RE: Thanks

Thanks for email. will listen to the whole of it later today. running
between meetings. sorry! mckinsey to be calling you.

attached is bio.

-----Original Message-----
From: Jeff.Dasovich@enron.com [mailto:Jeff.Dasovich@enron.com]
Sent: Friday, March 02, 2001 4:07 PM
To: kari.dohn@gov.ca.gov
Subject: Thanks

Thanks again for taking the time to meet. We're very interested in
following up on the demand buy-down/energy efficiency issues and are glad
to assist if we can--and we think we can.

As I mentioned, I've attached the final version of the document we've been
distributing in Sacramento describing our proposed solution to California's
energy crisis. If you have any questions about it, or want to discuss it
further, just let me know.

Also attached is the letter we sent to the PUC supporting Comm'r Bilas'
alternative decision designed to 1) make CDWR a creditworthy entity and 2)
permit the Legislature to continue its work on a "Direct Access" fix
without interference from the PUC. It's critical that the PUC adopt the
Bilas decision as soon as possible.

In addition, I'm including a story regarding the EOB/ISO filing at FERC
alleging price gouging and demanding refunds. As we discussed, it's
creating a good deal of consternation in the market.

Finally, we'd be very interested meeting with you and the folks from
McKinsey on our reverse-auction for demand reductions.

Have a nice weekend. Look forward to talking again very soon.

Best,
Jeff

(See attached file: Hertzberg final.doc) (See attached file: Comments on
Bilas Alternate.DOC)

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;
mark.golden@dowjones.com

(END) Dow Jones Newswires 02-03-01
1844GMT(AP-DJ-03-02-01 1844GMT)

- Kari's bio.doc