RE: RTO Week Comments -- ICAP

Sarah
=20
1) Fully agree with Steve. Only large industrials are assumed to bring elas=
ticity to demand in the absence of full retail competition. (or under emerg=
ency situations, such as rationing, when the regulator may establish that a=
ll customers recieve price signals above a certain baseline consumption). I=
would dare to say that even less than 20% of load being price sensitive (=
on a time interval basis) would have a significant impact on price spikes (=
and therefore on the entire logic for payment for capacity/reserves). CERA =
has just produced an interesting report. In the Northeast US, NY has had th=
e best demand response - despite being a few thousand MW they may have alli=
viated significant curtailment. One may hypothesize why customer response h=
as been so modest in genera;. One possible explanation is that, under the t=
hreat of rolling black-outs, customers do not want to face the inconvenien=
ce (and investments) or responding to demand. Situation may change in the f=
uture as they get used and perceive the real benefits of participating in t=
his game. That is why our ICAP paper relies heavily on demand response to m=
ake sure that the market will always clear.
=20
2) As far as the LSE holding forward call options, (as an intermediary solu=
tion). I think this is an idea originally developed by Oren, from Berkeley.=
He basically states that LSEs (or large industries) should decide their de=
sired exposure to the spot price, by holding more or less of those options.=
Options should be backed by real generation (in this case reserves). In Or=
en's view, this avoids the syndrome of one size fits all. Instead of all pl=
ayers buying for the same reliability level, the scheme would allow each pa=
rticipant to customize their risk preferences. This idea only makes sense i=
f you impose a contracting requirement on LSEs (otherwise, the free-ride pr=
oblem would still be there and because of the risk of curtailment the marke=
t would not be able to clear). In earlier versions of our Icap paper, we dr=
afted this idea as a possible alternative (I can send you older versions, i=
f you want to go further into the subject). However, Larry Ruff and some of=
our trading guys disliked the concept of any kind of mandatory contract re=
quirement (which I understand goes hand in hand with the call option propos=
al). If we had to choose, Larry would rather go for the British LOLP x VLL =
model instead of the mandatory contract requirement.=20
=20
To be fully consistent with our paper, you should state our interim proposa=
l, and explain why it is superior to the former UK model (LOLP) or the Oren=
's proposal (mandatory requirement). Or, alternatively, you should stress t=
hat Oren's idea only works if you impose a mandatory contracting requiremen=
t (over and above your forecasted load).=20
=20
LM

-----Original Message-----=20
From: Walton, Steve=20
Sent: Thu 11/8/2001 12:34 PM=20
To: Novosel, Sarah; Roan, Michael; Perrino, Dave; Maurer, Luiz; Hueter, Bar=
bara A.; Landwehr, Susan M.; Hoatson, Tom; Nicolay, Christi L.; Steffes, Ja=
mes D.; Alvarez, Ray; Shelk, John; Rodriquez, Andy=20
Cc:=20
Subject: RE: RTO Week Comments -- ICAP

Sarah,=20
=20
I don't know of a way that small customers could respond to real ti=
me prices in a price freeze/non-retail access state, however, there could b=
e demand bidding schemes put in place for larger industrials to forgo consu=
mption through a tariff rider in a retail tariff. We talked about this ear=
lier in the year. PGE put a program in place earlier in the year that is s=
imilar to what we proposed. Even if only 1/3 of the load is responsive, yo=
u still get substantial benefit.

In response to you second question, I like the forward contracting =
requirement better than an ICAP requirement because it can be applied in th=
e NW. The NW has more than enough capacity for any hour, but it cannot mee=
t annual energy requirements without the base load energy produced in MT an=
d WY. An ICAP market would be meaningless in an energy constrained system.=
The focus, in any event, needs to be on the LSEs meeting their load, whet=
her aggregators or vertically integrated utilities. It would seem that nat=
ural place to occur is at the State level where adequacy of supply would be=
a requirement in licensing people to serve at retail. =20

Steve=20

-----Original Message-----=20
From: Novosel, Sarah =20
Sent: Tuesday, November 06, 2001 4:59 PM=20
To: Novosel, Sarah; Walton, Steve; Roan, Michael; Perrino, Dave; Maurer=
, Luiz; Hueter, Barbara A.; Landwehr, Susan M.; Hoatson, Tom; Nicolay, Chri=
sti L.; Steffes, James D.; Alvarez, Ray; Shelk, John; Rodriquez, Andy

Subject: RE: RTO Week Comments -- ICAP=20

The FERC Staff report on RTO Week states that most panelists agree that so=
me type of long term capacity obligation is needed, as long as demand is no=
t very price responsive, in order to allow generation to recover its fixed =
costs and support investment. =20

The report also notes that some panelists support: =20

- a recent staff proposal supporting an LSE holding foward ca=
ll options on energy, and=20

- a capacity obligation being a transitional obligation until=
demand become price responsive=20

I have cut and pasted our Executive Summary from the ICAP comments as our r=
esponse (see below), but I have a couple of questions for this group:

1. We say in our comments that a real time energy market, thro=
ugh an RTO, will give consumers the means to adjust their demand curve beca=
use they will see real time prices. However, if a state ha=
s a rate freeze in effect and/or if retail access is not permitted in a sta=
te, how can retail load respond to the RTO's real time spot marke=
t prices? We need to include this response in our comments.

2. What do we think of a proposal where LSEs hold forward call=
options on energy as a way to achieve a capacity requirement?

Your thoughts are greatly appreciated. Also, any thoughts you have on othe=
r parts of the Staff report would be greatly appreciated (thanks Dave Perin=
o for sending you comments).

Thanks Everyone=20

Sarah=20

EPMI opposes the continuation or implementation of installed capacity requi=
rements. Four appropriately sized Regional Transmission Organizations ("RT=
Os") that encompass robust, competitive spot markets for energy and operati=
ng reserve products (including demand side management products) will provid=
e an efficient and timely solution for the construction of adequate generat=
ion, the siting of appropriate transmission and efficient use of demand sid=
e management products to ensure that demand is met in real time. Spot mark=
ets reveal the cost of procuring (or not using) electricity based on actua=
l supply and demand conditions and, thus, signal the need for new generatio=
n capacity. They also ensure that consumers 'see' the cost of procurement =
decisions through transparent spot market processes and adjust demand based=
on discovered prices. These markets will keep supply and demand in balanc=
e in both the long and short run without the use of artificial planning cri=
teria. Therefore, there is no need to continue separate installed capacity=
requirements in an RTO environment.

The use of the spot market to establish pricing for all energy products is =
new to the electricity industry. Regulated consumers have historically pai=
d utility tariffs that reflect regulatory decisions. These regulated tarif=
fs provide little, if any, meaningful supply/demand price information to th=
e consumer so the response has been to consume even during times when the u=
nderlying "cost" of doing so has been high. As a result, demand curves hav=
e been categorized as 'inelastic' or 'vertical' suggesting the need for 'ca=
pacity' related products to meet any unexpected price insensitive demand. =
The creation of RTOs and the resulting spot markets they include will, for =
the first time, give consumers the means and incentive to change the shape =
of their demand curve as a result of direct real time pricing information. =
Changes in the shape of the demand curve will in turn eliminate the need f=
or specific capacity related payments as supply/demand interaction, and cur=
tailment, will be based on economic choices.