Energy Regulatory Commission decided that it will
< have
< to consider at its meeting next week revisions to its June 19 price
< control
< ruling. The initial price cap rule, set by the California Independent
< System
< Operator last spring, was only a few paragraphs long. Each successive
< price cap
< order has gotten longer, though effectiveness still appears out of reach.
< The
< FERC's April order was 28 pages long; the June order was 48 pages. And now
< additional rules are on call to plug the new loopholes.
< The revisions will also try to repair damage done to the market by the
< June
< order. During a spell of very hot weather Monday, Sierra Pacific Resources
< (SRP)
< subsidiary Nevada Power had to initiate limited rolling blackouts to a
< small
< number of customers for 45 minutes. The company attributed the blackouts,
< in
< part, to the new price controls.
< Sierra Pacific's chief spokesman, Paul Heagen, provided a bird's eye
< view of
< the practical realities of the FERC's new price cap regime.
< Power Points: After having a few days to look into it, can you say that
< price
< caps definitely contributed to blackouts in Nevada on Monday?
< Paul Heagen: Yes, but first let me say that all of it was unintentional.
< FERC
< was trying to do the right thing. Price caps were a noble effort to solve
< a real
< problem in California.
< But on Monday the market needed speed and clarity to function. It had
< neither,
< and that can be attributed to the price caps. Normally, in one or two
< phone
< calls we could have got what we needed. On Monday, we were five to six
< calls
< into it and still on the phone.
< Price caps are having the unintended consequence of dragging other
< states into
< the California morass. We have this artificial environment which we are
< all
< trying to sort through.
< PP: How, specifically, are the caps having this effect?
< PH: There are a couple of elements. The 10% premium for power sold to
< California is supposed to reflect concerns about credit. That 10% in an
< open
< market is no big deal, but in a constrained situation the seller will grab
< it,
< because now it's his only chance to make money.
< Also, the way this is set up, they look backwards. They determine the
< price
< after the fact. I can't think of any business in the world where you sell
< a
< product and find out later what price you sold at.
< This had a very chilling effect on people's willingness to sell.
< Normally, a
< cloud cover comes in and a utility has a little extra power to sell in the
< real-time market. Normally, those little 50-megawatt packets move pretty
< easily,
< and that's really important for maintaining reliability.
< With the price cap, utilities hunkered down. Selling at $92 wasn't worth
< the
< risk. They figured they might as well hang on in case they needed it.
< Also, we have a voluntary curtailment program that allows us to share
< savings
< with customers who agree to curtail use. If the market is, say, $500, we
< might
< pay them $250/MWh to curtail demand. But in a $92/mkt, we can offer them
< such a
< small amount of money that they stay on.
< PP: Have you talked to FERC about these problems with the price
< controls?
< PH: We've had a senior team in Washington, D.C., at the FERC since last
< week.
< Right away we saw another effect of the FERC order: It penalizes companies
< like
< ours that signed long-term supply contracts before the order because many
< of
< those deals were done at prices above the price cap.
< The biggest issue for us, is, did FERC really mean to penalize companies
< like
< us that planned ahead? It's long-term contracts that provide price
< stability.
< It's unfair to our customers to expect them to pay for long-term
< contracts
< that have been undercut by price caps. If we get into a situation where we
< have
< a little extra to sell, now we can't recover our costs.
< PP: With such high prices the past year, a lot of small, oil-fired
< turbines
< have been dusted off and put into service on time for this summer. Traders
< for
< other southwest utilities have said that all these little turbines have
< been
< very helpful when supplies got tight earlier in the year, but they weren't
< available this week because they cost more to run than the price cap. Did
< you
< see the same thing?
< PH: We have some small turbines that we put in Reno and the Lake Tahoe
< area in
< the last few months. They were supposed to provide peak power, but they
< get
< uneconomic in a hurry under the price cap scheme.
< You know, we've tried to isolate ourselves as best we could from the
< California situation and behave very independent of how California
< behaves. So
< Nevada is a great test case to see if price caps have an unintended effect
< outside of California. We were able to minimize the impact on our
< customers
< Monday, but the situation has maximized the attention of the country on
< the
< impact of price caps.
< -By Mark Golden, Dow Jones Newswires; 201-938-4604;
< mark.golden@dowjones.com
<
< (END) DOW JONES NEWS 07-06-01
< 03:14 PM- - 03 14 PM EDT 07-06-01
<