Note:  The FERC meeting is today.  See the link below that can be checked for 
updates.

Enron's Lay Urges Bold Solutions to Power Market Woes

As the Federal Energy Regulatory Commission prepared to weigh in this morning 
with the federal government's answer to California's be-deviled power market, 
free market advocates issued last minute warnings against taking the price 
cap route espoused by the Cal-ISO. FERC's meeting is scheduled to start at 9 
AM EST. (Check http://intelligencepress.com this morning for updates) 

In a letter fired off to FERC Chairman James J. Hoecker yesterday, Enron CEO 
Kenneth Lay urged the Commission to find a fix for the underlying structural 
problems in the power market rather than follow the steps of policy makers 
who have placed "price cap 'band aids' over hemorrhaging wounds." 

Lay told Hoecker the power market is "halfway across a busy street in its 
transition from monopoly to competition. It can't stand where it is." He said 
FERC has to make a choice between falling into the "same trap of political 
expediency as California's ISO, leaving the nation's electric system in the 
lurch from one crisis to the next, [o]r it can take a big step toward 
fundamental structural reform." 

At the same time the Electric Power Supply Association (EPSA) called on FERC 
to issue an emergency cease and desist order prohibiting the Cal-ISO from 
"unilaterally implementing" any changes to its current $250/MWh price cap for 
wholesale electricity purchases. In a motion filed Monday, the marketer group 
specifically asked the Commission to bar the Cal-ISO board of directors from 
putting into effect its decision to impose a fiendishly complex 
load-differentiated price cap of $100 or less during the off-peak season 
effective Nov. 3. The plan was designed by the state's main utility consumer 
group (see Daily GPI, Oct. 30). In addition, the EPSA urged FERC to "state 
explicitly" that the Cal-ISO does not have the authority to impose or extend 
price or bid caps, unless expressly authorized to do so by the Commission. 
The Cal-ISO's current authority to set price caps expires on Nov. 15. 

Lay said the Cal-ISO's complicated new formula caps prices below the cost of 
gas-fired generation, "making obvious errors such as failing to take into 
account gas transportation costs between the Henry Hub and power plants in 
California; in doing so the bid cap makes it more economic for generators to 
sell their gas supply, rather than use it to make electricity in California." 
The new formula also forces the ISO into the market to buy power on an ad hoc 
basis "to keep the lights on when the capped market fails to attract 
sufficient supplies (which it inevitably will do)," Lay said. In addition, 
the capped formula "invites generators to shut in production, export power 
out of state and deploy their turbines in other states or countries." 

He noted that the ISO's Chairman voted against the measure while all of the 
state's utilities voted for it "presumably knowing full well that it simply 
will not work." 

California is "just the latest failure of partial or compromised open 
access," said Lay. "It's time for the Commission to reject this approach. 

"The power industry --- the nation's most essential industry --- is mired in 
the transition from regulated monopoly to open access and customer choice. 
Every step forward has been compromised out of concern for alienating one 
vested interest or another. As a result, utilities are free to slow the 
interconnection of new generation, withhold equal access to the transmission 
system, favor their own sales over those of competitors, miscalculated 
available transmission capacity, and exercise control over supposedly 
'independent' system operators and reliability organizations. 

Lay predicted that installing price caps for political expediency would 
"plunge markets into greater uncertainty and discourage new supplies and 
conservation methods..." 

FERC has to complete the work that it started, said Lay. It has to ensure 
that all parties have equal and fair access to transmission by "ending the 
special priority for utility uses of the system. Second, FERC must require 
transmission owners to separate operation of the monopoly transmission assets 
from their other businesses. Third, FERC must take politics out of 
transmission system operations by revising governance structures to ensure 
independence. Finally, FERC must end its reliance on shortsighted price caps 
by putting in place the necessary reforms to allow these markets to operate 
efficiently to encourage conservation and attract new supplies." 

EPSA said the Cal-ISO board "acted in obvious disregard for the Commission's 
orderly processes." It "cannot be permitted to make the Commission's 
decisions for it, or to alter so radically market rules, thereby injecting 
more uncertainty and confusion in the market and subverting the process for 
fashioning fair, effective and comprehensive remedies" for California's 
"flawed" electric markets, the group noted. 

The EPSA believes that any remedial actions taken by FERC with respect to the 
California markets will be "severely compromised" if the Cal-ISO board's 
imposition of new prices caps is allowed to take effect. 


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