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October 4, 2002
NEM Executive Committee Meeting Held in Chicago on September 26, 2002

Many thanks to all of the NEM members that attended the Executive Committee in Chicago last week. Much of the meeting was devoted to debate and discussion of FERC's Standard Market Design rulemaking and formulation of NEM comments. Participants also discussed NEM's draft, "National Guidelines for Credit, Risk Management and Financial Accountability," and proper next steps. The meeting concluded with a review of important retail issues across the country.

The following topics were identified at the Executive Committee meeting for follow-up conference calls and meetings. The call-in number for these calls is 703-788-0600 and the passcode is 209353.

I. FERC's Standard Market Design:

A) Congestion Revenue Rights (CRRs) and Locational Marginal Pricing (LMP) - Call to be held October 7, 2002, at 1PM EST;

B) Transmission Pricing - Call to be held October 7, 2002, at 1PM EST (issues to be addressed simultaneously with CRR/LMP call);

C) Resource Adequacy Requirement (RAR) and Market Mitigation - Call to be held October 9, 2002, at 1PM EST; and

D) Software Standardization - Call to be held October 14, 2002, at 1PM EST.

II. NEM's Credit, Risk Management and Financial Accountability Taskforce
- Meeting and conference call to be announced

III. Retail Market Issues and Priorities:
A) Retail Issue Identification MatrixB>
- Call to be announced after receipt of member input on matrix; and

B) NEM Outreach to Utility CEOs - Call to be announced (issue will be discussed simultaneously with retail market issues).

NEM Winter Executive Committee Meeting to Be Held in San Diego on January 16 and 17, 2003

NEM's Winter Executive Committee Meeting will be held in San Diego at the Sheraton San Diego Hotel & Marina, West Tower, on January 16 and 17, 2003. This meeting will be for NEM Executive Committee Members only. As in the past, the Executive Committee will establish the policy positions and priorities for NEM for the coming year. A registration form is hotlinked here for your convenience. A block of rooms has been reserved at the rate of $189 per night. Place your reservations at 619-291-2900 or 888-625-5144. Reservations must be received by December 16, 2002, in order to guarantee the discounted rate.

All Executive Committeee Members are requested to attend. An agenda will be sent out prior to the meeting.

NEM's Annual Membership Meeting and National Restructuring Conference for 2003 - Invitation for Speakers, Sponsors and Exhibitors

Next year’s Annual Membership Meeting and National Restructuring Conference will be held April 3 and 4, 2003, at the Hyatt Regency on Capitol Hill. We have arranged for additional space to accommodate more attendees with a special room for exhibits and added sponorship opportunities. Breakfast and all breaks will be in the exhibition room that is adjacent to and visible from the general session. The Agenda is hotlinked here for your convenience. A registration form is hotlinked is hotlinked here for your convenience.

Members who wish to be speakers, sponsors or exhibitors should contact headquarters immediately. Government officials and PUC commissioners have already started to RSVP.

FERC to Convene Natural Gas Markets Conference

FERC will convene a natural gas markets conference on October 25, 2002. The purpose of the conference is to evaluate FERC's approach to natural gas regulation and assess whether it impedes supply production and investment in infrastructure necessary for long-term growth. NEM members interested in participating in the conference on behalf of NEM should contact headquarters by October 7, 2002. Specific topics to be discussed at the conference include: 1) natural gas supply issues and infrastructure required to meet demand growth; 2) removing barriers to the development of LNG facilities and supply; 3) promotion of the development of offshore supply sources in the Outer Continental Shelf; 4) flexibility of pipeline infrastructure needed to serve current and future needs; and 5) other issues raised by forum participants. The full text of the Notice of Public Conference is available on the NEM Website.

FERC to Convene Additional Standard Market Design Conferences and Partially Extend Comment Deadline

FERC will convene a series of meetings to discuss specific issues set forth in the Standard Market Design (SMD) NOPR. The schedule is as follows: 1) operating characteristics of Western bulk power markets-November 4, 2002, in Portland, Oregon; 2) pricing proposals for network upgrades and expansions-November 6, 2002, in Washington, D.C.; 3) FERC participation in NARUC convention-November 10-13, 2002, in Chicago, Illinois; 4) resource adequacy requirement-November 19, 2002, in Washington, D.C.; and 5) congestion revenue rights-December 3, 2002, in Washington, D.C.

The Commission decided to extend the comment deadline to January 10, 2003, for the following issues: 1) western interconnection market design; 2) transmission planning and pricing; 3) Regional State Advisory Committees; 4) resource adequacy requirements; and 5) congestion revenue rights. The initial comment deadline for all other issues is still November 15, 2002. The deadline for reply comments for all issues is now February 17, 2003. The full text of the Notice of Conferences and Revisions to Public Comment Schedule is available on the NEM Website.

FERC Technical Conference on Market Mitigation Measures

Staff convened a technical conference this week to examine market mitigation measures as part of the Standard Market Design NOPR. The conference consisted of five panels as discussed below.

Academics, FTC, DOJ and Others - Jade Eaton of the Department of Justice noted that her job of examining transactions for competitive effects is made markedly easier with standard market design. Eaton said the use of the HHI index is too simplistic of a metric for application to the electric industry. Eaton was also concerned that suppliers not be provided with enough information to know if they will be the marginal supplier and able to exercise market power. Kristin Domanski of Energy Security Analysis Inc. noted that NYMEX had made a failed attempt to start an electricity futures market. She urged FERC to lead the charge to get NYMEX and the ISOs to revisit the concept because futures exchanges provide critical data in assessing market liquidity. FERC Staff noted that they are exploring the concept of requiring plant managers to certify the reason for a plant outage.

Market Monitoring Units - Frank Wolak of Stanford and CAISO said guidance is needed from FERC as to what constitutes significant harm to consumers that warrants market intervention. Wolak noted that the calculation of the Lerner Index for 1998, 1999 and 2000 had been performed for California. In 1999, the average difference between the competitive benchmark price and the actual price was $4/Mwh. In 2000, the difference was $45/Mwh. Wolak also said that in California there was a significant variation in actual price from the benchmark over many hours, not just peak hours. David Patton, an independent consultant to MISO said competitive benchmarks must include all elements of marginal cost. Patton recommended pivotal supplier analysis as a valuable metric.

NYMEX, CFTC, SEC and Others - Robert Levin of NYMEX said the key to facilitating a more liquid electricity market is ensuring the commercial usability of transmission. It was noted that SEC and CFTC have adopted the approach of delegating authority to market monitors. Alton Harvey noted the success of this approach is rooted in SEC's ability to bring an action that its market monitor (self-regulatory organizations such as the exchanges) fails to bring as well as SEC's ability to bring actions against the monitor itself. He also noted that the financial exchanges need to have a reputation for honesty because the financial markets are so competitive.

Market Participant Panel - Linda Clarke of Exelon Power Team requested that FERC provide clearer definitions of economic withholding and marginal opportunity cost. Vito Stagliano of Calpine recommended that all market players - transmission owners, LSEs, generators, non-jurisdictional entities - should be monitored, not just generators. Stagliano also noted the impossibility of determining who benefits from new transmission to make the participant funding concept workable. Susan Kelly of NRECA said FERC should monitor bilateral transactions because of the strong emphasis on bilaterals in the SMD. However, many other panelists felt that bilateral contracts should not be under the authority of the MMU. John Stout noted that in order to minimize the need for the market monitor to study behavioral conduct, there must be clear rules for participants. For instance, bidding virtual load is currently permitted in NYISO and is not allowed in CAISO. Stout also said participants need certainty that once they submit a bid it won't be challenged a year later for refunds. Commissioner Massey told this panel that SMD cannot get done politically without market mitigation. Given that fact, Massey asked how the Commission can balance the mitigation measures to encourage generators to enter the market. Staff noted that FERC is building a universal market monitoring unit and has two people in the California market right now.

Consumers and State Representatives - Mark Stojic of the MIPSC recommended that the MMU should report to FERC and the regional state advisory committees. Denise Goulet of the Pennsylvania Office of Consumer Advocate said the market monitor should have access to indices on bilateral contracts, capacity markets, and related markets (gas, oil, emissions).

FERC Technical Conference on Software Standardization

FERC Staff convened a technical conference on software standardization this week. The meeting began with representatives of the Electronic Scheduling Collaborative (ESC), NAESB, NERC, EPRI and ISONE asserting that they all need to play a role in standard setting. John Canavan of ESC noted that his group would be working on OASIS Phase II for the SMD environment and would produce a market functional model, a business practice catalog, and a communications protocol. Jim Buccigross of NAESB noted the success of GISB in developing standards for the gas industry, that NAESB is ANSI-accredited, and that at the standards development subcommittee level of NAESB any entity can participate and vote whether or not a member. Robert Cummings of NERC said the group is currently focused on cybersecurity standards and a master registry of market participants. Cummings did note that vendors are not allowed to vote in NERC subcommittees at this time. Peter Hirsch of EPRI noted that they have formed a new group to examine CIM (common information model) for market extensions that would support SMD.

The second panel consisted of representatives from other industries that successfully implemented data and software standard-setting processes. The critical success factors identified by these panelists as summarized by FERC Staff include: 1) open, balanced representation; 2) everyone has a seat at the table; 3) policy is set by the appropriate jurisdictional body; 4) those in charge (regulators) have to behave that way; 5) vendors must be full participants and equal stakeholders; 6) the benefits of participation must be clear to all stakeholders; 7) there should be a governing organization that is stakeholder-reflective; 8) consensus on high level goals must be reached early on; 9) regulatory pressure is needed to ensure compliance; 10) leverage from the legacy of other industries; and 11) regulators should monitor and give guidance to workgroups to avoid major impasses.

The final panel of software vendors and RTO representatives was charged with identifying the goals, process and plan for wholesale electric market and grid software consistency. Staff questioned how this effort could be completed outside of a mechanism overseen by the ISOs/ITPs because of cost considerations and the ability of these entities to seek cost recovery. Staff also said the ISOs/ITPs would be highly motivated to work well with others to get the systems implemented and therefore they would be a good candidate for the standard-development body. A proposal was developed whereby ISOs/RTOs would function as project managers that would coordinate the work of vendors, NERC, NAESB, ISO-RTOs, and EPRI through open processes that would be used to define priorities and assign tasks to the various groups. The ISOs/RTOs would be responsible for high level project plan development.

The next steps in the process will be for Staff to prepare a summary of the conference and their recommendations (within a week or two). A memo with Staff's recommendations will then be sent to meeting attendees for feedback on an expedited time frame. The revised memo will then be sent to the Commission.

Rulemaking on Whether Natural Gas Prices are Constrained by Market Forces

The Commission has issued a NOPR that would establish rules as to, "whether the prices for natural gas paid by firm retail customers are not constrained by market forces and are significantly higher than such prices would be if they were constrained by market forces." The NOPR provides that the Commission can temporarily direct distribution utilities to serve firm retail customers. The NOPR also provides for the imposition temporary price regulations on marketers. The price regulations would be imposed on a showing that market conditions are not competitive or prices are not constrained by market forces and are significantly higher than they would be if they were constrained by market forces. The NOPR would establish a rebuttal presumption that market conditions are not competitive if three or fewer marketers serve more than 90% of firm retail customers in a specific delivery group. The NOPR provides that prices are not contrained by market forces if 2 of 4 requirements are met: 1) the Herfendahl-Hershman Index exceeds 2500; 2) an individual marketer or group of marketers has excessive market power; 3) the market lacks the structure of an industry that is likely to result in competitive pricing; or 4) tacit or overt collusion between marketers has taken place in the delivery group.

The NOPR provides that prices would be deemed significantly higher than if constrained by market forces if: 1) over the previous 12 months, the prices are more than 10% higher than such prices would be if constrained by market forces; 2) over the previous 3 months, the prices are more than 20% higher than the prices would be if they were constrained by market forces; or 3) current prices are more than 30% higher than the prices would be if they were constrained by market forces. Comments are due November 1, 2002. NEM members should send their comments to headquarters no later than October 15, 2002. The full text of the NOPR is available on the NEM Website.

Department Established Distributed Generation Collaborative Forum

DTE has ordered that a distributed generation collaborative forum be held to establish uniform interconnection standards, policies, and procedures. The utilities were directed commence the process within a week. Proposed interconnection standards are due December 16, 2002. The full text of the Order is available on the NEM Website.

Rulemaking on Wholesale Market Design Issues in ERCOT

The Commission has instituted a rulemaking proceeding on wholesale market design issues in ERCOT. An educational workshop will be held November 1, 2002, at 9:30AM in the Commissioners' Hearing Room to focus on the different options for design of the ERCOT wholesale market. The Commission requests comment on Staff's draft procedural timeline for the rulemaking and implementation of the adopted changes by October 25, 2002. The full texts of the Notice of Workshop and Draft Procedural Timeline are available on the NEM Website.

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