From: mark.koenig@enron.com
To: steven.kean@enron.com
Date: 2000-10-27 10:03:00+00:00
Subject: FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER
 ENERGY ...

---------------------- Forwarded by Mark Koenig/Corp/Enron on 10/27/2000 
09:46 AM ---------------------------


firstcall.notes@tfn.com on 10/27/2000 01:41:59 PM
To: mark.koenig@enron.com
cc:  

Subject: FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER 
ENERGY ...


                          FIRST CALL RESEARCH NETWORK

09:56am EST 27-Oct-00 Prudential (C.COALE 713-650-4732) DYN DUK ENE CPN REI
FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER ENERGY ...

FERC COMMISSIONER HEBERT ADDRESSES ELECTRICITY PRICE CAPS AND OTHER ENERGY
POLICY ISSUES AT HOUSTON LUNCHEON

PRUDENTIAL SECURITIES                                   October 27, 2000

SUBJECT: Electric Utilities

----- ANALYST(S) --------------------          -------- OPINION --------
M. Carol Coale   713.650-4732                 Current:Accumulate
David R. Tameron 713.650-4731                 Risk:--



----- HIGHLIGHTS---------------------------------------------------------
1)   On October 26, FERC Commissioner Curt Hebert spoke on "Competition &
America's Energy Policy" to group of Houston industry executives, addressing 
the
merits and problems with electricity deregulation.
2)   Commissioner Hebert, the sole Republican, supports a comprehensive energy
policy, renewable fuel use, improved pipeline certification, and flexibility,
but opposes price controls and free market intervention.
3)   Last week, the California ISO called on the FERC to rule on a "market
stabilization plan" that would affectively cap the price electricity at 
$100/mWh
unless 70% of the power generated is sold forward within the state.
4)   FERC is expected to address this issue on 11/1, but we do not expect much
involvement until after the presidential elections, particularly given that 
the
FERC Commissioners are Presidential appointees.
5)   While we believe FERC's role in the electricity market problems in
California will be limited, any action taken is likely to be "bold, ambitious
and strict", requiring results, but likely would not affect 2001.

----- DISCUSSION---------------------------------------------------------
Energy is one of the leading topics in the approaching general elections and
congressional races, and spiking energy prices have been an area of 
contention.
Regional shortages have resulted in spikes in the price of electricity, and
this past summer, hot weather in the western U.S. sent electricity prices
soaring.  In California, where the rate payers served by PG&E and Edison
International are protected under a rate freeze, the higher power costs cannot
be passed on by the electric utilities to the consumer.  In southern 
California,
the situation is just the opposite.  Having recovered its stranded investment
costs from its ratepayers, Semipro Energy is charging market rates to 
consumers
which are complaining of higher electric bills.  While the government has
intervened by approving price caps on ancillary electric service in the state
and has capped the electric bills of low-income consumers in San Diego, the
state regulators are calling for more government involvement.

In California several proposals are on the table:
1)   A consumer group has called for the "excessive" profits earned by
generators and marketers this past summer to be retroactively refunded to
ratepayers.  .
2)   U.S. Rep. Bob Finer, D-California, introduced a bill to the House that
would create disincentives for power companies to earn profits, imposing a
windfall profits tax on wholesale power sold in the western U.S.
3)   As recently as last night, October 26, the California Independent System
Operator (ISO) implemented an interim measure that imposes hourly price caps 
on
generators based on forecasted load and arbitrary heat rates ranging between
negative $100/MWh and positive $250/MWh.  Effective on 11/3, the proposal
essentially shuts down the peaking generation plants which would not be able 
to
economically produce power within the state.
4)   California ISO staff has also proposed to impose a "bid" cap on 
electricity
of $100/mWh on power generators and marketers in the state that do not comply
with the requirement of selling 70% of their load under forward contracts 
within
the state of California.  Compliance with this Market Stabilization Plan means
that spot power will be sold under the existing $250/mWh price cap but 
violators
would be subjected to the $100 bid cap.
5)   California plans to require interruptible users of power to extend their
contracts, preventing these end users from switching to firm contracts, thus
ensuring that certain customers can be shut off in the event of a power
shortage.

While we doubt that any of these proposals will be passed in their current 
form,
the government is likely to be involved.  The Federal Energy Regulatory
Commission (FERC) has been overseeing the deregulation of the wholesale energy
markets, and has approved price caps in all of the regions that have opened to
competition thus far except for in the Midwest.  As a reminder, the FERC is 
made
up of commissioners that are appointed by the reigning President, and 
currently
the FERC is made up of three Democrats and one Republican (the other 
Republican
commissioner resigned earlier this year).

On Thursday, October 26, 2000, the sole Republican, Commissioner Curt Hebert,
Jr., gave a presentation to members of the Greater Houston Partnership on the
subject of "Competition and America's Energy Policy".  While his opinions are
not necessarily representative of the FERC as a whole, Hebert clearly supports
regulatory flexibility and free markets but is also sensitive to environmental
issues.  He is also vehemently opposed to price controls such as electricity
price caps in New England, New York and California.  Hebert believes that the
recent electricity price spikes in the West this past summer were great market
indicators that electric generation is in short supply, particularly during
periods of hot weather.  In the summer of 1999, the Midwest experienced 
similar
price spikes also related to summer heat.  The difference between the two
situations is that the Midwest allowed the market to decide, which responded
with new generation projects, but California imposed price controls on
electricity that have had the affect of discouraging new generation.  Thus, 
the
short supply situation in California may just get worse.

The FERC has completed an investigation of the recent electricity price spikes
in California but does not intend to release its findings to the general 
public.
  While we believe that the FERC will find a way to help resolve the situation
in that state, any actions would not likely take affect until 2002.  In the
interim, the electric utilities are suffering under a growing burden of
uncollected power purchase costs and are calling on the state regulators to
provide emergency financial relief.  Proposals include a refundable rate
surplus, removal of frozen rates, and/or the deferral of stranded cost 
recovery.
  We are doubtful that the FERC will rule on any action prior to the elections
because political considerations may influence their decisions.

Commissioner Hebert indicated that this was an opportunity for the FERC to 
send
to the electricity industry a signal on what may make the markets work, and
believe that any plan should be "bold, ambitious and strict" in requiring
results.  Renewable fuels are also likely to be encouraged, although this is 
not
necessarily good news for the natural gas industry, and old issues like the
Fuel Use Act and the "Btu" tax may resurface.  Ideally, the FERC would endorse
market pricing and encourage the development of electricity generation and
transmission infrastructure.  However, by doing so, the FERC may be perceived 
as
the "bad guy", which may not be ideal image in an election year.  However,
Hebert is hopeful that the FERC will move beyond politics and make the right
regulatory decision for the long term.  The benefits of price controls are 
short
term, and those markets under price caps may be disadvantages as the rest of
the U.S. opens to electric competition.






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