Restructuring TodayFriday February 28 2003

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Risk people reveal way to fix marketThe Committee of Chief Risk Officers(CCRO) filled 25 pages with itsrecommendations to improve thetransparency, accuracy, reliability androbustness of spot price indexes.

The group had set itself the task ofcoming up with best practices forcompanies reporting data to price surveysand for the publishers that collect the data.

Its recommendations includereassigning the role of reporting data tosurveys from the trading floors to the backroom where a company officer wouldverify that transaction data is complete andaccurate before reporting it.

CCRO wants greater detail in thosereports including the name of thecounterparty and the trading platformswhere deals are made.

Greater detail would eliminate double

counting when both parties to a deal reportit to publishers and make it easier forsurveys to verify transactions, said JeffWalker, chief risk officer (CRO) at ACESPower Marketing. Publishers would beresponsible for protecting confidential datafrom misuse and require employees whohandle it to sign confidentiality agreements.

Data protection is a serious matterand companies would have to be assuredit’s tight.

“If competitors or suppliers canfigure out where we have a large long orshort position it will affect the price wepay for fuel or power,” PSEG CROLaurie Brooks told reporters, since “itcould easily cost us hundreds of millionsof dollars if that information got out.”

Jesco von Kistowski backed “clearlydefined methodology.” He’s COO of

RWE Trading Americas.He favors one that sets standards for

what is deemed a sufficient sample size,avoiding double-counting, determining valuesin thinly traded markets and omitting dealspriced far higher or lower than the market.

CCRO want publishers to revealmethodologies and to tell how errors areresolved and what sources do if they finderrors after indexes are published.

Very important, CCRO maintained, isthat survey publishers and company’sreporting deals submit to independent audits.

The white paper and a model contract torelease counterparties from contractdisclosure provisions are at www.ccro.org.

NEMA President Craig Goodmanbacked the CCRO findings noting NEMAmembers have already adopted them andhave begun putting them into action.

Shell does landmarkGHG trade with Nuon

Shell Trading yesterday completedEurope’s first greenhouse gas trade,selling a large volume of emissionscredits to Nuon Energy Trade &Wholesale of the Netherlands.

“The trade marks the beginning ofpotentially the largest market ingovernment-devolved property rightsfor emissions for greenhouse gases,”Shell predicted.

The European Parliament hasvoted to cap carbon dioxide and openthe world’s first internationalgreenhouse gases trading system in2005.

Shell and Nuon have power plantsthat would be subject to the emissioncaps.

At the start of the Europeanmarket, each power plant or industrialsite is to be allocated credits based onits capped emissions limit.

At the end of each year, plants willface a fine if they don’t own credits atleast equal to their cap.

Plants with emissions below theircaps can sell credits while plantsexceeding their limits must buy.

It’s Suedeen or nothing, say DemocratsDemocrats on the Senate Energy &Natural Resources Committee will blockpermanently confirmation of Joe Kelliheras a FERC commissioner but not untilthe White House names former NewMexico regulator Suedeen Kelly to aseat now open.

“We’d like to get Joe confirmed butwe’ve dug in our heels” insisting thatKelly fill the vacant non-Republicanseat, an aide to Sen Jeff Bingman, D-NM, said.

“Until the White House moves to fillthat Democratic vacancy on FERC, it’san open question how quickly JoeKelliher’s nomination is going toadvance,” Bill Wicker, the aide, added.

Wicker insisted that there’s nothingabout Kelliher’s record prompting thedelay and pointed out that Bingamanthinks Kelliher “is a fine fellow that willmake a very strong commissioner.”

“God bless him, we love him,”Wicker maintained.

Bingaman has long championedKelly and got former Senate MajorityLeader Tom Daschle in May to writePresident Bush proposing she get thenod (RT, 5/29).

“It’s very important that the West berepresented on this importantcommission and I think Kelly would

bring valuable experience and perspectiveto the work of this panel,” Bingaman saidat the time.

Bingman’s insistence on Kelly appearsto diminish the chances for Marsha Smithof the Idaho commission to ascend toFERC.

“Suedeen’s our candidate,” Wickersaid.

Kelly is former chairwoman of theNew Mexico PUC (1984-1986) who isnow a law professor at the University ofNew Mexico.

Bingaman is aware of CommissionerWilliam Massey’s “keen interest” in a thirdterm, Wicker said, but “our focus is onSuedeen and getting that unstuck.”

Massey has gotten some quiet supportfrom Sens Dianne Feinstein, D-Calif, andMaria Cantwell, D-Wash.

Massey “has served as a beacon ofintegrity at FERC,” Feinstein and Cantwellsaid in a letter sent last week to Daschle.

“At a time when FERC was anunknown regulatory body that refused totake on its statutory duty to ensure just andreasonable energy prices, Bill Massey wasthe only commissioner to listen to ourconcerns and those of our constituents,”the senators added.

“Suedeen Kelly and Joe Kelliher aresuper-glued together,” the aide added.

© Copyright 2003 GHI LLC. Violations punishable by fines of up to $100,000 per occurrence.

Restructuring Today • Friday February 28 2003 2

4 stories in 1 minute GOP congressman urges FERC take time—

On deciding refundsfrom panic period

in CaliforniaTo hasten closure to the issue, FERCshould consider delaying its decision onwhether California is owed refunds onpower contracts, Rep Doug Ose, R-Calif,said yesterday in a letter to Chairman PatWood.

California officials have until Mar 3 tosubmit evidence to FERC that powerprices spiked due to market manipulationand Wood has said the commission couldrule on the issue by the end of next month.

“I urge FERC to carefully review all thedocuments presented from the Californiaparties, even if it takes more than the threeweeks that FERC has allowed itself for thistask,” explained the chairman of thesubcommittee on Energy Policy, NaturalResources & Regulatory Affairs.

FERC settled on Jan 31 with Reliantover the company’s admission that itwithheld power from the Californiamarket for two days in June 2000, Osenoted.

“I was outraged by the tactics ofReliant traders to manipulate the

California market and cause electricityprices to artificially rise,” Ose told Wood.

Ose expressed skepticism that FERCwould “properly root out and resolve anyother cases of market manipulation” sinceit is facing a mountain of evidenceresulting from FERC’s 100-day discoveryperiod.

Californians must not feel that therewas a “rush to judgement” or “a cloudwill continue to hang over California’senergy future.”

Power plants are not being built, Oseadded, “due to the continuing refundproceedings at FERC, fallout from theEnron scandal, lack of creditworthiness atmany energy companies and an unstableregulatory environment in the state.”

“This must be a fair process so thatthe people California can move beyond therefund proceedings and concentrate onmaking the necessary reforms toCalifornia’s energy market.”

The letter advised Wood that Ose hasreintroduced the “Electric Refund FairnessAct,” eliminating the 60-day delay beforeFERC can investigate and order refundson complaints.

The bill would increase the criminalpenalties for companies found to chargeunjust and unreasonable rates from $5,000to $1 million and prison terms from twoyears to five years.

Powell tells Congress why FCC was wrongThe FCC majority handed over its statutoryauthority to state PUCs, Chairman MichaelPowell told the House Committee on Energy& Commerce Wednesday, when themajority voted 3-2 to uphold unbundling ofRBOC switches (UNE-P) last week.

“One looks in vain to find a clear,coherent or consistent federal policydriving its decision. The focus of themajority was merely on giving the states asubjective and unrestricted role indetermining the fate of the switchingelement and therefore UNE-P.”

Powell’s fellow Republican andopponent on the UNE-P vote told thecommittee that decisions on unbundlingneed to be left up to state regulators whoknow where operational and economicbarriers exist in their states.

“The barriers competitors face indeploying equipment and trying tocompete for residential customers inManhattan, Kan, are different from thebarriers faced to compete for businesscustomers in Manhattan, NY,”Commissioner Kevin Martin noted.

“I believe in limited government. Ibelieve that competition, not regulation, isthe best method of delivering the benefitsof choice, innovation and affordability to

consumers,” he added.Eliminating UNE line sharing for

broadband internet “flies in the face of theexplicit congressional goals of bringingthe American public new infrastructureinvestment and innovation and meaningfulcompetition,” Powell said in denouncingthe majority’s broadband vote.

“I do not accept the argument that theelimination of line sharing provides anaffirmative incentive for ILEC deploymentof new broadband infrastructure,” headded, because “line sharing rides on theold copper infrastructure, not the newfiber facilities” FCC wants built.

Martin reasoned that since cableoperators are “predominant” in residentialbroadband it didn’t make sense to makeincumbent phone companies unbundletheir networks and leave cable operatorsoff the hook.

Powell argued that the commission’sdecision is being called “a full employmentact for telecommunications lawyers” andultimately will harm consumers.

The telecom industry lost $2 trillion inmarket value and half a million jobs in itsrecent troubles, Powell pointed out, andthe FCC decision last week did nothing toremedy that.

Community signsbig Pa contract: RadnorTownship, Pa, wants more windenergy than anyone else via its 1.4million-kwh accord withCommunity Energy. That’s 62% ofthe township’s power over threeyears. The power is generated atthe new Mountaineer Wind EnergyCenter, largest wind farm in theEast, says Community. Slightlyhigher cost is to be matched bysavings from using better trafficlights. The new retailer is EnergyCooperative (www.theenergyco-op.com).

Ignoring gold? Utilities thataren’t marketing services to smallbusinesses are “ignoring a potentialgold mine,” Chartwell found in asurvey (www.chartwellinc.com).Utilities may think small businessesare a tough market to crack into butmore than half surveyed said they’dbuy green power from their utilityand 49% would buy telecom. Theylike using a single provider, Chartwellsaid, in The Small Business Marketfor Utility Products & Services. Noneed to add expensive service repssince most said personal contactisn’t needed.

Williams sellstravel agencies: Williams wentfurther yesterday to return to its coregas business by selling its 60 travelagencies in 15 states to Pilot TravelCenters for $189 million. Williamsstill has 29 convenience stores inAlaska on the block as part of itsplanned divestiture of its North Polerefining operations.

Caterpillar winslarge fuel cellcontract with Ohio: FuelCellEnergy and Caterpillar will get acontract with Ohio to install one ofthe nation’s first utility-scale fuelcell power plants to feed powerinto the grid, Gov Bob Taft saidtoday. It’s Ohio’s first such deal.The three-year contract will pay$100 million and is to advanceknowledge about hooking up fuelcells to the grid. The project is tobe managed by American MunicipalPower of Ohio.

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Restructuring Today • Friday February 28 2003 3

Energy Atlantic exits northern MaineEnergy Atlantic’s decision to stop activelymarketing to customers in its regulatedparent’s remote patch in northern Maineleaves default supplier WPS Energy Servicesas the only marketer competing with itself.

WPS bought Maine Public Service’sgeneration when the utility was forced todivest. Energy Atlantic is the standardoffer supplier for Central Maine Power’s500,000+ customers and will shift itsfocus to retail markets in the central andsouthern parts of the state where it hasopportunities to grow and profit.

Non-shoppers in Maine are served bythe supplier that wins the SOS auction thatsets the price at retail.

SOS rates are rising modestly March1, allowing more headroom for marketers.

The modest size of the wholesalemarket in northern Maine and thedifficulty in obtaining “consistent, marketdifferentiated and competitively pricedwholesale energy” because of its isolationare fundamental reasons the marketerwon’t stay, Energy Atlantic General

Manager Cal Deschene told RT.It’s hard to be profitable and remain

competitive in such a small market,Deschene explained, unless a marketerwins “the vast majority” of the C&Icustomers.

“Retailing of electricity is very much avolumetric business,” Deschene said, andwhen you’re spending marketing dollars toattract customers it makes it hard tocompete with the standard offer.

Northern Maine is tied to the CanadianMaritimes grid — not directly to Nepool— and has little generation of its own (RT,2/19).

That isolation has piqued concern atthe Maine PUC where regulators areseeking input on how to solve the isolationproblem.

Deschene will be watching what comesout of the PUC’s inquiry and would keep anopen mind about returning to its regulatedparent’s market if conditions change.

The company is serving 230 mediumcommercial customers, four industrials

and 2,300 residential customers innorthern Maine it had sold the hard way— one-by-one — and had “minor”success offering a pure green product,Deschene told us.

The numbers seem small except thewhole market is about 35,000.

“The customers have been loyal andwe’ll miss not being able to service them,”Deschene said.

The company will continue providingenergy until its customer contracts runout.

Select starts tomorrow as Mainedefault firm: Select Energy (NortheastUtilities) begins serving tomorrow asdefault supplier for Bangor Hydro Electricand Central Maine Power large C&Is.

The marketer — one of the biggest ifnot the biggest in the Northeast — wonthe PUC auction.

It may supply the 150 mw from itsown 1,400 mw of generation or othersources. The contract is worth $30million to the company.

Calif PUC split vote starts Sempra probeDespite intense lobbying by the utility andopposition by its president, the CaliforniaPUC has voted to begin a probe intoSempra Energy’s dealings with itsmarketing subsidiaries.

Sempra located its unregulated units inthe San Diego Gas & Electric (SDG&E)and Southern California Gas (SoCal)footprints and that “raised a red flag”about potential conflicts of interest, saidchief sponsor of the probe CommissionerLoretta Lynch.

“The unregulated businesses are vastand cover billions of dollars,” Lynchadded.

The PUC’s action is an attempt to“strong arm” Sempra into renegotiating a$6.6 billion power contract signed withthe state Department of Water Resources(DWR), the company contended.

“There is nothing factual or specific inthis order, so we have to question the

political motivations behind singling usout,” the company added.

“That is absolutely inappropriate ofSempra to imply or suggest,” said PUCPresident Mike Peevey, who voted againstthe investigation.

“No one from Sacramento has madean inquiry about this matter, at least to myoffice,” Peevey added.

Consumer groups and others haveraised concerns at the PUC about Semprabusiness decisions on gas supplies, powercontracts and construction oftransmission lines, the order contended(RT, 2/13).

Newly appointed Commissioner SusanKennedy voted against the majority askingfor a “higher standard.”

“There must be some evidence, somebasis for investigating the company. Wecan’t afford to throw ratepayer dollars at aproblem we can’t even identify.”

PUC OKs DG plan to get power closer to marketThe California PUC yesterday approved aplan to encourage placing DG closer tocommercial and residential customers.

Potential benefits include reducingpeak power demand on the grid, extendingthe life of existing power distribution gear,reducing capital risk for utilities,improving service reliability anddeveloping new power technologies, thePUC staff wrote in the order.

The order covers ownership andoperation of DG and how it is to beintegrated into utility grid operations.

The PUC approved $55.4 million ofupgrades to Sempra’s San Diego Gas &Electric Co (SDG&E) grid aimed atreducing congestion in Southern Californiaand opening the way for better access forfuture power supplies from newgenerating stations in Mexico.

The grid projects will reduce powercosts to SDG&E customers, the PUCforecast, by $6 million to $14 million ayear and by $13 million to $50 million forall of the utilities served by the grid.

Texas’ new PUC facesprice-to-beat test

But it would be amazing if they don’t backthe ALJ ruling this week to pass on highergas prices to the customers of ReliantResources and TXU Energy.

When incumbent IOUs applied last fallduring the gubernatorial campaign, theagency sent the issue to an ALJ for morestudy fearing Democratic Candidate TonySanchez would use any price hike in hisnow unsuccessful campaign to discreditthe GOP and competition.

Fortuitously, Sanchez is out of thepicture.

And the PUC lost when the IOUsappealed.

When the three regulators sit downtogether March 5, they are poised to OK ahigher price to beat that reflects higherfuel costs and thus helps Texas avoid thelet’s-pretend markets in many other states.

Reliant, through its CenterPointEnergy, wants to go to 10.13¢/kwh from9.36¢, up from 8.6¢ when marketsopened last year.

TXU, through its regulated Oncor,wants a 12% rise to 9.69¢. The proposedincrease would carry Oncor 17% higherthan the 8.25¢ when markets opened.

ALJs Thomas Walston and CraigBennett, citing the sharp rise in the priceof natural gas, have recommendedapproval of the rate hikes.

Texas law lets regulated utilities twicea year ask for higher prices if fuel costs

(Continued on page 4)

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Restructuring Today • Friday February 28 2003 4

Texas’ new PUC faces (from page 3)... rise more than 4%, a threshold passedseveral times.

The PUC has only once voted down arate hike OKd by an ALJ, the PUC said.

Pat Ennis of Priority PowerManagement utilities with capped prices arelosing big time since gas prices have spiked.

Marketers without a cap can reactimmediately to fuel price changes whileadjustment for the price to beat, saidEnnis, takes time.

And the right political atmosphere.Ennis is an aggregator who finds

Texas a tough market with thin marginsand small volumes.

Little power is being sold bymarketers to residentials with IOU prices

so low, he noted.Rusty Cates, International Gas

Consulting, described the price-to-beatconcept as a “strange hybrid” in transitionto competitive markets.

A contrary view?Consumers Union, one of the

advocates that tried to abort competition inthe run up to market opening, called theprospect for higher retail prices “bad newsfor the consumer,” quoting Tim Morstad,a policy analyst.

He expects customers to continue to“subsidize” deregulation efforts. Catesworries that when gas prices fall, IOUswon’t ask for price cuts.

Lord, lord, he’s clever.

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for End-Users & Utilities3 Philadelphia Secrets of Energy Sales Success PGS Energy Training 412-279-92983 Berkeley 8th Annaul Power Conference on UCEI register online

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4-6 Houston Electric Power 2003 TradeFair Group 713-463-95954-5 San Francisco Electric Business Understanding Enerdynamics LLC 415-777-10074-6 Glenn Allen, VA NERC System Operator Certification System Operations Success 704-641-44174 Portland NGX-202 Natural Gas Industry Basics Energy Business School 713-680-25004 Portland PWR-201 Electric Power Operations Energy Business School 713-680-2500

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Power Industry6 Philadelphia Practical Applications of Structured PGS Energy Training 412-279-9298

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Values-at-risk7 Philadelphia How to Hedge Generation Assets & PGS Energy Training 412-279-9298

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Restructuring Today • Friday February 28 2003 5

March & April conference calendar continued

March Location Description Organization Contact number11-13 St Louis Basler Electric Distributed Generation Basler Electric 618-656-234113-14 Houston Gas Processing Contracts Energy Seminars 281-362-7979

& Negotiations17-18 Houston Credit Risk Management for Energy Paradigm 866-637-1092

Companies17-18 New Orleans Understanding Energy/Electricity PGS Energy Training 412-279-9298

Futures, Options & Derivatives17-18 Bethesda, MD Advanced Derivative Structuring Paradigm 866-637-109217-19 Charlotte Mastering Business Development MBDi 704-553-000017-21 Chicago Commercial & Industrial Gas Gas Technology Institute 847-768-0556

Marketing Fundamentals18-19 Newport Beach, ICEPAG 2003: International US DOE, CEC, PARCON, 949-824-1999

Calif Colloquium on Environmentally APEPPreferredAdvanced Power Generation

19 New Orleans Understanding Today’s US Electric PGS Energy Training 412-279-9298Power Industry

19 New York City Financing Wind Power Projects Infocast 818-888-444419-20 Arlington, VA Demand Response: Developing the Peak Load Management 561-575-1788

Business Case Alliance24 Orlando Managing the Risks of Climate Infocast 818-888-4444

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Our Nation’s Power Institute27-28 Washington, DC 2nd Annual Demand Response CBI 800-767-949930-4/1 New Orleans 18th Annual Platts Global Power Platts 281-477-6979

Markets31-4/1 Stamford Fuel Cells 2003 BBC Conference 203-853-4266

April Location Description Organization Contact number2-3 Denver Connecting Wholesale and Retail Electric Utility Consultants 303-770-8800

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