The smoking gun, or just traders being traders?

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Reshaping Regulation The Smoking Gun, Or Just Traders Being Traders?

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irst, there were ``Get Shorty,'' ``Death Star,'' and ``inc-ing load.'' Enron Corp. turned over memos from early December 2000 describing the company's trading tactics in the dysfunctional California market, and how the company was able to arbitrage, or game, the market, and the result was a firestorm. California's politicians were in full bray. This, they said, was the smoking gun that showed that it was evil Enron, not California, that was to blame for the energy crisis of 2000±2001. In response, the Federal Energy Regulatory Commission broadened its California inquiry to all other sellers of power into the state when prices were spiking. In a letter, FERC's Donald Gelinas, associate director of the of®ce of markets, tariffs, and rates, said the commission staff ``will issue 2

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in the near future data requests to all jurisdictional and non-jurisdictional sellers of wholesale electricity and/or ancillary services to the California Independent System Operator and/ or the California Power Exchange during the period 2000±2001.'' The Gelinas letter also put sellers ``on notice that they must preserve all material that discusses'' trading strategies like those outlined in the Enron memorandums ``including documents to which a claim of privilege may attach.'' But the Enron memos may be substantially less than the politicians claimed (and hoped). Most of the behavior outlined in the memos was probably legal and didn't cause much outrage among economists who looked at the practices. Stanford's Frank Wolak, who is the market watchdog for the California Independent System OperatorÐ and who believes that the generators were ripping off the stateÐtold the Sacramento Bee that the Enron practices were ``what speculators do in

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market . . . If the price in one area is higher than another, you buy in one area and sell in the other. All these guys would do that in a minute.'' Wolak and Severin Borenstein of the University of California Energy Institute both argued that the Enron memos are a sideshow. ``This is not where the big money is,'' said Borenstein. The real problem wasn't gaming the system, he argued, but the ability of generators to exercise market power. Then came ``round-trip trading,''aka ``wash trading.'' It turns out that some power marketersÐspeci®cally CMS Energy, Reliant Resources, and DynegyÐhad engaged in sham transactions designed to make their markets look more liquid and boost sales and revenue volumes (but with no real impact on the bottom line). It was simpleÐand some experts say common in early commodity markets. I buy from you and sell back to you at the same price, simultaneously. It turns out that these fake trades were the dominant element The Electricity Journal

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in CMS Energy's trading operationÐthree quarters of its trading activity in 2000 and 2001 were round-trippers. Tamela W. Pallas was quickly ®red as CEO of CMS Energy Marketing, Services, and Trading. Pallas came to the Michigan-based CMS from Houston's Reliant trading operation. A week later, the ¯ap claimed another CMS victim: Chairman and CEO Bill McCormick, who announced his resignation as the company's board was meeting to try to ®gure out a damage control strategy. McCormick, after 17 years at the helm of CMS, walked the plank. At the same time, CMS announced that it would write off some $1 billion in roundtrip trades in 2001, on top of a writeoff of $3.3 billion in roundtrip trades in 2000. Also, the company is scratching some $900 million in revenue and expense for 2001 from a roundtrip gas trade that has not been completed. CMS said it is looking at whether to extinguish roundtrip trades that remain as open positions on the company's books. Two days later, another icon of energy marketing, Dynegy's Chuck Watson, who essentially founded the company as Natural Gas Clearinghouse in 1986, resigned as chairman and CEO. He was under pressure from ChevronTexaco, 27 percent owner of Houston-based Dynegy, as the company's stock tumbled 90 percent over the past year. July 2002

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Was it Enron, FERC, Or Gaming Cal-ISO? Asks Sen. Dunn

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alifornia's power woes of 2000±2001 may have had less to do with Enron, or the Federal Energy Regulatory Commission, and more to do with the California Independent

System Operator, according to a state legislator chairing an inquiry into the crisis. State Sen. Joe Dunn, a Democrat, charged that the ISO gamed its reliability market in order to cover up its own ``bad management.'' The ISO denied the allegation. Dunn chairs the Select Committee to Investigate Price Manipulation of the Wholesale Energy Market. Dunn contended that because the ISO was unable to tell whether generators were running plants at levels required by FERC, it essentially arranged for the generators to overschedule in order to assure that the supply of power was adequate. Dunn charged that the ISO told the power buyers at

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the state's Department of Water Resources to overstate demand, pushing up the price of power. The ISO, Dunn said at a Sacramento news conference, ``has a view that all we're doing is making sure that load meets demand and we really don't care what the price is associated with that balance. That is dead wrong, and has served as a huge liability to the California consumer throughout the energy crisis.'' Dunn played a tape of a nineminute conversation last Nov. 14 between the ISO's director of grid operations and DWR of®cials concerning Reliant Energy's Ormond Beach plant and Duke Energy's Morro Bay generator, telling them to ``bring the units on and hold minimum load.'' DWR of®cials objected, because, they said, they already had enough power on hand and would have to sell the unneeded power at a loss. According to Dunn, that is exactly what happened. The state arranged to buy power from Ormond Beach and Moro Bay at above-market prices and sold it at a loss. Michael Kahn, chairman of the ISO board, denied any improper behavior by the ISO. ``There is no behavior, in any way, shape, or form, that was improper or inappropriate,'' he said. But The Los Angeles Times quoted him on the Nov. 14 taped telephone conversation: ``We did it to ensure reliability because we weren't sure we'd have enough electricity on a certain line.''

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Transmission Shifts Rejuvenated MISO Wins Commitment From FirstEnergy

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kron, Ohio's FirstEnergy, one of the original members of the Alliance for-profit transmission company promoted by Ohio's American Electric Power, has decided to join the Midwest Independent System Operator (MISO) instead through FirstEnergy subsidiary American Transmission Systems Inc. ATSI owns and operates the utility holding company's transmission lines in Ohio and western Pennsylvania. Adding FirstEnergy's transmission system puts another 14,000 MW of peak load under the MISO, an increase of more than 15 percent, as the regional transmission organization once left for dead continues to enjoy a remarkable rejuvenation, largely at the expense of the Alliance. Said MISO CEO James P. Torgerson, ``The ¯exibility of the Midwest ISO's transmission owners' agreement provides a framework that can accommodate the Alliance Gridco's business model and we would welcome them as another independent transmission company operating within the Midwest ISO.'' Under pressure from the Federal Energy Regulatory Commission, the Alliance companies have been in talks with MISO since late December, when FERC 4

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rescinded its earlier approval of the Alliance RTO ®ling, about operating for-pro®t transmission companies within the non-pro®t MISO. FirstEnergy's Pennsylvania transmission that came to it when it acquired GPU will continue to be operated by the PJM Interconnection. Earlier, AEP said it would join PJM and part of the PJM West operation.

The Competitive Grind Exelon Beset by Class Suits

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feeding frenzy of class action shareholder suits has struck Chicago-based Exelon Corp., after the failure last fall of the utility holding company to achieve estimated earnings, followed by a 22 percent drop in the value of the company's shares. The suits were kicked off by a May 8 filing of a class action suit against the company in the U.S. District Court for the Northern District of Illinois by the legendaryÐor notorious, depending on your point of viewÐplaintiffs' attorney Bill

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Lerach of the firm of Millberg, Weiss. He is also the lead attorney in the shareholder suits against Enron Corp. The suit charges that the company issued false and misleading statements of its ®nancial condition, leading investors to purchase common stock with arti®cially in¯ated prices over the period Apr. 24 to Sept. 27, 2001. Other well-known shareholder class action suit specialists from around the country quickly followed suit. Among them, Charles Piven of Baltimore; Cauley, Geller of Little Rock; Much Shelist of Chicago; Schiffrin & Barroway of Bala Cynwyd, PA; and Schatz & Nobel of Hartford, Conn. The ®lings used much the same legal boilerplate language as the Lerach ®ling. The complaints allege that, in press releases and public interviews, Exelon said it was adequately immunized from the types of problems that plague utility companiesÐmild weather and economic downturnÐand thus expected to meet its earnings target of $4.50 per share in 2001. Exelon failed to disclose that investments in telecommunications companies held by Exelon Enterprises were dropping rapidly in value and would not contribute meaningfully to the company's ®nancial results, the lawsuits allege. Last Sept. 27, Exelon announced it would not meet its earnings goal of $4.50 for 2001, blaming the economy, poor weather, and writedowns for failed The Electricity Journal

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telecommunications investments. Exelon's common stock fell to a low of $38.85 per share on Sept. 27 from $50.45 the previous day. A ComEd spokesman, while not responding to the speci®c assertions, said, ``We absolutely don't believe there is any sound basis for this complaint.''

As the Turbine Turns

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 Existing power plants, with emphasis on mercury and hazardous air pollutants, NOx, solid waste, particulates, and SO2removal, at $1.2 billion for 2002± 2010 and $250 million for 2011± 2020.  Advanced steam-electric coal-fired plants, focusing on higher temperatures for supercritical operation ($1.5 billion for

Group Urges $10B To Back Coal-Fired Generation by 2020

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he U.S. should spend $6.6 billion in combined federal and private funds between now and 2010 and another $3.5 billion from 2011 to 2020 to boost prospects for new coal-fired generation, according to a report from a coal industry lobbying group. The Coal Utilization Research Council (CURC), a successor to the 1980s Clean Coal Technology Coalition, issued the investment goals in its latest ``clean coal technology roadmap.'' If the money is spent, says the organization, that ``could lead to costeffective electricity generation from coal with near-zero emissions by 2020.'' The high-priority issues for coal R&D, says the CURC, include:  CO2 management, including sequestration, and separation of CO2 from exhaust streams, which the group says should get $1.5 billion between 2002 and 2010 (and another $750 million in the 2011±2020 timeframe). July 2002

2002±2010 and $230 million for 2011±2020).  Gasification and hybrid power plants (something the industry and government have been pushing without much success since the early 1980s), at $1.8 billion for 2002±2010 and $1.7 billion for 2011±2020.  Coal liquids and coal-derived chemicals, at $575 million for 2002±2010 and another $590 million for 2011±2020. The CURC has 40 members, led by Peabody Energy of St. Louis, the world's largest coal company, and Atlanta's Southern Co., the largest investor-owned utility coal consumer in the U.S. Other members include the Electric Power Research Institute, the

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United Mine Workers of America, the Edison Electric Institute, the National Mining Association, and the National Rural Electric Cooperative Association. ``The CURC roadmap,'' said Charles McCrary, of Southern Co. subsidiary Alabama Power, ``is being offered to suggest ideas to Congress and the Bush administration for achieving the goal of energy independence with a strong economy and a quality environment.'' The CURC is staffed by Ben Yamagata of the Washington law ®rm of Van Ness, Feldman. Yamagata led the 1980s CCTC, which successfully lobbied the Reagan administration and Congress on behalf of the Department of Energy's clean coal program, which the second Bush administration is now proposing for expansion. Pushing greater use of U.S. coal, says the report, ``will impart stability when there are political pressures elsewhere in the world that threaten to disrupt the economy as well as energy markets. Technology is the key to assuring the long-term use of coal, and the DOE's coal R&D programs are vital to that technology development.

Environmental Environment Canada's Deferral Seen As Blow to Kyoto Protocol

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anada appears to have officially put off Kyoto Protocol ratification for this year. This decision has international impli-

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cations, making it extremely unlikely that the protocol will go into effect as an international legal instrument during the Rio‡10 summit in Johannesburg, South Africa, in late August. If so, it is a resounding setback for the global green movement. The summitÐ the World Summit on Sustainable DevelopmentÐis supposed to set the work plan for the next decade of international environmental activism. Kyoto is by far the biggest action item on the agenda. Canada's recently released climate change ``discussion paper'' says, ``Following consultations based on this document, a preferred approach will be identi®ed and a draft plan developed in greater detail and analyzed over the summer. Consultations on that plan will take place in the fall.'' s with everything in the global climate change game, the Kyoto details are tricky and complex. In order to go into binding legal effect, the protocol requires that enough countries must ratify it. The protocol includes a list of 34 so-called ``developed'' countries, and their estimated 1990 baseline emissions of greenhouse gases, expressed in tons of carbon equivalent. Countries accounting for 55 percent of the total listed amount must ratify. This has become the critical numbers game. The United States is by far the biggest emitting country on the list, with 36.1 percent. But the U.S. has dropped out, which means that almost every country left on the list must ratify before the protocol goes into force. The swing margin is just 8.9 percent. Australia, with 2.1 per-

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cent, has said it will not ratify without the U.S., bringing the margin to 6.8 percent. Canada has 3.3 percent, loss of which would take the margin to 3.5 percent. If another large country, or a handful of small ones, fails to ratify, then the protocol cannot come into force. As of late spring, almost no one had rati®ed, and time was rapidly running out.

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countries, when Kyoto negotiations reopen in October, and every country counts. So it remains to be seen whether the Canadian position is a temporary setback for the Kyoto Protocol coming into force, or the beginning of the end.

Conn. Law Limits Emissions Credits Use on SO2

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Canada's action was particularly galling to Canada's environment minister, David Anderson. He is the chairman of the governing council of the United Nations Environment Program, which owns the Kyoto Protocol. He is also a leading advocate of ``global environmental governance,'' a movement to create a green alternative to the World Trade Organization. The Kyoto Protocol is the ¯agship of the global environmental governance scheme, but Anderson has failed to deliver his own country. Even worse, Canada is demanding new concessions, especially credit for natural gas exported to the U.S. This message is not likely to be lost on other

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onnecticut Republican Gov. John Rowland has signed into law a bill that would bar the state's older power plants, six in all, from using emissions credits to meet stringent standards to reduce sulfur dioxide emissions. Under current regulations, adopted by the Connecticut Department of Environment Protection in late 2000, the six power plants must burn liquid or gaseous fuel that has a sulfur content of no more than 0.5 percent sulfur by weight. The average emissions rate must be no higher than 0.55 pounds of SO2 per million Btu each quarter. If the owner or operator averages the emissions from two or more affected plants on the premises, then the average emissions rate must not exceed 0.5 pounds of SO2 per million Btu for each quarter. Regulations set to take effect on Jan. 1 further tighten the requirements to 0.3 percent, 0.33 pounds, and 0.3 pounds, respectively. But under those regulations the older power plants are allowed to purchase emissions credits to meet the DEP's 0.3 standard. As an escape, the DEP's commissioner has the power to The Electricity Journal

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temporarily suspend the standards in case of emergency. Under the new law, the six plants will not be allowed to use emission trading to meet the difference between the 0.5 and 0.3 standard beginning Jan. 1, 2005. Trading will only be allowed to make up for excess emissions when the commissioner suspends the standards. In 2001, Rowland vetoed a similar bill, saying that it would compromise the reliability of the state's electricity supply. The new bill is acceptable because it delays the emission trading ban until 2005, at which time the governor is hopeful that new, low-sulfur sources of energy will have come on-line, making trading unnecessary. ``We tried to balance the needs of the energy community and the environmental community,'' said Rowland. ``I think it's fair and I think it's a doable approach.'' Others disagree. ``The bill does little to improve air quality while signi®cantly increasing production costs and eliminating fuel ¯exibility necessary for providing reliable and affordable energy to Connecticut consumers,'' said Bryan K. Riley, vice president of NRG Energy, a Minnesota-based company that owns four of the affected plants. As a result of higher production costs, NRG will be reconsidering future investments in the state. The Connecticut law could face a legal challenge. A federal court recently overturned a New York law limiting SO2 allowance trading as a violation of the Commerce Clause of the U.S. Constitution. July 2002

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Fed Agencies' Plan On Parks Irks Coal Lobby

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hree of the nation's greenest federal government agenciesÐThe Department of Agriculture's Forest Service and the Interior Department's National Park Service and Fish and Wildlife ServiceÐare running a

new air pollution control program up the flagpole. Environmentalists are saluting, but industry is giving the program a cold shoulder. The three agencies have formed the Federal Land Managers' Air Quality Related Values Working Group (FLAG) to set rules for the impact of air pollution in what the Clean Air Act calls ``Class I areas,'' de®ned as national parks over 6,000 acres and wilderness areas and memorial parks over 5,000 acres. The 1977 amendments to the air act give ``federal land managers,'' that is, the three agencies, ``af®rmative responsibility'' to protect air quality and ``air quality related values'' such as visibility in the Class I areas.

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Working since 1999, FLAG has developed a stringent process for determining the impact of NOx and SO2 emissions on parks and wilderness areas. The FLAG recommendations are to be used by state permitting agencies and others when applying the EPA's New Source Review process and the Prevention of Signi®cant Deterioration program to power plants near parks and wilderness areas. The FLAG process applies to new power plants up to 300 kilometers away from Class I areas. FLAG is driving the coal industry nuts. In a recent report to the Department of Energy, the National Coal Council complained, ``The FLAG process is a very conservative air quality assessment approach that effectively limits the siting of new coal- and gas-®red units to some distance from the Class I area. In the western U.S., for example, given the existing clean air quality that generally prevails, the minimum siting distance determined by the FLAG process for new coal®red power plants is approximately160 kilometers(100miles).'' According to the NCC, ``In the 11 western states, the available candidate siting areas for new coal-®red units are reduced to central Nevada, north central Utah, east central Wyoming, and extreme eastern Colorado. All other lands in the western U.S. are closed to consideration, since they are located too close to the Class I areas.'' The coal council analysis also notes that many existing coal-®red plants are located within 100 miles

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of Class I areas. ``They would not likely pass the FLAG test,'' says the report, ``even though they are not currently causing an air pollution concern in a Class I area. While Class I areas need to be protected, the FLAG process is so conservative that it effectively prohibits plants where they would otherwise be acceptable.''

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Ferry units, located in Muscle Shoals, Ala. Browns Ferry 1 has been closed since 1985, following NRC action that shut down TVA's entire nuclear power operation, over 10,000 MW of generation. All of the operating reactors except the ®rst Browns Ferry unit, the oldest on the TVA system, have been returned to power. Browns Ferry 1

The Nuclear Family TVA Buy Brings Breathing Room on Nuke Restart

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he Tennessee Valley Authority will be buying up to 500 MW of per day of baseload capacity from Calpine Corp.'s 794 MW Decatur Energy Center, beginning in June 2004 and running through May 2007. The gasfired, combined-cycle plant in Decatur, Ala., is under construction. Calpine won the contract in a competition that TVA began in January 2001 with a request for proposals that generated 45 offers from 15 bidders. The purchased power from Calpine will give TVA breathing room while it brings its 1,050 MW Browns Ferry Unit 1 nuclear plant back into service after a 17year layoff. The purchase followed TVA board approval of a staff recommendation to put the Browns Ferry Unit 1 nuclear plant back into service. The three-member board also told the TVA staff to ask the U.S. Nuclear Regulatory Commission for a 20-year license extension for all three Browns

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is a General Electric Mark 1 boiling water reactor, with generating capacity of 1,650 MW, which went into service in May 1967. TVA estimates restarting the unit will cost $1.7±$1.8 billion and take 5 years to ®nish. The federal power agency says restart will slow repayment of the system's very large debt until the unit comes back on line. TVA Chairman Glenn McCullough Jr. said, ``Returning Browns Ferry 1 to service is the best business decision for TVA and its customers in terms of power supply, cost, generation mix, delivered cost of power, and the environment.'' Under an earlier RFP, Calpine will provide TVA with an option to buy up to 400 MW of peaking

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supply this year and up to 500 MW in 2003.

Restructuring Watch Sale of Enron's Portland Unit Bites the Dust

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he shaky merger between Enron Corp.'s Portland General Electric and Northwest Natural Gas Co. finally bit the dust. NW Natural, based, like PGE, in Portland, Ore., said the Enron bankruptcy made the merger too difficult. Enron itself had been signaling that it wants to keep the electric utility in the restructured company it hopes will emerge from Chapter 11 bankruptcy protection. NW Natural CEO Richard Reiten said, ``The agreement signed last October, before Enron's problems began, simply doesn't work given the complexities of the situation.'' The companies reached agreement on the merger on Oct. 5. In 1999, Enron, which acquired PGE in 1997, said it would sell the utility to Nevada-based Sierra Paci®c Resources. That deal fell through when western power prices surged, hurting Sierra Paci®c's ®nancials. A May 3 plan by Enron chief Stephen Cooper would keep PGE, with its 736,000 customers, in the slimmed-down Enron successor, temporarily known as OpCo. PGE would represent about a third of OpCo's assets and a steady source of cash. The plan must be approved by the unseThe Electricity Journal

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cured creditors committee and the bankruptcy court. A local group, made up of municipalities and consumer groups, is pushing a plan to turn PGE into a public power system. PGE of®cials say they will ®ght municipalization. ``A government takeover is a bad idea under any scenario,'' said PGE CEO Peggy Fowler.

Ga. Power Plans First Closings in Six Decades

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or the first time in six decades, Georgia Power will retire operational units in its power system. The Atlanta utility announced that by the end of the year it will shut down 11 aging generators producing 415 MW of powerÐabout 2.5 percent of the company's total output. The facilities that will be retired, all located in Georgia, include four 40 MW coal-fired units and two 15 MW gas-fired units at the Arkwright plant in Macon; three 60 MW coal-fired units at the Atkinson plant in Smyrna; and two 22.5 MW coal-fired units at Mitchell in Albany. The units, built in the 1940s, are among the most inef®cient in Georgia Power's system. They are also heavy contributors of NOx and sulfur dioxide pollution. The utility said the overriding reason to retire the units is the bottom line. ``It is more economical to retire these 11 units than to continue to operate them,'' Georgia Power President David Ratcliffe told the Atlanta Journal-Constitution. July 2002

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The generators were to be shut down after the utility brings on line three gas-®red plants this summerÐtwo at Wansley in Heard County and one in Lee County, Ala., near Columbus. The Mitchell complex in Albany in southwest Georgia will continue to operate three combustionturbine units and a 125 MW steam unit, the utility said. Georgia Power of®cials say these are the ®rst of several aging plants that will be retired in the coming years. The utility has said it plans to cut the percentage of electricity it generates from coal®red plants from 75 percent today to 45 or 50 percent. The closings, to be proposed in ®lings with the Georgia Public Service Commission, were likely to prove popular statewide, because the utility is routinely criticized by environmental groups for air pollution. The Sierra Club's Georgia Energy Project said it was pleased with Georgia Power's announcement, although it expressed disappointment the utility is not replacing the retired generation with renewable energy. Georgia Power has said it is developing a plan to allow customers to pay a higher rate for renewable energy.

Going Global ICF: Bad Timing for U.S. Retreat from Euro Market

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ust as U.S. companies are packing up and leaving the European market, Europe is about

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the experience a major upswing, says the U.S. firm ICF Consulting. Facing excess production capacity, high valuations on assets, and strong competition from entrenched European competitors, the Yanks have found Europe to be an uncomfortable environment. But, says ICF of Fairfax, Va., ``with environmental pressures tightening on the European power sector, particularly constraints on carbon emissions, a massive investment in new power stations will be needed over the next few years to meet energy needs. With their painfully won knowledge of the European markets, trading structures already in place, and more merchant project development and ®nancing experience than European rivals, the U.S. companies could be major bene®ciaries of the European situation.'' Simon Allen, president of ICF's European consulting practice, says, ``The U.S. power companies seem to be retreating at exactly the wrong time. The perception of U.S. investors has been shaped by low returns over the last few years and uncertainty regarding the evolution of competitive and liquid power markets in Europe. However, our analysis shows substantial opportunities exist in the future for attractive generation investments as the European markets react to environmental pressures.'' ICF estimates that up to $90 billion will have to be invested in the European power sector to cut carbon dioxide emissions and meet national targets for renewables.&

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