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July 7, 2003
NEM Conference Call on FERC Price Indices Safe Harbor and Market Manipulation Rules

NEM will convene a conference call on July 10, 2003, at 12PM EST to discuss FERC's price indices safe harbor concept as well as FERC's proposed market manipulation rules. The call-in number is 703-788-0600, and the passcode is 209353.

NEM Retail Issues Conference Call

NEM will convene a retail issues conference call on July 15, 2003, at 11AM EST. Subjects for discussion will include the Ohio Commission's proceeding to review the gas cost recovery mechanism rules (for further details see the update item below), Columbia's gas pilot program in Kentucky, NJ Staff's meeting on retail electric rules, New York's HEFPA rules, and California direct access legislation. The call-in number is 703-788-0600, and the passcode is 209353.

NEM's Summer Executive Committee Meeting

NEM held its summer Executive Committee meeting on July 30, 2003, at Constellation NewEnergy's Chicago headquarters. Many thanks to Phil O'Connor for hosting the meeting. Nick Fulford, Senior Vice President, Business Development, Centrica and Steven Murray, President and CEO, Shell Energy Services were elected as Chair and Vice Chair of NEM's Executive Committee, respectively. Discussions included NEM's efforts to forge a cooperative and constructive relationship with PUCs and utilities across the country, FERC market manipulation rules and price indices conferences, retail market issues, and technology standards. Draft meeting minutes will be circulated, and new policy development meetings and P.R. discussions will be scheduled shortly.

NEM's fall meeting is planned for the Northeast the last week of September or the first week of October. NEM's winter meeting is planned for Houston for the third week of January. NEM's annual spring membership meeting and restructuring conference will be held March 31, 2004, and April 1, 2004, at the Capital Hyatt in Washington, D.C. Please mark these dates in your calendar.

COGA's Rocky Mountain Natural Gas Strategy Conference

Colorado Oil & Gas Association will hold its annual Rocky Mountain Natural Gas Strategy Conference on August 4-6, 2003, at downtown Denver's Colorado Convention Center. The conference will focus on the "Rocky Mountain Solution: Long-Term Energy Supply & Security," a theme that emphasizes the critical role of the gas-rich basins of the Rocky Mountains in meeting the nation's need for clean, secure domestic energy. Further information is available on the NEM Website or at

Industry Votes to Approve NERC Cyber Security Standard

The electric industry voted to approve cyber security standards to help ensure the continued reliability of North American bulk electric systems. The standards require that critical cyber assets related to the reliability operations of the bulk electric systems are identified and protected. The entity performing the reliability authority, balancing authority, interchange authority, transmission service provider, transmission operator, generator, or load-serving entity function will monitor physical access to critical cyber assets 24 hours a day, 7 days a week. The same entities will establish systems management policies and procedures for configuring and securing critical cyber assets. At a minimum, these policies and procedures shall address: (1) use of effective password management that periodically requires changing of passwords, including default passwords for newly installed equipment; (2) authorization and periodic review of computer accounts and access rights; (3) disabling of unauthorized, invalidated, expired, or unused computer accounts and physical access rights; (4) disabling of unused network services and ports; (5) secure dial-up modem connections; (6) firewall management; (7) intrusion detection processes; (8) security patch management;(9) installation and update of anti-virus software; (10) retention and review of operator logs, application logs, and intrusion detection logs; and (11)identification of vulnerabilities and responses. The standard has been posted for a 30-day notice period and will then be presented to the NERC Board for adoption. NERC will file the standards with FERC. The full text of the NERC Cyber Security Standards is available on the NEM Website.

FERC Conference and NEM Conference Call on Price Indices Safe Harbor Concept and Market Manipulation

On July 2, 2003, FERC Staff held a Conference in connection with last week's Conference on Energy Price Discovery & Indices. The Conference focused on the concept of a "safe harbor" for addressing errors made by buyers and sellers of natural gas and electricity in reporting to index publishers. NEM will convene a conference call on the legal and regulatory standards and range of a safe harbor and comments on FERC's proposed market manipulation rules on July 10, 2003, at 12PM EST. The dial-in number is 703-788-0600, and the passcode is 209353.

Some conference participants agreed that a safe harbor provision would protect small entities from the costs of mandatory price reporting while incenting companies to report on a voluntary basis. The conference participants discussed the threshold showing companies would have to demonstrate to be eligible for the safe harbor. NEM stated that a safe harbor with a rebuttable presumption of good faith is a low cost, efficient way to increase the number of companies reporting and provide regulatory certainty to voluntary reporting entities. Others discussed that if matching of counterparty information were to be utilized, it could serve to catch errors in data before incorporation into a price index and reduce the need to fix errors after the fact.

A phased implementation process for the industry was discussed whereby in phase one entities would be encouraged to report as described in the protocol in the Coalition document subject to Commission review of whether the process was working. It was mentioned that some entities are not reporting because of confidentiality clauses in master agreements and that many were not likely to modify those agreements absent some direction and guidance from FERC. FERC asked about the nature of guidance the industry needs - ranging from an informal policy statement to a formal rulemaking (possibly in phases). Most agreed that a policy statement would be preferable. The conference also discussed how to increase liquidity in the fixed price month ahead market. NEM argued that the safe harbor is the lowest cost way to encourage liquidity. It was also noted that if reporting is mandatory, it will prevent the development of a liquid fixed price market because parties will move away from that market to avoid compliance requirements. Comments on the safe harbor provision are due July 16, 2003.

FERC Issues Proposed Gas and Electric Market Manipulation Rules

FERC has issued proposed gas and electric market manipulation rules. NEM will convene a conference call on the proposed rules (in addition to the subject of a price reporting safe harbor) on July 10, 2003, at 12PM EST. The call-in number is 703-788-0600, and the passcode is 209353. FERC proposed to require that pipelines and all sellers for resale adhere to a code of conduct with respect to gas sales. The proposed rules would, "prohibit pipelines making unbundled gas sales and persons making sales for resale in interstate commerce from engaging in actions or transactions without a legitimate business purpose that manipulate or attempt to manipulate market prices, market conditions, or market rules for natural gas or that result in prices that do not reflect the legitimate forces of supply and demand." FERC would also require pipelines and blanket marketing certificate holders to: 1) provide complete, accurate and factual information if providing information to price inidices publishers and to notify FERC that it reports to such entities; and 2) to retain relevant data and information to permit reconstruction of price indices for three years. These entities would be prohibited from reporting transactions with affiliates to price indices publishers.

FERC has proposed six transactions and practices to be prohibited under sellers' market-based rate tariffs. Those found to have violated the tariffs would be subject to disgorgement of unjust profits as well as non-monetary remedies such as revocation of market-based rate authority or revision to the seller's code of conduct. The proposed rules prohibit: 1) "actions or transactions without a legitimate business purpose which manipulate or attempt to manipulate market prices, market conditions, or market rules for electric energy and/or energy products, or result in market prices for electric energy and/or electric energy products which do not reflect the legitimate forces of supply and demand, are prohibited;" and 2) sellers' to engage in false or misleading communications with FERC, market monitors, RTOs/ISOs, or similar entities. The proposed rules require that: 1) sellers operate units in compliance with market rules and regulations; 2) if a seller reports transactions to price indices publishers it must provide complete, accurate and factual information and advise FERC that it reports transactions; 3) sellers must retain data to permit "the reconstruction of the electric energy or electric energy products prices it charges or of the prices it reports for use in published price indices for a period of three years;" and 4) sellers shall not violate or collude with another party to violate its own code of conduct or Order 889 standards of conduct.

Comments on the gas NOPR are due August 6, 2003, and comments on the proposed electric market manipulation rules are due 30 days after publication in the Federal Register. The full texts of the Gas NOPR and Electric Order are available on the NEM Website.

SB 888 Drops Language on Direct Access

Senator Dunn's Bill (SB 888) to repeal California's electric industry restructuring law was heavily amended in recent days. The bill now allows customers to keep and even renew power supply contracts signed with energy merchants other than their local utility. Under the amended bill, DA customers are prohibited from switching energy service providers (ESPs) or going back and forth between DA and bundled utility service. However, at a hearing on July 2, 2003, Dunn indicated that he would further amend SB 888 to allow switching between ESPs. Without a specific date and no longer as a requirement, the bill language now says that the California PUC can "develop and submit to the legislature...a detailed proposal for implementation of a 'core/non-core' model for retail electric service..." Direct access can be -- but is not a required -- part of this submission. Additionally, SB 888 as amended now requires non-core customers to pay for energy cost obligations "on a schedule comparable" to the recovery of such costs from core customers, thus eliminating the existing cap on the DA Cost Responsibility Surcharge (CRS).

The Assembly's Committee on Utilities and Commerce, which held hearings on July 2, 2003, will vote on SB 888 on Monday, July 7, 2003. If the bill passes the Assembly committee it will move to the Assembly's Committee on Appropriations after which it could be voted on by the entire Assembly. SB 888 would then have to return to the state Senate for concurrence with Assembly amendments. The full text of SB 888 as Amended is available on the NEM Website.

General Assembly Passed a Bill to Extend Cap But Raise Prices

The General Assembly passed a bill that would extend a cap on rates, but raise prices ten percent. The Connecticut law that allowed business and residential consumers to choose a competitive electric supplier froze standard offer service prices at 10 percent below the rates set in December 1996. If the bill is signed into law it will set the standard offer at the 1996 price and hold it there until 2007.

Commission Meeting on Gas Price Volatility

The Commission will hold a public hearing to increase public awareness of significant natural gas price increases that are expected next winter, to solicit comments and to discuss potential solutions. The meeting will be held 9AM on July 22, 2003, at MPSC Lansing offices. Comments are due July 29, 2003.

New Jersey
NJBPU Staff Meeting on Electric Rules

Pursuant to NEM's request, Staff has scheduled a meeting on July 23, 2003, from 10AM to 12:30PM to discuss electric enrollment, billing, metering, EDI and other issues. Staff's intent is to use the meeting as a forum to explain the rationale when the original electric rules were developed, let parties' voice their concerns, and Staff will subsequently let the industry know what, if anything, will follow. The meeting will be held at PSE&G in Newark. Contact Fran Sundheim at PSE&G at: if you plan to attend. Staff has also provided a call-in number for the meeting as follows: dial-in 877-287-0283 and code 404552. An agenda for the meeting is forthcoming.

Utilities Submit Joint Proposal on BGS Auction

The EDCs submitted a proposal for the competitive bidding of BGS for the Post Transition Year 2 BGS competitive bid process. The proposal is as follows: (1) BGS procurement offers will be conducted through a statewide Auction Process that simultaneously seeks offers for all BGS Load in the State; (2) The Auction will seek offers for the supply of full requirements tranches of each EDCís BGS-FP Load. Tranches will be identical and uniform within each EDC and will represent a fixed percentage of the EDCís total BGS-FP Load. As one-third of the EDC load has already been procured for 24 months beyond the start of Post Transition Year 2, two-thirds of EDC load will be procured for terms starting June 1, 2004, the start of Post Transition Year 2. The majority of the EDCs propose that one-half of that requirement, or one-third of each EDCís total BGS-FP Load, will be procured for a one year term. The remaining one-half of the requirement will be procured for a period of three years. The end result of this Auction will be that beginning June 1, 2005, and each June 1 thereafter, the EDCs will have under contract one-third of their total BGS Load with a remaining contract term of one year, one-third of their total BGS Load with a remaining contract term of two years, and will need to procure one-third of their total BGS Load for a term of three years; (3) The EDCs will use a Clock Auction to procure BGS-FP supply. In a round, bidders will state how many tranches they wish to serve of a product (an EDCís BGS-FP Load for a given term) at the price in that round. The Auction ends when the amount supplied is equal to the amount the EDCs wish to procure. There will be a single clearing price for the BGS-FP Load of each EDC for a given term that will apply to all tranches for that EDC for that term. Payments to bidders for July through September will be shaped to reflect higher summer costs. Payments to bidders for the remainder of the bid period will be shaped to reflect lower winter costs; (4) A Clock Auction will also be used to procure supply for BGS-CIEP Load. Beginning August 1, 2003, the larger customers will begin to receive BGS-CIEP service; (5) For BGS-CIEP tranches, rate schedules will specify a 0.03Ę/kWh payment for the Default Supply Service Availability Charge (DSSAC), a per kW or per kWh rate for the transmission obligation, a per kWh rate for ancillary services, and a provision to pass through the hourly PJM real-time energy price. The capacity charge will be determined through the Auction clearing price. The term of the BGS-CIEP procurement will be for one year beginning June 1, 2004. The entire position will be open as of that date; (6) BGS Suppliers will be physically and/or financially responsible for the day-to-day provision of electricity to BGS customers. This full-requirements service includes the provision of capacity, energy, transmission, ancillary services and any other services as may be required by PJM. All BGS customers are free to come and go from the BGS service upon notice requirements that generally require prior notice of 20 days; (7) The terms and conditions under which the BGS Supplier will operate will be set forth in the BGS Supplier Master Agreements. Under the Agreement, the EDCs will provide billing, bill calculation and metering for all BGS customers in their service territory and Suppliers will be responsible for meeting Renewable Portfolio Standards, both those currently in force and any new ones that may be implemented during the supply period. The full text of the Joint Proposal and Proposed Auction Rules and Master Agreements are available on the NEM Website.

New York
Staff Requests Information on Implementation Costs of HEFPA

Staff has requested comments on the initial capital costs and annual costs of complying with HEFPA for small businesses (defined by state regulation as, "any business which is resident in this state, independently owned and operated, and employs less than 100 individuals"). Staff also requests comments on the economic and technical feasability of HEFPA compliance for small businesses. Comments on the job impacts of the legislation should also be submitted. Comments are due July 14, 2003.

NYPSC Extends RG&E's Full Requirements Option

The NYPSC granted RG&E's April 1, 2003, petition to extend its full requirements option through October 31, 2003, and directed RG&E to file tariffs implementing a month by month calculation of the base energy and capacity backout credits. The Commission also directed RG&E to hold conferences with interested parties to develop a revised Market-Based Backout Credit (MBBC) calculation methodology to ensure transition to a fully functioning MBBC by October 31, 2003. Additionally, at these conferences, RG&E will discuss the development of its class-specific load shapes, which the Commission stated should be completed by November 1, 2003. The full text of the Order is available on the NEM Website.

PUCO Requests Comments on GCR Rules

As urged by NEM, the Commission seeks comments and proposals for revisions to the rules on GCR that would make the GCR more reflective of recent events in the natural gas industry relating to price volatility and the growth of customer choice. This proceeding will be one of the subjects of NEM's retail issues conference call on July 15, 2003, at 11AM EST. The call-in number is 703-788-0600, and the passcode is 209353. The specific issues for which the Commission seeks comment includes: (1) Should the rules permit or require the use of weather normalized, historical sales volumes for calculation of the Expected Gas Cost (EGC), Actual Adjustment (AA), Balance Adjustment (BA) and/or Refund and Reconciliation Adjustment (RA)? (2) Currently, GCR rates are required to be filed 30 days in advance of their effective date. Should the EGC rate be allowed to be updated at or near the end of that 30-day period in order to reflect the most current market prices? (3) Should the rules allow flexibility to adjust the EGC rate and/or the adjustments other than quarterly? If so, what time periods should be permitted? (4) Should the rules by modified to require the BA to be recovered through the AA and thus recovered over a 12-month rather than 3-month period? (5) Currently, customers that switch to a marketer are responsible for the AA, BA and RA adjustments for a period of 12 months only. Choice customers that subsequently return voluntarily to GCR service resume paying those adjustments immediately upon their return. This leaves open the potential for large credits in these adjustments to artificially lower the GCR rate and induce choice customers to return to the GCR. To prevent such temporary price anomalies from distorting the market in this way, should there be a 12-month moratorium until the adjustments would apply to customers that have returned to the GCR after being with a choice supplier for at least 12 months? Comments are due August 1, 2003, and Reply Comments should be filed by August 15, 2003. The full text of the Request for Comments is available on the NEM Website.

FirstEnergy Applies for Reduction in Shopping Credit

FirstEnergy Services, on behalf of Ohio Edison Company, The Cleveland Electric Illuminating Company, and the Toledo Edison Company seeks to reduce the shopping credit incentive for each rate class commencing in 2004. Under FirstEnergy's proposal the shopping credit levels currently in place would remain intact throughout the remainder of 2003. Starting with bills reflecting 2004 usage, shopping credit levels would be reduced. The reduced shopping credits would remain in place until the end of 2005 or the end of the market development period, whichever occurs first. The full text of FirstEnergy's Application will be on the NEM Website as soon as it is available in electronic form.

Staff Submits Stranded Cost Report to Legislature

As required by the legislature, Staff has submitted a report on stranded costs summarizing the activities of a working group formed to study the issue. Staff reports that no consensus was reached on a calculation methodology. Staff offered its own recommended definitions of "stranded costs" and "just and reasonable net stranded costs." Staff defines "stranded costs" as, "a utility's net loss in economic value arising from electric generation-related costs that become unrecoverable due to restructuring and retail competition." Staff defines "just and reasonable net stranded costs" as, "a utility's net loss in economic value arising from prudently incurred, verifiable and non-mitigable electric generation-related costs that become unrecoverable due to restructuring and retail competition." Staff also said that to monitor the over- or underrecovery of just and reasonable net stranded costs you must calculate total just and reasonable net stranded costs and recoveries of stranded costs from capped rates and wires charges. Staff requested the legislaure to provide guidance as to whether the Commission should formulate a calculation methodology or whether the legislature would provide one. The full text of Staff's Report can be viewed at

Dominion Seeks to Join PJM

Dominion Virginia Power filed an application to join PJM. A state law requires Virginia utilities to file an application to join a RTO with the State Corporation Commission by July 1, 2003, but prohibits utilities from joining an RTO until July 1, 2004. Dominion said a consulting firm found that the company could save its customers $477 million over ten years by joining PJM. Dominion will operate in a separate transmission-control zone called PJM South. AEP already filed an application with the SCC and federal regulators to join PJM.

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