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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Mary Hain X-To: Richard Sanders X-cc: X-bcc: X-Folder: \Richard_Sanders_Oct2001\Notes Folders\Iso_ pricecaps X-Origin: Sanders-R X-FileName: rsanders.nsf FYI ---------------------- Forwarded by Mary Hain/HOU/ECT on 10/17/2000 09:11 AM --------------------------- Enron Capital & Trade Resources Corp. From: "Ronald Carroll" <rcarroll@bracepatt.com< 10/17/2000 07:07 AM To: <jdasovic@enron.com<, <mary.hain@enron.com<, <smara@enron.com<, <seabron.adamson@frontier-economics.com<, <cfi1@tca-us.com< cc: Subject: Fwd: Portland Consultant's Investigation Finds California Has Capacity for Electricity Needs FYI Content-Transfer-Encoding: quoted-printable Date: Tue, 17 Oct 2000 08:53:16 -0500 From: "Tracey Bradley" <tbradley@bracepatt.com< To: "Deanna King" <dking@bracepatt.com<, "Paul Fox" <pfox@bracepatt.com<, "Ronald Carroll" <rcarroll@bracepatt.com< Subject: Portland Consultant's Investigation Finds California Has Capacity for Electricity Needs Mime-Version: 1.0 Content-Type: text/plain; charset=US-ASCII Content-Disposition: inline FYI - It sounds like this consultant's findings are being questioned by many in the industry, including by the CAISO. Portland, Ore.-Based Firm Says California Has Capacity for Electricity Needs Dan McSwain , North County Times, Escondido, Calif. ( October 17, 2000 ) Oct. 13--PORTLAND, Ore.--A private investigation of state power markets has come to the conclusion that California had plenty of electricity generating capacity this summer. The state enjoyed a 32 percent reserve margin even as wholesale prices soared and the state's power manager declared 36 separate "power emergencies" because California was thought to be in the grips of a critical shortage, according to the investigation. The author of the investigation's preliminary report, Portland-based economist and utility industry consultant Robert McCullough, said at a conference of analysts, power traders and electricity industry regulators Thursday that he has found evidence that generators and trading companies manipulated the production of power from June through August to create a false shortage and push up prices. The Encina power plant in Carlsbad provides a stark example: it ran at well below its full capacity for much of June, even though wholesale power prices ---- and consumer electricity bills ---- shot to well above the generating plant's cost of production. The actual production of electricity by the plants was determined by an analysis of data from the Environmental Protection Agency, which monitors emissions. "We are seeing a lot of under-generation," McCullough said. "This is market power in action." Market power is a term used by economists to describe the ability of market participants -- in this case suppliers -- to influence prices. Many of the industry experts present at the conference Thursday reaffirmed their belief that supply shortages were very real this summer, and contributed to high prices, but several participants said deregulation has reduced the amount of market information that is available to analysts. Mainstream economists have questioned the accuracy of data from federal agencies, including the EPA. Conventional explanations for the low energy production observed in San Diego County are scant. Encina's operators, a joint venture of energy giants Dynegy Inc. and NRG Energy Inc. called Cabrillo Power, confirmed that the power plant had no abnormal maintenance problems. The San Diego Regional Air Quality Board said Wednesday that the power plant was well within its state-mandated pollution limits. But David Lloyd, the corporate secretary of Cabrillo, denied that the Encina plant has been used to game the San Diego County power markets. "That can't possibly be right," Lloyd said of McCullough's analysis. "In North County, we were right on the ragged edge of being off (an emergency shutdown because of heavy output). "Without knowing the specific details of time and which units were on or off, I can't comment," Lloyd said. "We certainly don't want to be accused of anything wrongful," he said. "We don't have that much power in California, and for us to be shutting down in California to push up the price somewhere else doesn't make sense for us. We want to run all we can when the prices are high." Electricity prices have soared to record levels since May, resulting in a doubling and tripling of power bills this summer for the 1.2 million customers of San Diego Gas & Electric Co. and causing an estimated $5 billion in losses for Southern California Edison and Pacific Gas & Electric. State lawmakers have intervened on behalf of San Diego County consumers with a retail rate cap, but the law in turn created a looming IOU that could grow beyond $300 million if high wholesale prices persist. No fewer than five private, state and federal investigations are under way to assess the competitiveness of power markets in the interconnected Western states. The investigations also seek to answer charges that the companies which produce and trade electricity have either figured out how to exploit deregulated markets to outmaneuver regulators or have engaged in outright manipulation in order to increase profits. Inquiries by the California Public Utilities Commission, Electricity Oversight Board and attorney general, along with a Federal Energy Regulatory Commission investigation, were launched in July and August. Staff investigators of the state and federal commissions said this week that they are still in the process of issuing subpoenas and gathering market data. McCullough was hired in late May by the Seattle city utility and a consortium of large industrial power consumers in the Pacific Northwest to investigate the price spikes. His effort is thought to be the first to complete an exhaustive analysis of state and federal information that tracks the amount of electricity that was available and compares it to the amount of power that was actually used. Chief among McCullough's findings was that demand for power was lower this summer than what was forecasted by the Western Systems Coordinating Council, a federal agency that is charged with ensuring the stability of the vast web of power transmission lines that connect California to 13 other Western states, British Columbia and northern Mexico. McCullough provided a copy of his preliminary findings Tuesday to the North County Times, and the initial reaction of the state's energy community was one of deep skepticism. "EPA data is notoriously unreliable," said Frank Wolak, a Stanford professor and the chairman of the market surveillance committee of the California Independent System Operator, the agency that manages the state grid and which has paid enormous sums for emergency power this summer. To gauge the actual output of power plants that burn fossil fuel, McCullough used emissions data from the EPA. "Greed would get the best of anybody," Wolak said. "I found a lot of hours where in-state generators were exceeding nameplate capacity. These guys were cranking it out." Wolak, in a study of power markets for the system operator, did conclude, however, that exercise of market power by power generators and traders was the major cause of higher prices this summer. At the conference in Portland, most of the panelists did not openly criticize McCullough's analysis, but implicitly disputed his conclusions by attributing higher prices and the presumed exercise of market power to a very real shortage of electricity generating capacity among the Western states. Low hydroelectric production in the Pacific Northwest and high temperatures in the Southwest were blamed for limiting California's ability to import electricity. Others said state and federal regulators, along with market participants themselves, won't really know what happened until more experts look at hard market information that is in short supply. Ron Eachus, the chairman of the Oregon Public Utilities Commission, said market information is routinely withheld from regulators, the public and buyers of electricity, but is shared among power generators and trading companies. "If the market is sharing it with themselves, but not us, I don't buy that," Eachus said. Tim Belden is the vice president of West Trading for Enron North America, the largest marketer and trader of electricity in the world. Enron takes the unique stand that more information which has been labeled "proprietary" by companies, such as when a plant is being run and how much the electricity is selling for, should be made available instantly to the markets. "Is there a smoking gun out there or are market participants behaving rationally?" Belden said. "California is characterized by secret, black box market models that nobody understands," he said. "If you've got nothing to hide, release the data." ----- To see more of the North County Times, or to subscribe to the newspaper, go to http://www.nctimes.com © 2000, North County Times, Escondido, Calif. Distributed by Knight Ridder/Tribune Business News. SRE, SCE.Q, PCG,
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