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Enron Mail |
Jeff,
I will be out of the office Monday in Ohio and returning Tuesday. We need to talk about how to proceed. Are you coming to Houston this week? If so, perhaps we could sit down on Thursday if you are coming in the night before. Steve Jeff Dasovich@ENRON Sent by: Jeff Dasovich@ENRON 03/02/2001 12:22 PM To: Richard Shapiro/NA/Enron@Enron cc: Alan Comnes/PDX/ECT@ECT, James D Steffes/NA/Enron@ENRON, Steve Walton/HOU/ECT@ECT Subject: Re: Cost of Protectionism will do. Richard Shapiro 03/02/2001 07:00 AM To: James D Steffes/NA/Enron@Enron cc: Alan Comnes/PDX/ECT@ECT, Steve Walton/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron Subject: Re: Cost of Protectionism Agree- Steve & Jeff- can you take the lead? From: James D Steffes on 03/01/2001 06:15 PM To: Alan Comnes/PDX/ECT@ECT, Steve Walton/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron, Richard Shapiro/NA/Enron@Enron cc: Subject: Re: Cost of Protectionism I recommend that we ask MRW to do a quick and dirty (nothing more than $10k) to quantify Steve's qualitative analysis. Good to have before we fight this out at FERC. If someone internal can do it, great. Thoughts? Jim ----- Forwarded by James D Steffes/NA/Enron on 03/01/2001 06:13 PM ----- Steve Walton@ECT 02/28/2001 10:06 PM To: Jeff Dasovich/Na/Enron@ENRON cc: Alan Comnes/PDX/ECT@ECT, James D Steffes/NA/Enron@Enron, Jeff Dasovich/NA/Enron@ENRON, Mary Hain/HOU/ECT@ECT, Paul Kaufman/PDX/ECT@ECT, Richard Shapiro/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON Subject: Re: Cost of Protectionism Jeff, In order for California to "shut its doors" it must open its interconnections with the rest of the west and become a Texas-like electrical island. This they cannot do. California has a substantial investment in units located in Nevada, Arizona, New Mexico and Utah. The lights would go out in California if they opened the ties. In the 1970's there was a hue and cry over loop flow, with California claiming that it was being injured by others, particularly by the interior systems trading practices, however they never considered opening the ties, because the benefits of interconnection were so large that the "cost" of loop flow was far exceeded by the value of regional trade, i.e., they are economically interdependent. If such a foolish thing were done and California full "closed its doors" by opening its ties, cost would go up in the Northwest, in California and all the rest of the Western System. There are "gains for trade" which accrue to all parties from interconnection. The trade is more complicated than just summer/winter peaks (seasonal load diversity) there is also seasonal resource diversity (Spring run off effects) and finally there opportunity to capitalize on storage vs base load thermal operations. I will address the last point first to illustrate the complexity of the trading patterns. The interior west (Montana, Wyoming, Utah, Arizona and New Mexico) has large amount of base load coal plants. As load drops off in those areas, the energy flows to the coast to back off peaking plants and to back off hydro. The reduction of hydro production allows night time reservoir refill which can be used to meet peak load in the Northwest and California. This can be seen in the attached file, which contains a set of plots for hourly flow on the Pacific DC Intertie Jun97, Dec 97, Jun 98, Dec 98, Jun 99, Dec 99, Jun00. In these plots the clear day/night exchange of energy can be seen, especially in the Jun00 plot when sales are being made to California in the day and to the Northwest at night. This day to night storage exchange benefits lowers costs for everyone. On top of this daily/weekly cycle, there is the seasonal shift in load diversity you noted. For the Northwest, its peak load occurs when energy production is the lowest -- during the winter. As a stand alone system, the Pacific Northwest (i.e., the Columbia Drainage area) is energy constrained. The hydro in that area does not produce enough energy to meet annual needs. There is plenty of generating capacity to meet any peak, but not enough to total water flow. Energy imports from Wyoming and Montana (e.g. Colstrip and Bridger) are required to allow the Pacific Northwest to meet its annual energy requirement. With these energy inputs from the coal fields, the seasonal water budget can be arranged to get the most value out of the hydro system, although fish, navigation, irrigation, etc. impose an increasing number of constraints. Energy imports from in the winter from the South help to meet this energy balance during the winter so water can be reserved until the snow pack is better know in early Spring. Some of the sales to the Northwest from California during the winter are a result of displacement from Desert Southwest energy moving through California and then up the Interties to the Northwest. Finally, the Spring run off/fish flush when production on the river is at a maximum and load in the Northwest is down. The sale of these surpluses paid for the Pacific Intertie lines and remain important to the entire system. Much system maintenance of base load units has been historically been planned to take advantage of this factor. Again both California and the Northwest benefit from this trade. In all cases, the parties would be worse off if the ties were open and everyone was on their own. The Northwest may be capacity long, but it is typically energy short, even in flush hydro years. The winter energy imports from the South hold Northwest costs down just as spring run off sales to the South lower energy costs in California. California cannot craft a solo solution that ignores the rest of the West. It is probably hard to decide who would be worst off if California "closed its doors". It is only clear that total cost would rise in both California and the rest of the West from which it divorced itself. I hope this rambling response comes at the question you raise. Steve Jeff Dasovich@ENRON Sent by: Jeff Dasovich@ENRON 02/28/2001 11:35 AM To: James D Steffes/NA/Enron@Enron cc: Alan Comnes/PDX/ECT@ECT, Mary Hain/HOU/ECT@ECT, Steve Walton/HOU/ECT@ECT, Susan J Mara/NA/Enron@ENRON, Richard Shapiro/NA/Enron@Enron, Paul Kaufman/PDX/ECT@ECT Subject: Re: Cost of Protectionism To Jim's last point. I understand that the good 'ol utility system was often operated with little regard for basic economic principles, but there's something in this that seems very odd and difficult to assess, and it seems to always be tied to this notion that "California is a net importer, even in the winter." I'm going to start with the economics and then let folks describe why it seemingly doesn't apply in Western electricity markets. Just about every theory of economics and trade would lead to one conclusion: If California closes it's doors the other Western states will pay higher prices for power and/or face increased threats to reliability. I'm struggling to try to determine why these basic principles aren't applicable to Western power markets. I understand that the PNW is a very complex place and that the reasons could be embedded in the arcane structure that has developed over the years. To keep it simple (though not necessarily accurate), I've confined the analysis to a world in which only the PNW and California exist. The basic situation: The PNW peaks in the winter; California peaks in the summer. Let's take two scenarios: 1) The West, less California, is so awash in electricity that even in its peak--the Winter--it still has power to send to California, i.e., it has so overbuilt it's system that it has persistent surpluses to sell to California. Irrespective, there have (to my limited knowledge) always been sales from CA to the PNW during the winter, when the PNW is peaking. The only conclusion that one can make, assuming that the PNW is awash in electricity, is that the PNW takes the power in California because it makes economic sense to do so. That is, during the winter peaking months, it must be cheaper on the margin for the PNW to buy from California rather than produce itself. Otherwise, it's difficult to understand why it would buy from California during this month, particularly if they're long. As such, at a minimum, the PNW's electric bill will necessarily increase if California closes its doors. 2) Neither the PNW , nor California, has indigenous capacity to meet peaking load. Therefore, the PNW must buy California's power during its peaking summer period, and California must buy power during it's summer peaking period. In this case, not only will the PNW's bill go up if California closes its doors, the lights are likely to go because they'll be short power. I realize that this is a simplistic model, and that there could be other legitimate economic factors driving the flows out of California to the PNW (e.g., transmission costs). And again, I also realize that economics may not have traditionally been a driver in the industry. But I thought it might be useful to get a common framework in place as a starting point for the question that Jim asks. With that, I'll pose the question (understanding the simplicity of the model set forth above): Given that California sends power north--even if the PNW is long---how can California closing it doors not increase the PNW's cost of power? Best, Jeff James D Steffes 02/28/2001 08:05 AM To: Alan Comnes/PDX/ECT@ECT cc: Jeff Dasovich/NA/Enron@Enron, Mary Hain/HOU/ECT@ECT, Steve Walton/HOU/ECT@ECT, Susan J Mara/NA/Enron@Enron Subject: Re: Cost of Protectionism It seems to me that this information leads one to conclude that the value of an open transmission network is that California does not have to build 5,000 MW of power plant (4,500 MW max input + 10%) in state. In other words, if California were to disconnect from the grid, someone would have to build additional power plants in-state. The cost to California consumers is therefore the annual carrying cost of 10 500 MW plants (made even more expensive after California expropriates the current fleet of merchant generation). From the perspective of the remainder of the West, the question still remains - if California does go it alone, what is the economic impact? Other than legal arguments about Interstate Commerce, why should the Federal Government want to continue to pursue open acess? This is the hard question that we need to answer. Jim Alan Comnes@ECT 02/27/2001 09:40 PM To: James D Steffes/NA/Enron@Enron, Jeff Dasovich/NA/Enron@Enron cc: Susan J Mara/NA/Enron@ENRON, Steve Walton/HOU/ECT@ECT, Mary Hain/HOU/ECT@ECT Subject: Cost of Protectionism Jim, Jeff: Jim asked me in a voice mail what would be the cost to California of moving from the current (evolving) system of open access to a "protectionist" environment where access to the grid would be determined by a political body responding to populist pressures. Here are some things to consider. We can talk more and I welcome Sue Mara or Steve Walton's input: California is a net importer so any restraint of trade would risk the state being able to meet its own demand. See attached slides that show PNW-CA trade. Even in the winter, power on a net basis flows south. Limiting open access would primarily act to hold in-state generators hostage. this will kill incentives for new investment If the ISO's proposal for market power mitigation are any guide of where a protectionist ISO would go: in-state generators would be required to sell forward or lose their market based rate certificates load serving entities would be required to contract forward for load and a reserve margin. This is costly: it will lead to centralized planning solutions to reliability rather than more efficient market outcomes Artifical notions of "just and reasonable" rates (on top of unreasonable reserve requirements) would lead to severe reliability problems. (In other words, if Steve Peace has his way, the imports into the state will drop off signficanly) There is no reason the state would be more effective at expanding the grid (e.g., Path 15) than the current system. (Although, admittedly the current system has flaws. The CAISO was set up with little thought to transmission expansion planning. Other RTOs are not repeating this mistake.).
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