Price Caps

As requested.
---------------------- Forwarded by John J Lavorato/Corp/Enron on 10/30/2000
12:23 PM ---------------------------

From: Tim Belden @ ECT 10/27/2000 05:40 PM

To: John J Lavorato/Corp/Enron, Dave Delainey, Mike Swerzbin/HOU/ECT@ECT,
Robert Badeer/HOU/ECT@ECT, Sean Crandall/PDX/ECT@ECT, Tim Belden/HOU/ECT@ECT,
Jeff Richter/HOU/ECT@ECT, Diana Scholtes/HOU/ECT@ECT, Tom Alonso/PDX/ECT@ECT,
Mark Fischer/PDX/ECT@ECT, John M Forney/HOU/ECT@ECT, Paul Choi/SF/ECT@ECT,
John Malowney/HOU/ECT@ECT, Holli Krebs/HOU/ECT@ECT, Greg Wolfe/HOU/ECT@ECT,
Chris H Foster/HOU/ECT@ECT, Stewart Rosman/HOU/ECT@ECT, Kim Ward/HOU/ECT@ECT,
Debra Davidson/PDX/ECT@ECT, Tim Belden/HOU/ECT@ECT, Lester
Rawson/PDX/ECT@ECT, John Zufferli/CAL/ECT@ECT, James D
Steffes/NA/Enron@Enron, Mary Hain/HOU/ECT@ECT, Christopher F
Calger/PDX/ECT@ECT, Dave Parquet, Phillip K Allen/HOU/ECT@ECT, Vladimir
Gorny/HOU/ECT@ECT, Monica Lande/PDX/ECT@ECT, Elliot Mainzer/PDX/ECT@ECT, Tim
Heizenrader/PDX/ECT@ECT, Cooper Richey, Stephen Swain/PDX/ECT@ECT, Susan J
Mara/SFO/EES@EES, Steven J Kean/NA/Enron@Enron, Mark Palmer/Corp/Enron@ENRON
cc: Debra Davidson/PDX/ECT@ECT

Subject: Price Caps

The following summarizes recent price cap events in California. I think that
I have most of it right. If there is anything wrong or missing please let me
know. Please don't share the attached spreadsheet with anyone outside of
Enron.

Regards,
Tim

New Cap Specifics
On 10/26/2000 the ISO Board passed a motion by a vote of 13-10 to implement a
new price cap methodology.
The new methodology will become effective 11/3/2000 or as soon thereafter as
can be implemented. CAISO staff has indicated that it will be difficult to
achieve that start date. They have not yet indicated what an achievable date
might be.
The new price cap methodology will remain in place until:
Comprehensive market changes have been implemented and the market has proven
to be workably competitive under a variety of load conditions.
Either FERC or the ISO board orders its removal.
Cap prices will be based on the average NYMEX L3D settlement average and the
following heat rate table:
Load Level Heat Rate 4.00 Gas Example Cap
<25 GW 10,775 $43.10
25 GW to 30 GW 14,175 $56.70
30GW to 35 GW 17,225 $68.90
35GW to 40 GW 27,225 $108.90
<40 GW $250/MWh $250/MWh
Caps will be rounded up to the nearest $5/MWh increment.
Demand bids and demand responsiveness programs are exempt from these caps.
The ISO will post the price caps for each load level at least 48 hours prior
to the beginning of each calendar month. Based on the ISO's two day-ahead
system load forecast, the ISO will post hourly caps at least 24 hours prior
to the hour of delivery.

FERC Context
FERC has delegated cap authority to the CAISO until 11/15/2000.
The ISO has asserted that they don't need FERC authority since it is a bid
cap rather than a sales cap. FERC regulates sales, not purchases, of
electricity and therefore can regulate sales prices but not purchase prices.
The ISO has filed with FERC for an extension of the price cap authority.
FERC has to rule on the filing by 11/18/2000. (Note that this is 3 days
after their authority expires)
FERC will release its proposed order on 11/1/2000 based on the results of its
206 investigation of the California wholesale power markets. We don't know
what they will find or what they will propose.
The proposed order will have a 30 day comment period, after which FERC will
likely issue a final order. FERC will be accepting oral comments on
11/9/2000 in Washington. Enron still has to determine who will provide oral
comments.
Many companies have filed at FERC advocating or opposing a litany of price
caps, cost based rates, and market redesign recommendations.
It is likely that the price caps approved by the ISO board will go into
effect. How long they will remain in effect will depend on whether FERC
extends the ISO price cap authority and whether the final order stemming from
the current 206 investigation stipulates a specific price cap policy.

Impact of Price Caps
The attached spreadsheet contains a table of likely maximum monthly prices at
different gas price levels. We think that this is the highest that markets
would clear since it assumes that each hour clears at the cap. It is hard to
say whether actual prices would clear significantly lower than the cap
because we don't know whether sellers will offer below the cap or at the
cap. The assumptions behind our analysis are detailed in the bullets below.
Take actual historical loads from 1999 and 2000.
Calculate implied price cap for each hour using actual historical load, new
price cap methodology, and a range of gas prices.
Divide historical hours into peak and off-peak buckets.
Calculate average price for each month for peak hours and off-peak hours.
For example, we have two years worth of data for the months of January
through September. Each month has approximately 400 hours. for January
through September, we took approximately 800 observations for each month (400
from each year) and calculated a simple average of all of the individual
observations.
We created a peak table and an off-peak table. The table shows the
calculated implied cap based off of the acutal loads at varying gas prices
for each month. This value represents what the month would clear at if each
hour cleared at the cap (based on historic loads). While any given hour
could be above this value, our calculation estimates the likely monthly
average cap value!
The blue shading indicates what the caps would be given current (10/27/2000
NYMEX) forward prices. The yellow shading indicates those forward power
prices which are in excess of the proposed cap.