FW: Pending FERC Order, West-wide Mitigation

-----Original Message-----
From: Alvarez, Ray
Sent: Tuesday, June 19, 2001 11:36 AM
To: Belden, Tim; Swerzbin, Mike; Driscoll, Michael M.; Motley, Matt; Badeer, Robert; Scholtes, Diana; Crandall, Sean; Mallory, Chris; Richter, Jeff; Alonso, Tom; Fischer, Mark; Platter, Phillip; Carla Hoffman/PDX/ECT@ECT; Calger, Christopher F.; Etringer, Michael; Hall, Steve C.; Yoder, Christian; Heizenrader, Timothy; Swain, Steve; Dasovich, Jeff; Mara, Susan; Hartsoe, Joe; Alvarez, Ray; Mainzer, Elliot; Williams III, Bill; Kaufman, Paul; Steffes, James; Allen, Phillip K.; Grigsby, Mike; Black, Don; Bresnan, Neil; Whalan, Jubran; Benevides, Dennis; Hewitt, Jess; Kitchen, Louise; Lavorato, John; Whalley, Greg; Shapiro, Richard; Kean, Steven; Robertson, Linda; Cantrell, Rebecca; Lawner, Leslie; rcarroll@bracepatt.com; Novosel, Sarah; Palmer, Mark; Briggs, Tom; Haedicke, Mark E.; Leboe, David; Comnes, Alan; Shelk, John
Subject: Pending FERC Order, West-wide Mitigation

The following report is comprised of what was discussed at the Commission meeting held yesterday and additional intelligence gathered from FERC staffers after the meeting. We are awaiting the final order and will update this report as soon as it issues. Generally, the order is expected to expand the scope of the Commission's April 26 Order, and this report will highlight the differences.

Geographical Scope- Mitigation is extended to cover all 11 western states.

Term- The term of the order will be extended to cover 2 summers. We expect the order to issue today. If so, the order will take effect at midnight tonight and continue in effect until 9/30/02.

Spot Market- Defined as sales of 24 hours or less, transacted on the day of delivery or the day prior to delivery.

Must Sell- To prevent physical withholding, the plan will require all sellers to offer all their available power in real time. All California generators, even those not subject to FERC price regulation, will be required to sell into the ISO's real time market. Sellers in the rest of the WSCC are similarly required to sell, except that they are not required to sell into California and can choose their spot market. They will be required to post available power on the Western Systems Power Pool board. Hydroelectric facilities will continue to be exempted.

Price Mitigation- Expanded to be in place 24 hours per day, 7 days per week. Applies to all sellers, including marketers and non-public utilities. The plan retains a single market clearing price auction for the spot market, based on marginal cost bids. The proxy price formula is changed in several respects:

1. Gas price will be the average of the mid-point of the monthly bid week prices as reported in Gas Daily for Malin, SoCal Gas Large Packages and PG&E City Gate.
2. O&M increases from $2 to $6.
3. Fuel start-up and emissions costs are eliminated from the formula and uplifted from the ISO (i.e. these costs will be recovered from the ISO, but will not go into setting the proxy price).
4. Similarly, a credit adder of 10% will apply, only in CA.

A reserve deficiency in CA (7% or less) also triggers mitigation for the rest of the WSCC. The applicable price during reserve deficiency periods is the proxy price outlined above. During times when no reserve deficiency exists, the mitigated price will be 85% of the highest price calculated in the last Stage 1 emergency. This price will be in effect until the next Stage 1 emergency. Sellers can bid higher than the proxy, with justification, during periods of reserve deficiency or when no reserve deficiency exists; PROVIDED THAT MARKETERS MAY NOT BID ABOVE THE PROXY PRICE. FERC will consider the entire portfolio of a seller who seeks to justify a higher price than the proxy. Generators may seek cost based rates for their entire portfolio in CA if they so choose (i.e. no cherry picking).

Demand Side Management- The plan originally set forth in the April 26 order is expected be removed in this order.

ISO Reporting- ISO will need to report on a quarterly basis as to the status of building supply in CA.

Comments- Comments will be sought on the issue of whether the price mitigation formula should be adjusted in response to expected varying load conditions due to seasonal changes.

Settlement Conference- The settlement judge will convene a settlement conference on the refund issue no later than June 25 (next Monday) and the parties will have 15 days to settle. A report from the judge to the Commission is due 7 days thereafter (for a total of 22 days).

Issues that are NOT expected to be addressed in the order include confidentiality, ISO board issues, ISO scheduling penalty application, and market based rate authorization. The Order is not finally issued as of yet, and the status of the foregoing items could change upon issuance of a Final Order. We will keep you posted.

Ray Alvarez