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Enron Mail |
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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