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<title>FERC Granted Market Rates To Generators For Emergency Power</title>
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<td width="75%" valign="top"><p ALIGN="left"><b><big><big><big><strong>FERC Granted Market
Rates To Generators For Emergency Power</strong></big></big></big></b></p>
<p ALIGN="center"><font size="3"><b><strong>Generator Shows How To Make $9 Million in 3
Glorious Hours<br>
ISO Cries Out To FERC 'Stop Market-Based Rates Now'</strong></b></font></p>
<font SIZE="2"><p></font><font size="4"><strong><font face="Arial">BY </font><font size="4" face="Arial">SEASON HAWKSLEY<br>
</font><font face="Arial">RESTRUCTURING TODAY</font></strong><br>
<small>(<em>originally published by PMA OnLine Magazine: 07/98</em>)</small></p>
</font><i><b><p></b></i> </p>
<font FACE="Arial" SIZE="2"><p></font><font face="Arial">The California ISO has and needs
other markets than the Power Exchange. The Ancillary Services Market is an example. It
helps "fine tune" the flow of electrons when the unexpected happens -- a power
plant failure, a sudden spike in temperature. </font></p>
<p><font face="Arial">The energy can be dispatched within seconds, minutes or hours.
Wednesday someone in the South needed 6,000 mw power. </font></p>
<p><font face="Arial">In the hours from 1 am until 10 am the buyer was able to get 500 mw
at $1/mw. The price rose to $3.95/mw between 11 am and 1 pm then shot up to $2,500 at 2pm
and $5,000/mw 3-5 pm listed as $7.5 million for those two hours. </font></p>
<p><font face="Arial">This table issued by the ISO helps understand what happened. Some of
the math looks strange but we assume ISO knows something here that we don't and they had
gone home when this was written:</font></p>
<div align="center"><center><table border="3" width="42%">
<tr>
<td width="20%" align="center"><font face="Arial"><strong>HOUR</strong></font></td>
<td width="32%" align="center"><font face="Arial"><strong>#_Hours</strong></font></td>
<td width="16%" align="center"><font face="Arial"><strong>mw</strong></font></td>
<td width="20%" align="center"><font face="Arial"><strong>$/mw</strong></font></td>
<td width="20%" align="center"><font face="Arial"><strong>$</strong></font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">0100-1000</font></td>
<td width="32%" align="right"><font face="Arial">10</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">1.00</font></td>
<td width="20%" align="right"><font face="Arial">5,000</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">1100-1300</font></td>
<td width="32%" align="right"><font face="Arial">3</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">3.95</font></td>
<td width="20%" align="right"><font face="Arial">5,925</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">1400</font></td>
<td width="32%" align="right"><font face="Arial">1</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">2,500.00</font></td>
<td width="20%" align="right"><font face="Arial">1,250,000</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">1500-1700</font></td>
<td width="32%" align="right"><font face="Arial">3</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">5,000.00</font></td>
<td width="20%" align="right"><font face="Arial">7,500,000</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">1800</font></td>
<td width="32%" align="right"><font face="Arial">1</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">750.00</font></td>
<td width="20%" align="right"><font face="Arial">375,000</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial">1900-2400</font></td>
<td width="32%" align="right"><font face="Arial">6</font></td>
<td width="16%" align="center"><font face="Arial">500</font></td>
<td width="20%" align="right"><font face="Arial">1.00</font></td>
<td width="20%" align="right"><font face="Arial">3,000</font></td>
</tr>
<tr>
<td width="20%" align="left"><font face="Arial"><p align="center"><strong>TOTAL</strong></font></td>
<td width="32%" align="right"><font face="Arial"> </font></td>
<td width="16%" align="center"><font face="Arial"> </font></td>
<td width="20%" align="right"><font face="Arial"> </font></td>
<td width="20%" align="right"><font face="Arial"><strong>9,138,925</strong></font></td>
</tr>
</table>
</center></div><p><font face="Arial">Generators had a cost-based price cap on power into
the Ancillary Services Market of $5-10, said Jeffrey Tranen, ISO CEO in a conference
recently.</font></p>
<p><font face="Arial">ISO will soon ask FERC to instantly reconsider its decision to allow
market based rates and hopes for a decision -- not in weeks -- in a few days. The ISO had
told FERC there may not be enough competition in all those hours.</font></p>
<p><font face="Arial">And the other generators who haven't gotten market-base rate
approval from FERC would not be able to sell the power for more than about $10 at a time
when spot markets may be drawing much more. Since there is not much competition, Tranen is
asking FERC to end the play of market forces -- fast. </font></p>
<p><font face="Arial">FERC had rejected a cap, Tranen said, but he's going back to ask
again. "It's happening now as we foresaw it could."</font></p>
<p><font face="Arial">The ISO is seriously considering allowing resources from
out-of-state sources to be allowed in a few hours a day "when we're short" to
drive down some of the prices.</font></p>
<p><font face="Arial">Who were the companies at FERC that got the market-based rates?
Tranen listed AES, El Segundo, NorAm and Duke. </font></p>
<p><font face="Arial">How many generators are credited to sell into that market who don't
have the FERC pricing authority?</font></p>
<p><font face="Arial">About five to 10, said Tranen, have the $5-10 caps. </font></p>
<p><font face="Arial">Will residential customers be hurt?</font></p>
<p><font face="Arial">No, replied Tranen, since their retail price has been fixed by law
through 2002. </font></p>
<p><font face="Arial">California had a cool spring thanks to El Ni�o but hot weather
began to hit last week. Some supplier south of Path 15 -- the north/south constraint
-- needed the emergency power possibly because of the weather.</font></p>
<p><font face="Arial">What action has he taken?</font></p>
<p><font face="Arial">Minutes before the conference call began he bid zero power for
yesterday confident that in case of emergency they could come up with power somehow
without running up a bill for $9,138,925 as they had a day earlier. </font></p>
<p><font face="Arial">"But we need some immediate regulatory relief."</font></p>
<p><font face="Arial">Wouldn't the buyer be the new owners of Southern California Edison
plants? "Let's just say that I shouldn't comment on specific owners making
bids." </font></p>
<p><font face="Arial">Does Tranen fear high offers in other areas such as the spinning
(now generating) that has extra capacity available in minutes and non-spinning (not
generating now but can get power out in 10 minutes) markets. </font></p>
<p><font face="Arial">"We expect it but I don't believe we've seen it yet," he
replied. </font></p>
<p><font face="Arial">The ISO has other markets too such as the Congestion Management
Market allocating space on transmission lines. When the grid is full congestion zones are
established and scheduling coordinators "play the congestion management market,
curtailing their power deliveries or generating more power," ISO said. </font></p>
<p><font face="Arial"> <b>WHAT COSTS $5,000 ONE DAY AND 1� 2 DAYS LATER?</b></font></p>
<p><font face="Arial">A megawatt. A megawatt for 1�? Yep. The California ISO talked with
FERC staff about the need for a big fix on the market-based rates for some companies while
others have a $5-10 cap (RT, 7/10).</font></p>
<p><font face="Arial">No, FERC doesn't look at it like that. The market based rates meant
market rates for everyone in California's own Ancillary Services market not just AES, the
IPP whose name is on the FERC order, ER98-2843-000 for Redondo Beach (1310 mw),
ER98-2844-000 for Huntington Beach (566 mw) and 2883 for Alamitos (2083 mw). </font></p>
<p><font face="Arial">The urgent request for reconsideration (RT, 7/10) will not be filed,
ISO told us but the chatting with FERC staff will continue. ISO Thursday wanted the cap
back on. </font></p>
<p><font face="Arial">Then came a call Friday for an emergency 500 mw and the ISO
nervously bid Friday to buy power in the Ancillary Services market fearing it might have
to pay $5,000/mw as it had Wednesday.</font></p>
<p><font face="Arial">They got the 500 mw and the bids ranged from 1� to as high as
$7.87/mw, the ISO's Stephanie McCorkle told us late Friday. She wasn't allowed to identify
the offeror. The market has corrected itself, she added. </font></p>
<p><font face="Arial">You can't help but wonder whether it was AES offering low prices as
payback after the $5,000 in the 3-5pm time slot down south on Wednesday.</font></p>
<p><font face="Arial">The three gas-fired plants were recently bought from Southern
California Edison. The ISO has designated some units at each plant as "must run"
for reliability but even so does not have to sell power into the Ancillary Services
market. </font></p>
<p><font face="Arial">The four services AES sought market rates for were regulation,
spinning reserves, non-spinning reserves and replacement reserves. SoCal Edison intervened
at FERC but didn't raise substantive issues in FERC's view. </font></p>
<p><font face="Arial">But the Metropolitan Water District of Southern California did. AES
failed to submit adequate economic analysis and didn't demonstrate its lack of market
power, Metropolitan alleged. </font></p>
<p><font face="Arial">ISO leaders were uncomfortable with letting the market set rates for
emergency power believing that not enough bidders would be available on short notice 24
hours a day to provide competition. It wanted caps set on prices at $5-10/ mw. </font></p>
<p><font face="Arial">"We are not persuaded by the arguments of the ISO and others in
opposition to the application," FERC wrote June 30. "As the ISO's pleading
suggests, `thin` markets for ancillary services have occurred in California largely
because the prevailing caps on capacity prices have not drawn forth sufficient capacity to
meet demand. Substituting new caps would perpetuate the problem."</font></p>
<p><font face="Arial">But FERC agreed to revisit the issue if a problem arises. </font></p>
<b><p><font face="Arial">CALIFORNIA EMERGENCY POWER REACHES $9,999/MW<br>
<small>ISO SETS $500/MW CAP UNTIL FERC ACTS</small></font></p>
</b><p><font face="Arial">The California ISO went into the Ancillary Services replacement
reserve market yesterday for an unstipulated small amount of backup power and had to pay
$9,999/mw in the 2-6pm period.</font></p>
<p><font face="Arial">The leadership reversed its Friday decision not to ask FERC for a
cap on free market prices. ISO expects to have an urgent request for a cap by this
morning. </font></p>
<p><font face="Arial">Meanwhile the ISO has put on its own $500/mw cap. FERC has a regular
meeting set for tomorrow. On Friday the Ancillary Services market drew offers of 1� to
$7.87/mw (RT, 7/13). FERC has rejected an earlier bid to cap the market. </font></p>
<p><font face="Arial">The ISO's bid to buy Sunday for Monday was met by offers to sell
through the night from Sunday to Monday at 1�/mw until the 11 am offer at $3.95 through
1pm then the price jumped to $9,999/mw through the 6pm hour. Magically the price fell back
to 1� in the day ahead market for 7 pm through midnight. </font></p>
<p><font face="Arial">Meanwhile FERC's agenda for tomorrow doesn't have time set for
discussion or an emergency review of the June 24-26 price spikes in the Midwest. </font></p>
<p><font face="Arial">The amount bought by ISO was: </font></p>
<div align="center"><center><table border="3" width="39%">
<tr>
<td width="50%"><p align="center"><strong>HOUR</strong></td>
<td width="50%"><p align="center"><strong>VOLUME</strong></td>
</tr>
<tr>
<td width="50%" align="center">1400</td>
<td width="50%" align="center">135</td>
</tr>
<tr>
<td width="50%" align="center">1500</td>
<td width="50%" align="center">115</td>
</tr>
<tr>
<td width="50%" align="center">1600</td>
<td width="50%" align="center">83</td>
</tr>
<tr>
<td width="50%" align="center">1700</td>
<td width="50%" align="center">83</td>
</tr>
<tr>
<td width="50%" align="center">1800</td>
<td width="50%" align="center">140</td>
</tr>
</table>
</center></div><p><font face="Arial">So that's 556 mw for a total of $5.5 million. The ISO
passes on the price to the requesting marketer whose name is kept secret as if the name of
the seller. </font></p>
<p><font face="Arial">The firms buying plants from the incumbents were AES Corp, Dynegy
(NGL), Duke Energy and NorAm.</font></p>
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