NEM is pleased to announce that Alstom Energy Automation & Information Corporation (Alstom EAI) has been elected to the Executive Committee. Around the world, Alstom's EAI Business provides leading solutions for the energy industry, developing and integrating technologies for substation and distribution automation, real-time power control, information management and energy market systems. With world class informations software, reliable automation systems, and value-added application and support services, Alstom EAI Business delivers solutions to ensure the reliable, efficient and secure operation of energy infrastructure and energy markets. Alstom EAI will be represented within NEM by Renee Guild, who is responsible for emerging markets and development of new businesses and Ali Ipakchi, Director of Market Participants. Renee Guild has offered to chair the North West Policy Development Team.

The Commission issued a NOPR to provide a better definition of transactions and practices that constitute prohibited market manipulation under electric power sellers' market-based tariffs and gas sellers' blanket certificate authority. The NOPR would require the tariffs and certificates to contain provisions on market manipulation, communications, reporting and record retention. Electric tariffs would also be required to contain provisions on unit operations.

The NOPR provides that if a seller engages in prohibited behavior it would be subject to disgorgement of unjust profits as well as revocation of market-based rate authority or blanket certification authority.

Since FERC's jurisdiction over gas entities is limited to sales for resale of domestic gas by pipelines, LDCs or their affiliates as long as they don't produce the gas they sell, the Commission requests comment on whether application of these rules to only part of the gas market could have adverse effects.

Comments are due 30 days after publication of the NOPR in the Federal Register. The full text of the Market Manipulation Rule Press Release is on the NEM Website, and the NOPR will be posted on the NEM Website when made available electronically.

FERC held a technical conference and workshop to consider the role of price indices in the formation of prices for natural gas and electricity. The panelists discussed possible solutions to ensuring accurate, transparent and reliable gas and electric price indices. The discussion focused on comparing the merits of the various options which included industry solutions as well as solutions involving regulatory or self-regulatory oversight. The conference was composed of four panels: (1)Third-Party Index Providers and Proposals From Other Industries; (2)Industry Consensus Building: Discussion with the industry spokespersons on points of agreement, points needing resolution, and areas of non-compromise; (3) Discussion of the Stakeholder Group’s Proposal (panelists were current index providers and exchanges); and (4) Industry Requirements for Price Discovery.

NEM spoke at the conference and commended the consensus document as very far reaching with agreement on substantive principals. NEM stressed that the consensus must be a voluntary approach. NEM stated that if this proposal becomes a regulatory mandate, rather than a voluntary protocol, it will impose heavy burdens on small entities to comply. NEM believes that light-handed regulatory guidance and oversight will produce the most efficient outcome and protect the public interest. NEM stated that there should be a safe harbor provisions for those companies that collect and supply information using the protocols. Additionally, NEM stated that a safe harbor provision could incent companies to collect and provide data and be far more efficient and less costly than an unfunded mandate on the entire industry. A NEM Analysis of the Technical Conference is available on the NEM Website. An Article on the Safe Harbor Provision is also available on the NEM Website.

FERC is convening a workshop to explore the concept of a "safe harbor" for suppliers and collectors of natural gas and electricity pricing data used in price indices.
This workshop is scheduled for, Wednesday, July 2, 2003, from 10:00 a.m. to 1:00 p.m. EDT, at the Federal Energy Regulatory Commission. The purpose of the workshop is to attempt to achieve consensus regarding the meaning and scope of such a safe harbor. For those unable to attend, teleconferencing will be available also during the workshop hours. The full text of the Notice of Workshop is available on the NEM Website.

The Commission issued a series of show cause orders in the western energy markets cases to entities that appear to have engaged in activities constituting gaming and/or anomalous market behavior in violation of CAISO and CalPX tariffs during the period January 1, 2000 to June 20, 2001, for which disgorgement of unjust profits is warranted and that may warrant other non-monetary remedies. The CAISO's Market Monitoring and Information Protocol (MMIP) defines gaming as "taking unfair advantage of the rules and procedures set forth in the PX or ISO tariffs, Protocols or Activity Rules . . . to the detriment of the efficiency of, and of consumers in, the ISO Markets." The CAISO tariff, defines anomalous market behavior as "behavior that departs significantly from the normal behavior in competitive markets that do not require continuing regulation or as behavior leading to unusual or unexplained market outcomes."

The Commission identified gaming practices under the tariff that warrant disgorgement and that do not warrant disgorgement as well as what constitutes legitimate business practices. The following gaming practices warrant disgorgement under the tariff: 1) False Import (Ricochet) - parking day-ahead or day-of California energy with a company outside of California, buying it back for a small fee and then selling it to the ISO as "imported" out-of-market power; 2) Congestion-related practice of Cutting Non-firm (Non-firm Export) - scheduling non-firm power that was not intended to be delivered or could not be delivered; 3) Congestion-related practice of Circular Scheduling (Death Star) - when a market participant schedules a counterflow in order to receive a congestion relief payment; 4) Congestion-related practice of Scheduling Counterflows on Out-of-Service Lines (Wheel Out) - when a market participant submitted a schedule across an intertie line at the ISO border known to be out of service and derated to zero capacity, thereby creating artificial Congestion; 5) Congestion-related practice of Load Shift - when a market participant underschedules load in one zone in California and overschedules load in another, resulting in an increase in congestion in the direction of the overscheduled zone; 6) Ancillary Services-related practice of Paper Trading - selling ancillary services in the day-ahead market even though the market participant does not have the required resources available to provide the ancillary services; 7) Ancillary Services-related practice of Double Selling - selling ancillary services in the day-ahead market from resources that were initially available, but later selling those same resources as energy in the hour-ahead or real-time markets; and 8) buying non-firm energy from outside California and then selling it to the ISO as firm energy.

The following gaming practices do not warrant disgorgement under the tariff: 1) the utilities' practice of underscheduling load which was a price-reducing purchasing strategy; and 2) overscheduling load (inc-ing or Fat Boy) as a counterbalance to utility underscheduling, resulting in increased reliability.

The following were identified as legitimate business practices: 1) purchasing power in the California day-ahead market at or below the price cap and then reselling of the power outside the state at a higher (uncapped) price; 2) utilizing systematic differences in the day-ahead and hour-ahead market prices for ancillary services by selling ancillary services in the day-ahead market and buying them back at a lower price in the hour-ahead market.

The Commission issued an Order to Show Cause to Enron and other entities that participated in "partnership gaming" whereby the entities jointly engaged in market manipulation schemes that had adverse impacts on market outcomes and that violated CAISO and CalPX tariffs.

FERC also adopted a market-wide screen that all bids in the CAISO and Cal PX markets above $250 per MW for the period May 1, 2000 to October 2, 2000, be considered excessive. FERC directed the Office of Market Oversight and Investigation to investigate all parties who bid in the CAISO and the Cal PX markets above the level of $250 per MW to determine whether these parties may have violated the CAISO's MMIP prohibition against anomalous market behavior.

The full texts of the Order to Show Cause on Gaming Practices, Order to Show Cause on Partnership Gaming, and Order to Ascertain Whether Certain Bids Did Not Constitute Anomalous Behavior are available on the NEM Website.

FERC issued a new rule on cash management practices. By the terms of the new rule, FERC-regulated entities must have their cash management programs in writing, and the agreements must specify the duties and responsibilities of administrators and participants; methods for calculating interest and allocating interest and expenses, and restrictions on borrowing from the programs. FERC seeks comment on the proposal to require FERC-regulated entities to file their cash management agreements with the Commission and to notify the Commission when their proprietary capital ratio drops below 30 percent of total capitalization and when it subsequently returns to or exceeds 30 percent. The full text of the Press Release is available on the NEM Website, and the Order will be posted on the NEM Website when made available electronically.

FERC revoked the electric market-based rate authority of Enron Power Marketing, Inc. and Enron Energy Services, Inc. FERC also terminated six Enron-affiliated companies' blanket gas marketing certificates. FERC's actions stem from a Staff Investigative Report released March 26, 2003, in which Staff alleged that Enron companies gamed western energy markets, severely disrupting the industry in 2000 and 2001. Acting on Staff's findings, FERC launched an enforcement proceeding, issuing a show cause order and directing the Enron companies to explain why they should be allowed to retain their broad authorization to trade in the electric and gas markets at market-based rates.

FERC's investigation has led it to find that these Enron companies disrupted the energy industry. FERC found that Enron's management routinely failed to respect the corporate boundaries of its various subsidiaries and affiliates and treated them essentially as shell corporations under a single corporate umbrella. FERC found that the Enron Power Marketers engaged in gaming in the form of inappropriate trading strategies: (1) False Import (i.e., Ricochet or Megawatt Laundering); (2) congestion-related practices such as Cutting Non-firm (i.e., Non-firm Export), Circular Scheduling (i.e., Death Star), Scheduling counter flows on out of service lines (i.e., Wheel Out), and Load Shift; (3) ancillary services-related strategies known as Paper Trading and Double Selling; and (4) Selling Non-firm Energy as Firm. FERC held that in their conduct the Enron Power Marketers engaged in behavior that undermines the functioning of the wholesale power market and our reliance on that market to ensure that rates are just and reasonable. FERC found that the behavior of the Enron Power Marketers constituted market manipulation and resulted in unjust and unreasonable rates. FERC also found that this same conduct violated the express requirements in its orders allowing the Enron Power Marketers to make sales at market-based rates that they report changes in their status. FERC also found that the Enron Gas Marketers engaged in wash trading on EOL that resulted in the manipulation of prices.

The FERC Order establishes that any energy companies that emerge from Enron's bankruptcy must apply for authorization to sell electricity or natural gas at wholesale at market-based rates. This will guarantee that Enron, or its successors, not participate in future wholesale markets at market-based rates without the Commission first scrutinizing the matter. The full text of the FERC Order Revoking Enron's Market-Based Authority and Terminating Blanket Gas Certificates is available on the NEM Website.

FERC found that evidence did not support modifying power contracts in the West. At issue were long-term contracts between the California Department of Water Resources (CDWR), the California Public Utilities Commission and the California Electricity Oversight Board and six sellers; contracts held by Nevada Power, Sierra Pacific, Southern California Water Company, and Public Utility District No. 1 Snohomish County, Washington; a complaint filed by PacifiCorp seeking to modify 12 power contracts; and a request by other utilities in a case initiated by Puget Sound Energy for refunds.

NRG/CL&P Agreement Case

In this Order involving power supplies in Connecticut, FERC concluded that, despite its bankruptcy status, NRG Energy must continue to honor its contract to supply power to Connecticut Light & Power (CL&P). FERC held that the NRG/CL&P Agreement is a fixed-rate agreement and therefore subject to the Mobile-Sierra doctrine. To abrogate its contractual obligation to provide service under the agreement NRG-PMI must demonstrate that it is contrary to the public interest. NRG-PMI must show, for example, that its contract "might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory."

Based on the record FERC is unable to determine whether NRG-PMI has public interest grounds for abrogating the NRG/CL&P Agreement. Therefore, FERC established procedures for the submission of information regarding the public interest issue. Until the Commission reaches a final determination on the merits of the "public interest" issue, FERC required NRG-PMI to comply with the rates, terms, and conditions of the NRG/CL&P Agreement including providing service to CL&P, pursuant to the agreement, until that time.

Additionally, FERC set for hearing the issue of which party is responsible for SMD-related congestion and losses. The full text of the Order on the NRG/CL&P Agreement is available on the NEM Website.

Puget Sound and Refunds in Pacific Northwest Case

FERC granted rehearing of a December 2000 denial of a complaint filed by Puget Sound Energy and said that relief sought by Puget has already been provided by a June 2001 Order that prescribed price mitigation in the electricity spot markets throughout the West.

As for retroactive refunds for spot market bilateral sales in the Northwest, requested by other complainants, the Commission said they were not warranted. In denying refunds, the Commission said it agreed with the state commissions. The Commission's lack of jurisdiction over so many of the sellers in the Pacific Northwest would lead to an inequitable outcome if retroactive refunds were ordered. Additionally, FERC held that refunds would unfairly reward those that relied on the spot market and purchasers in the Pacific Northwest had numerous options in developing a portfolio of power supply and for years have been free to enter into short, medium, and long-term contracts to achieve a hedged and balanced portfolio. FERC held that based on the totality of the circumstances it concludes that, even if prices were unjust and unreasonable, the directing of refunds in this proceeding would not result in an equitable resolution of the matter therefore it will not require refunds and terminates this matter without further proceedings. The full text of the Order for Refunds in the Pacific Northwest is available on the NEM Website. The other FERC Orders will be available on the NEM Website as soon as they are available in electronic form.