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July 25, 2003
NEM Upcoming Meetings and Conferences

NEM's Fall 2003 Leadership Roundtable will be held October 7-8, 2003. Centrica has generously offered to host the meeting at the fabulous Queen’s Landing Inn and Conference Resort at Niagara-on-the-Lake in Ontario. The NEM rate will only be available through August 18, 2003. Please reserve your room early at (905) 468-2195.

The easiest way to arrive is to fly into Buffalo and drive across the border. However, there is shuttle service available at the Toronto Airport. Given the size, diverse expertise and desire of the group to develop detailed advocacy positions there will be break out sessions for (1) Wholesale, Trading, Credit, Clearing, Price Reporting/Manipulation issues, (2) Retail, National Consumer Education, and PR issues, (3) Technology Standards and Implementation issues. Detailed agendas for each policy team will be available on the NEM Website shortly. All members and selected prospective members are encouraged to attend.

A block of rooms will be reserved for October 6-7, 2003, at the rate of $265/night (Canadian). Registration Information is available on the NEM Website.

The Winter Executive Committee Policy and Planning Meeting is scheduled for January 20th and 21st, 2004, at the Woodlands Inn and Conference Center, in Houston, Texas. Registration Information is available on the NEM Website.

Please also mark your calendars for March 31 and April 1, 2004, for NEM's Annual Membership Meeting and National Restructuring Conference. It will be held in Washington, DC at the Capitol Hyatt. Chairman Wood, NARUC President-elect Wise and a number of other important speakers have already confirmed. If you wish to be listed as a sponsor of this event, please contact headquarters ASAP as advertisements will be coming out shortly. Registration Information is available on the NEM Website.

NEM Wholesale Conference Call

NEM will convene a conference call on July 29, 2003, at 12 PM EST to discuss NEM's comments on FERC's Gas and Electric NOPRs to devise and implement market manipulation rules. The call-in number is 703-788-0600, and the passcode is 209353. An Agenda for the call is available on the NEM Website.

NEM Retail Issues Conference Call

NEM will convene a retail issues conference call on July 30, 2003, at 12PM EST. Subjects for discussion will include 2 recent Ohio issues (CG&E's Proposal for a monthly GCR and FirstEnergy's application to decrease its shopping credits) and New York's HEFPA rules and Renewable Portfolio Standards. The call-in number is 703-788-0600, and the passcode is 209353. An Agenda for the call is available on the NEM Website.

NEM Technology Standards Conference Call

NEM will convene a conference call on July 31, 2003, at 12 PM EST to discuss policy goals, current issues, and next steps for the Technology Standards and Policy Development Team. The call-in number is 703-788-0600, and the passcode is 209353. An Agenda for this meeting is available on the NEM Website.

June/July 2003 Issue of Retail Energy Foresight

The June/July 2003 issue of Retail Energy Foresight contains an interview with NEM and two NEM National Policy Chairs, Phil O'Connor, Vice President of Constellation NewEnergy and Bill Kinneary, President of Total Gas & Electric. The interviews address the key features of a retailer-friendly restructured market: (1) market based utility pricing; (2) unbundled utility bills; (3) payment allocation from single bills; and (4) long-term certainty on stranded costs. The experts agreed that an important part of any strategy to achieve the above objectives should include a plan to get the utilities to realize that it is in their own best interests to make retail competition work. The issue also covered switching trends in different states. The full text of the June/July 2003 Issue of Retail Energy Foresight is available on the NEM Website. Many thanks to Retail Energy Foresight for generously allowing NEM to provide copies of this issue.

Restructuring Today Articles on NEM's Positions in NY and Ohio

Restructuring Today featured articles on NEM's positions in Ohio and New York on key issues facing the industry.

The Article on Ohio discussed NEM's speech at a Gas Association meeting in Ohio. At the meeting, NEM stated that marketers cannot succeed in Ohio without being allowed to bring competitive prices down to the lowest income customers. NEM stated that Ohio should create incentives to reward utilities for helping to promote migration and educating customers about energy choices. The full text of the Ohio Article.

A Restructuring Today article discussed NEM's comments on the New York Commission's proposal to implement hourly energy pricing. The article discussed NEM's position that marketers should not be required to offer hourly pricing, but that requiring utilities to do so for certain customer classes would send better price signals, encourage demand response and encourage customer switching to marketer fixed price offerings. The full text of the Hourly Pricing Article is available on the NEM Website.

Restructuring Today also had an article about NEM's speech at the New York State Bar Associations Committee on Public Utility Law. Among other important topics, NEM spoke about its position on HEFPA. The article discussed NEM's positions that: (1) ESCOs should never be treated or defined as utilities and (2) utilities should be required to buy ESCO' receivables to avoid duplicating existing infrastructure investments already made by utilities to implement HEFPA protections. The full text of the NY Speech Article is available on the NEM Website.

Debate Will Resume on Energy Bill

Debate on the Energy Bill will resume July 28, 2003. Currently, there are 391 proposed amendments to the bill. Amendments include a climate change section, a renewable portfolio standard, and hydro licensing issues. Additionally, Energy Committee Chair, Pete Domenici is reportedly attempting to rewrite the Electricity Title.

Senate Minority Leader Tom Daschle and Minority Whip Harry Reid called on the GOP leadership to bring the energy bill to the floor late this week rather than early next. Senate Majority Leader Bill Frist is still attempting to get a unanimous consent (UC) agreement on energy amendments before going to the floor, fearing an open-ended debate would extend well into the recess and endanger the bill's success. Democrats yesterday continued to resist a UC deal, leaving the amendment picture unclear. In a floor statement, Frist again urged Democrats to accept a proposal to file all amendments with the Senate clerk by today in preparation for debate the week of July 28. Though Republicans will go back to the floor with the energy bill with or without the agreement, aides acknowledged the UC will greatly expedite the debate and help Frist manage floor time. The Bill, as introduced in the Senate, is available on line.

House Passed FY 2004 Energy and Water Appropriations Bill

The House, by a vote of 251-153, passed the FY 2004 Energy and Water Appropriations bill. The Chairman's mark provides a total of $27.1 billion in new discretionary spending authority for the U.S. Army Corps of Engineers-Civil, the Department of Interior including the Bureau of Reclamation, the Department of Energy, and several Independent Agencies. The recommendation of $22 billion for the Department of Energy is $147 million under the President's request and $1.2 billion above fiscal year 2003. The chairman's mark includes: (1) $330 million for renewable energy programs; (2) $268 million for nuclear energy programs; (3) $3.48 billion for DOE science programs; (4) $765 million for nuclear waste disposal; (5) $207.3 million for the Power Marketing Administrations. Reimbursable purchase power and wheeling activities are maintained at the fiscal year 2003 levels; (6) $8.5 billion for the National Nuclear Security Administration (NNSA), which includes the nuclear weapons program, defense nuclear nonproliferation, naval reactors and the office of the administrator; and (7) $7.6 billion for DOE environmental management cleanup activities. The full text of the version of the Bill that was sent to the Senate is available on line.

FERC Adopts Consensus Reporting Guidelines and NEM's Safe Harbor Provision

FERC and the CFTC issued a Joint Statement to make it absolutely clear that neither Commission has or will bring false-reporting cases against energy market participants where the false report is inadvertent or based solely on human error. Separately, FERC also issued a policy statement on price formation which creates a rebuttable presumption (safe harbor) that market participants, by adhering to specified standards, are acting in good faith and will not be subject to investigation or administrative penalties for inadvertent errors.

FERC called on price index developers to adopt standards for the creation and publication of any energy price index. Among other criteria, index developers should: (1) adopt and make available a written code of conduct that discloses how the developer will obtain, treat and maintain price data; (2) ensure that price reporting systems maximize the amount of useful and appropriate information that they collect and disseminate; (3) verify price data through various methods, including matching buys and sells and immediately contacting data providers about any discrepancies. In addition, FERC requested that the index price developers undergo periodic independent audits or verification of processes and index production; and (4) provide reasonable access to the price reports in a timely basis to the FERC and the public.

The Commission also set guidelines for price data providers. Price data providers were urged to: (1) provide a clear code of conduct for employees to follow in buying and selling natural gas and electricity and in reporting data to index developers; (2) assign trade data reporting duties to a department that is independent of and not responsible for trading. This will be expected of all companies, regardless of size; and (3) report bilateral, arms-length transactions between non-affiliated companies in the physical cash markets by the data providers to index developers in accordance with confidentiality agreements.

FERC, noting the voluntary nature of its guidelines, said, "if voluntary reporting does not increase to the point that indices are sufficiently robust to support a healthy market, or if the standards recommended by the Commission herein are not widely adopted, the Commission will consider further action." The full text of the FERC Policy Statement is available on the NEM Website.

FERC and CFTC Find No Manipulation During February Price Spike

FERC and the CFTC announced jointly that they had completed their respective investigations of trading behavior during the price spike observed in natural gas prices across the U.S. in late February 2003. Neither investigation identified evidence of market manipulation.

FERC’s Report found that the sharp price rise across the U.S. during the week of February 24, 2003, reflected relatively high short-term demand in the eastern and the mid-continental U.S. along with reduced ability to deliver natural gas from storage characteristic of the then-prevailing low storage inventories. Additional increases in price for specific eastern and mid-continent markets reflected even tighter supply demand balances due to the exhaustion of market-area storage. FERC examined records of transactions for that week subpoenaed from brokers and found no evidence of market manipulation. The Report stated that markets appeared to work effectively throughout the spike, but also stated that there are concerns about the “thinness” of some of these markets and the need to improve liquidity by attracting more traders into these markets. The full text of FERC's Report is available on the NEM Website.

The CFTC’s investigation focused on exchange-traded futures and options trading in natural gas during the week of February 24. The CFTC monitored the activities of large traders while comparing the prices of the expiring March natural gas futures contract to a host of other related prices. The CFTC found nothing in its analysis of large trader positions, prices, floor broker and trader activity, and trading tapes to suggest any manipulative activity in the natural gas futures and options market during the week of February 24, 2003.

FERC Sets New Interconnection Standards for Large Generators & Proposes Expedited Procedures for Small Generators

FERC issued an Order setting new interconnection standards for large generators and issued a NOPR on expedited procedures for small generators.

FERC issued standard procedures and a standard agreement for the interconnection of generators larger than 20 megawatts. The rule covering the larger generators requires public utilities that offer transmission services also to offer nondiscriminatory, standardized interconnection service. The rule clarifies who pays for interconnection costs when the transmission provider is not independent. The generator pays for facilities on its side of the point of interconnection. The cost of upgrades to the transmission provider's transmission system to accommodate the new generator is initially funded by the generator. The transmission provider then refunds the amounts paid by the generator during the five years following commercial operation of the generator.

The rule sets out standard large generator interconnection procedures that the transmission provider and an interconnection customer must follow throughout the interconnection process. Included in the procedures are a standard application form and procedures for studies that would be conducted to assess the proposed interconnection's effect on the transmission system. The standard large generator interconnection agreement sets out the legal rights and obligations of the parties, including cost responsibility, milestones for the project's completion, and a process for resolving disputes. The rule would apply to any new generator larger than 20 megawatts in capacity that wants to interconnect to a public utility's transmission system. The rule does not require changes to individual interconnection agreements filed with FERC prior to the effective date of the rule. The rule would apply to Independent Transmission Providers, such as RTOs and ISOs, as well as non-independent Transmission Providers. Independent Transmission Providers would be allowed more flexibility in proposing alternative interconnection policies for both pricing and non-pricing matters.

In a companion order issued today, the Commission proposed a rule that would apply to the interconnection of small generators no larger than 20 megawatts. The proposed rule should expedite the interconnection of small generators, many of which use alternative fuels such as wind and solar, and innovative technologies. The proposed standards would apply to all public utilities that own, operate, or control transmission facilities in interstate commerce. The proposed rule includes small generator interconnection procedures that the public utility transmission provider and an interconnection customer must follow throughout the interconnection process. It includes: (1) super-expedited procedures for interconnecting pre-certified generators 2 MW or less to a low voltage electric system; (2) expedited procedures for interconnecting generators between 2 and 10 MW to a low voltage electric system; and, (3) expedited procedures for interconnecting small generators to a high voltage electric system – 69 kilovolts and above – and for generators larger than 10 MW to a low voltage electric system. The proposed small generator interconnection agreement establishes the legal rights and obligations of each party, addresses cost responsibility, lays out milestones for completing the project, and sets forth a process for dispute resolution.

NEM has been urging FERC to issue Interconnection standards for some time. Comments on the proposed rule are due within 45 days of the NOPR's publication in the Federal Register. The full text of the FERC Order and FERC NOPR is available on the NEM Website. Please send comments to NEM Headquarters before August 15, 2003.

FERC Orders Through & Out Grid Fees to Be Eliminated

In July 2002, FERC issued an order accepting the Alliance Companies’ decision to join MISO, subject to certain conditions, including an investigation into regional through-and-out rates (RTORs) for service between MISO and PJM. FERC concluded that the RTORs are unjust and unreasonable and directed PJM and MISO to eliminate the RTORs from their respective tariffs. The draft order concluded that the through-and-out rates contained in the tariffs of certain Alliance Companies may also be unjust and unreasonable. The Commissioners instituted an investigation to determine whether the Alliance Companies’ through-and-out rates are just and reasonable. The Commissioners also held that transmission owners (TOs) may submit filings to recover lost revenue resulting from the elimination of the RTORs. The full text of FERC's Draft Order will be available on the NEM Website when it is available in electronic form.

Two Utilities Solicit Bids for Power Needs

Arizona Public Service (APS) and Tucson Electric Power (TEP) completed solicitations for power under the Commission's Track B proceeding. The two utilities put out for bid all power needs not met by their own generation or already under contract. Both utilities secured power supplies through 2006. APS estimated that it saved about $70 million by signing these contracts instead of buying the power on the open market. TEP estimated that it will save between $1 million and $2.5 million in power costs by signing contracts will competitive suppliers for its power needs.

NEM Submits Comments on Continuing Gas Choice Program

NEM submitted comments urging the Commission to continue, expand and make permanent implementation of Columbia's gas choice program and opposed the Motion of Columbia for early termination of the choice program. Despite Columbia's contention, customers in the Choice program have saved money. IGS, one of the marketers participating in the program stated that, "[a]s of April 2003, IGS estimates that it has provided its customers with savings in excess of $2.7 million." Without conceding that Columbia's savings analysis is correct, NEM also submitted that the value of choice programs to customers is not limited solely to savings. Rather, customers also benefit from the opportunity to choose additional value-added offerings from competitive suppliers, such as fixed rate plans or plans that guarantee a percentage savings from Columbia's rate.

NEM concluded that it would be contrary to the public interest to terminate a choice program that has achieved significant success (33% switch rate). NEM stated that, eliminating or proposing to eliminate a successful program after private capital has been invested to serve consumers in the state of Kentucky increases the risk of doing business in the state substantially, making it even more difficult to raise investment capital in the future. The full text of NEM's Comments are available on the NEM Website.

MPSC Holds Hearing on Natural Gas Prices

The Michigan Public Service Commission held a public hearing on natural gas prices. The hearing was held to increase public awareness of significant natural gas price increases that are expected next winter, to solicit comments and to discuss potential solutions.

A recent report released by the MPSC indicates that wholesale prices for natural gas, the average prices paid by the utility to purchase gas, are likely to remain in the range of $5 to $6 per thousand cubic feet (Mcf) for the remainder of the year. This is more than 30 percent higher than the average price of $3.87 per Mcf that prevailed in 2000 and 2001. Those higher wholesale prices faced by Michigan's utilities are beginning to make their way to residential customers.

MPSC Approves Settlement on Mich Con's GCR Factor

The Commission approved a settlement agreement authorizing Michigan Consolidated Gas Company (Mich Con) to implement a uniform gas cost recovery (GCR) factor of up to $5.75 per Mcf for the billing months of August 2003 through December 2003. The increase reflects recent increases in market prices that are significantly higher than forecasted by Mich Con.

The Commission anticipates that today's action will cause the monthly bill of a typical residential customer using 1,200 hundred cubic feet of gas to increase an average of $3.90 during the summer months and by an average of $13.26 during the winter months.

The agreement also requires Mich Con to seek the MPSC's approval in its 2004 GCR plan of an April 1 to March 31 GCR period and shall propose a gas supply purchasing strategy that fixes the price of 40 to 50 percent of its November 2003 through March 2004 purchase requirements. The full text of the Order approving the Settlement is available on the NEM Website.

New York
NEM Submits Petition for Rehearing in HEFPA Case

NEM submitted a Petition for Rehearing in the HEFPA case. NEM submitted that under no circumstances should ESCOs be defined or treated as utilities under the laws and regulations of the State of New York. NEM submitted that the most efficient means to continue HEFPA protections until the utilities exit the merchant function is to require utilities to offer to purchase ESCO receivables as it is done in the O&R service territory and in Ohio. Requiring utilities to offer to purchase ESCO receivables will avoid imposing
a duplication of these infrastructure costs on the nascent competitive market when migration rates are low and potential future natural gas prices are rising or uncertain. NEM submitted that it is consistent with the legislative intent and the Commission finding that it has sufficient authority to require utilities to offer to purchase receivables. The full text of NEM's Comments is available on the NEM Website.

FirstEnergy Application to Lower Shopping Credits

FirstEnergy submitted an application to reduce its shopping credits next year and in 2005. The utility requested the following shopping credit adjustments: (1) a 13% decrease for Ohio Edison (OE) residential customers and an 11% decrease for OE commercial customers; (2) a 14% decrease for Cleveland Electric Illuminating (CEI) residential customers and an 11% decrease for CEI commercial customers; (3) a 9.5% decrease for Toledo Edison residential customers and an 11% decrease for commercial customers. The requested reductions for the residential and commercial customers would bring the shopping credits below the 2001 shopping credit levels. FirstEnergy requested a 0.34% increase in shopping credits for industrial customers in all three utilities. The full text of FirstEnergy's Application is available on the NEM Website. NEM plans to intervene in this case. Interested members should contanct Headquarters immediately.

CG&E Application for Monthly GCR

CG&E requested that PUCO allow them to make the following changes to its Gas Cost Recovery (GCR) rate for a period of 12 months to take effect beginning September 1, 2003: (a) authority to make monthly adjustments to the Expected Gas Cost (EGC) Component of its GCR; (b) authority to make such monthly EGC adjustments immediately after the NYMEX settlement for the prompt month; and (c) authority to calculate the quarterly adjustments (AA, RA and BA) on the basis of projected 12-month weather-normalized sales rather than the past 12 months actual sales. The full text of CG&E's Application is available on the NEM Website. NEM plans to intervene in this case. Interested members should contanct Headquarters immediately.

Commission Adopts Metering Rules

The Commission adopted Staff's proposed rules on customer meter ownership by large commercial and industrial (C&I) customers. The new rules state that the utility will install and maintain meters owned by large C&I customers and that the utility will continue to have full access to the meter and will continue to perform testing, replacement, customer accounting, reading and data management functions. Under the rules, the utility will provide customers or their competitive service providers with read-only electronic access to the meter.

The Commission also directed Staff with the assistance of the working group to study expanded or voluntary Time-of-Use programs and new meter technologies. Staff is directed to file a report on May 1, 2004 providing the results of this investigation. The new metering rules will go into effect on January 1, 2004. The full text of the SCC Order is available on the NEM Website.

Staff Report on Dominion Virginia Power (DVP) Retail Access Pilots

Staff's Report recommended that the Commission approve DVP's three retail access pilots, however, acknowledged that it shared many of the concerns raised by parties in their comments. Therefore, the Report included Staff recommendations for each of the three pilots. The three pilots are: (i) a Municipal Aggregation Pilot, in which one or more localities may aggregate its residential and small commercial customers utilizing an opt-in method’ and one or more localities may aggregate its residential and small commercial customers utilizing an opt-out‘ method for the purpose of soliciting bids from Competitive Service Providers (CSPs) for electricity supply service; (ii) a Competitive Bid Supply Service Pilot’, in which CSPs will bid to serve blocks of residential and small commercial customers; and (iii) a Commercial and Industrial Pilot, in which CSPs can make offers to large Commercial and Industrial customers with demand equal to or greater than 500kW.

In terms of the Competitive Bid Supply Service Pilot, Staff recommended that DVP be required to notify customers of their random selection for the program and that this notification be sent out immediately following the random selection process. Staff was concerned that these randomly selected customers could possible pay more than if they had remained on capped rates. Therefore, Staff offered two potential remedies: (1) require DVP to guarantee that assigned customers will be no worse off under the pilot that under capped rates; or (2) limit participation in the pilot to volunteers. Staff's Report also stated that DVP should be the party to provide updated market prices, fuel factor, wires charge, and price-to-compare information. Additionally, Staff stated that DVP should adminiser the bidding process with oversight and final selection by Staff.

In terms of the Commerical and Industrial Pilot, Staff recommended that the proposed choice of market-based pricing models to be used in performing the proposed simulation analysis not be restricted to those used or under consideration in other jurisdictions.

Staff's Report stated that absent the three pilots, it appears that there would be little, if any, competitive activity in the near future in Virginia. The full text of Staff's Report is avaiable on the NEM Website.

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