The devil is in the details and the truth is in the testimony. God bless Bob Bennett for sneaking this stuff into his written testimony. Hey media, how come you didn't catch this? I would say this has major story written all over it.

Can someone who knows old Bob Bennett ask him what he meant by the following statement contained in his testimony:

"For instance, the North American Electrical Reliability Commission (NERC) reports that excess electrical generation capacity will be available while short-term electricity trading will be halted to ensure that additional stresses are not added to the overall system."

Short-term electricity trading will be halted to ensure that additional stresses are not added to the overall system?

Hey Bob, have you told any of the poor saps who might be holding juice futures about this? What happens to their investments? Hosed in the name of grid stability? Yikes! When's the last time we halted trading in an entire commodity market? I'm not talking locked limit down, i'm talking frozen solid 'til the smoke clears.

Here's Bobby's entire statement:

Statement of Senator Bennett

Online Update of Electric and Gas Utilities

Wednesday, August 04, 1999

Over a year ago, when this Special Committee held its first hearing, the topic the Y2K readiness of the all-important power industry. Because quite simply, without power nothing else works. As a result, we make utilities the Committees top priority. We knew we had to focus attention on this sector to avoid the worst of Y2K scenarioscascading blackouts across North America.

Today, the Committee is taking statements from the regulators of the electric and gas utilities as well as members of these industries. The good news is that there has been remarkable progress in these utilities over the past year, and overall, these industries are well-prepared. However, lingering doubts remain about the ability of all producers, suppliers, and distributors to deal with unexpected failures. It is not enough, I contend, to report that all systems are Y2K-ready or that they will be ready by September, we must know that these sectors are planning for possible problems and how to recover from them.

Last year we were concerned that the entire electric grid would collapse or that the gas pipelines would shut down, cutting of service to millions of customers in the middle of winter. Today we are reassured that while some utilities are not 100% Y2K-ready, the situation is now more manageable. According to industry and the regulators, if Y2K were to occur today, the vast majority of Americans would experience no problems whatsoever.

Todays testimony will reveal that extensive contingency planning is occurring. For instance, the North American Electrical Reliability Commission (NERC) reports that excess electrical generation capacity will be available while short-term electricity trading will be halted to ensure that additional stresses are not added to the overall system. As the recent heat wave events has made evident, the ability of power producers to get power to customers depends heavily on demand. Winter demand is as much as 50% lower than summer peak demand, so there is a lot of extra capacity available.

There is some obvious concern about the safety of nuclear reactors and what contingency plans are in place. The Nuclear Regulatory Commission is saying that, as of July 1, 1999, 100% of the safety systems are Y2K-ready, but that some minor operational systems will be updated as late as December 1999. The proposed contingency plans include staffing two NRC monitoring centers and to have onsite inspectors with global satellite phones. Of major concern is whether these contingency plans have been sufficiently tested. To my knowledge, nuclear power plants are not planning tests to ensure that personnel are fully trained in the use of manual procedures should computer monitoring systems fail. Nonetheless, we are assured that the Nuclear Regulatory Commission is taking adequate steps in the next few months to follow up on these concerns.

The delivery of natural gas is a different story, with less coordination between production and distribution than in the electric industry. Today we have statements from the gas utilities represented by the American Gas Association (AGA), the distributors for pipelines represented by the Interstate Natural Gas Association of America (INGAA), and the Federal Energy Regulatory Commission (FERC). Industry representatives claim that they will be Y2K-ready by December 31st, and that by September 30th all but 4% will be ready. But according to a survey by the American Petroleum Institute in June, less than 25% of the industry was ready with less than 6 months remaining. There is good news in this sector however, with over 88% reporting that independent testing will be conducted. Also, it is clear that the industry is taking the problem very seriously, committing over $1 billion to remediation. Furthermore, according to industry experts, the delivery of natural gas has a strong foundation of contingency planning since they are accustomed to dealing with a variety of problems on a daily basis.

Over the next few months, we will be tracking the efforts of NERC and following up on its exception reports; monitoring the NRC on the contingency planning and remaining nuclear plant operational issues; and watching the gas industrys late surge to become Y2K-ready. We will be posting on our web site follow-up information we obtain from these and other witnesses regarding the preparedness of the utilities sectors.

We appreciate the statements from the industry and believe that the American public will be reassured that this most important sector is meeting the Y2K challenge head on. I am confident that, with some minor exceptions, the lights will be on and the gas will be there to heat our homes. However, we are fully cognizant of the fact that these exceptions wont be so minor if you are the one affected.

-- Anonymous, August 07, 1999

Answers

Thanks, Jim. NERC's "Defense In Depth" strategy in action.....

-- Anonymous, August 07, 1999

Hey media, how come you didn't catch this? I would say this has major story written all over it.

Geesh. I'm still waiting for mainstream media to notice that the inspector general of the US State Department said this, July 22:

"These assessments suggest that the global community is likely to experience varying degrees of Y2K-related failures in every sector, in every region, and at every economic level. As such, the risk of disruption will likely extend to the international trade arena, where a breakdown in any part of the global supply chain would have a serious impact on the U.S. and world economies."

As someone has put it (on the TB2000 forum, I think), "What part of every don't they understand?"

-- Anonymous, August 07, 1999

Jim,

Due to the current tone in this forum, I am gravely reluctant to get in the middle of this discussion. However, I offer this, simply, as something to consider as a reasonable possibility. Clearly, I would not presume to speak on Senator Bennetts behalf nor would I presume to interpret his remarks for you. So you may choose to dismiss the following entirely or you may choose to contact Senator Bennetts offices to get a confirmation or clarification. That choice has always been yours! If I am the one who has misinterpreted his remarks, I apologize in advance.

First of all, the text posted from Senator Bennett and referenced in your question was, I think, in the fourth paragraph and went something like:

Todays testimony will reveal that extensive contingency planning is occurring. For instance, the North American Electrical Reliability Commission (NERC) reports that excess electrical generation capacity will be available while short-term electricity trading will be halted to ensure that additional stresses are not added to the overall system.

Actually Jim, I think the reference Senator Bennett made to trading has more to do with the real-time hourly non-firm economy interchange than any market based futures trading or commodities market. Hourly interchange is purely sales or purchases of convenience executed solely for opportunistic economic reasons by the utilities. For example, if my current generation mix yields a next hour incremental production cost of $25/Mwh and I can find it cheaper off system, it is in the interest of my customers that I contact a seller and schedule a purchase for the energy I need for the next hour. This trading is often performed by an energy broker rather than the system operator. If the energy is available and their cost plus transmission costs is about $18/Mwh or less, a schedule is initiated and the energy would be ramped at the agreed upon hour. I would ramp my generation down and he would ramp his up on schedule.

It is my understanding that the halt to this type energy interchange is to be a voluntary curtailment for a period of four hours, two hours prior to and two hours after the transition (22:00 12/31/1999 to 02:00 1/1/2000). This part of the plan is listed in the NERC report on page 43 under Section 4, Contingency Planning and Preparations, item 4.7, Market Cooperation.

Hourly non-firm interchange is nothing new and is most often referred to (at least in the FRCC region) as Schedule C Interchange. Procedurally, this non-firm energy must be backed up by the buyer and is considered an interruptible schedule. By this I mean to say that a recall of this energy by the seller is fault free and affords no penalties for failure to deliver. It does not mean that customers are interrupted, it simply means that the seller, for what ever reason, cannot deliver and must pull it back. In fact, this is one of the first schedules to be curtailed during the implementation of transmission line constraints during heavy line loading.

The problem with this type of interchange is that the hourly re- dispatch of energy across control areas can sometimes result in unwanted, unexpected or unpredictable power flows. Now, this may or may not be a problem on December 31 during the rollover given the low demand and light transmission loading expected. But then again, why risk it when the benefits are minimal anyway. Personally, I see this as a prudent effort to ensure system security and I see no affect on energy futures trading at all.

Once again, this is just my opinion. : )

-- Anonymous, August 07, 1999

You've got it JT. It's not the stock market, it's power sales. Regards,

-- Anonymous, August 07, 1999

I appreciate your opinion as it seems to be an informed one. Since all we have is Bennett's statement minus his intentions, it would seem we're both speculating at best.

I am inclined to agree that Bennett is referencing the spot market, however it is very difficult, if not impossible; to cease trading in a spot market without impacting the futures market and vice versa.

Since I am an "oil" guy, my knowledge of the "juice" futures market is limited, however my guess is that they are somewhat similar in terms of pricing mechanisms. The futures market and spot markets are normally pretty close in price. If there is a serious disconnect, then the futures contract ceases to be a valid hedging instrument (which can and does happen). The extent to which these disconnects occur seriously affects the validity of the futures contract as a financial instrument. My intention in posting this was to alert one and all to that fact.

For example, if I were a mutual fund manager or a utility manager trying to hedge my exposure in late December, I would certainly find the idea that the spot market might close for a while to be most disconcerting. Especially if I already owned some futures contracts for that time period.

I apologize for my lack of knowledge regarding juice, but still find this little snippet to be quite signifigant indeed. If someone were to suddenly freeze trading of petroleum on the spot market, the effects would be hard to measure but would be apparent immediately.....me thinks the boys in the admin haven't really thought this one through completely and neither have you.

-- Anonymous, August 08, 1999

Jim,

Ok so be it. That is certainly your choice. I dont know about the boys in the admin, but I can share this. At your suggestion, I have re-read his remarks, thought this through and I am now convinced my take on this issue is dead on.

While it is true that Senator Bennett did not clarify the intent of his remarks, I am compelled to point out that the context of that particular paragraph begins by citing the subject of the paragraph as testimony relevant to contingency planning. It then goes on in the second sentence to name the specific source of the contingency plan as NERC. If what this politician meant is consistent with what he said, it leaves little doubt that the cessation of trading, whether imposed or voluntary, refers very specifically to NERCs proposed plans regarding hourly non-firm economy interchange or as it is sometimes called next hour power. Therefore, if we go to the NERC report.

In Section 4, Contingency Planning and Preparations, under item 4.7, Market Cooperation, first bullet, the paragraph reads:

Voluntary Halting of New Transactions from 22:00 December 31 to 02:00 January 1

Operating entities are requested to implement and market participants are requested to honor a voluntary halting of new hourly non-firm transactions during this four hour period. The time refers to local time of the operating entities involved in the transaction. It is anticipated that hourly non-firm transactions will be minimal during this period anyway, especially considering the large surplus of generation that is on, and therefore impacts should be minimal.

What his remarks did not address or even mention in any context was your interpretation regarding juice futures or entire commodity market. Even the term spot market as used in your response does not in any way parallel real time, next hour, non-firm electric sales by utilities. It just aint the same animal, Jim. No wonder the media didnt pick up on this, it just wasnt worth the sound bite!

-- Anonymous, August 09, 1999

I appreciate your answer Jetis and I think you're probably right on this issue. I appreciate the information and will probably sleep better having read that.

I would however still like to know what the Senator himself meant by that statement. It's rather important. The current open interest on the September electricity futures market totals some 2.6 million MW hours and over $100 million in capital committments. I think that we should clarify exactly how long that physical window will be closed. My guess is that although the original Nerc document is referencing a four hour period, this window will probably be expanded. At a bare minimum, it's something the futures market will want to take into account. The Rueters energy desk was quite interested in that statement (i emailed it to them) and they are going to place a call to Bob and his staff.

-- Anonymous, August 10, 1999

Jetis, I didn't read far enough down in your post.

You must be kidding. Not worth the sound bite? You bet your ass it's worth the sound bite. In fact it's worth an entire 60 minutes report on this and nothing but this. It's worth a freaking miniseries.

Why do you think that we haven't had any in depth reporting on Y2K? Because if we did, we'd all find out how simply sad some of these remediation programs are! The industry has done a poor job of accounting itself to say the least.

History will show that we should have all been more willing to question "authority" on Y2K.

-- Anonymous, August 10, 1999