Enron Mail

From:kevin.presto@enron.com
To:john.lavorato@enron.com
Subject:Prudency C
Cc:
Bcc:
Date:Tue, 3 Oct 2000 07:50:00 -0700 (PDT)

Now that the accrual book is fresh on your mind, I would like to propose the
following for Schedule C prudency:

1) Monetize $20 million of the 2001 accrual gas position to be utilized for
the following Schedule C prudency accounts:

$10 million against the JEA (Northern Florida) short position (170,000 MWh's
on-peak). We have mid-marketers attempting to buy energy for 01 and 02 in
FL, however, the market is extremely tight with no competitive offers. The
JEA position is covered with FPL non-firm power, therefore, we are exposed to
on-peak price volatility due to FPL economic curtailment during load
management periods.
$3 million against the VEPCO market-based call option with a look back audit
on pricing. This deal is an absolute pain in the ass because we are forced
to quote a price to VEPCO that is representative of an actual transaction at
reasonable prices with a rationale counterparty in the SE market. They can
call on the MW daily, weekly, or monthly. We can lose as much as $2-3
million/yr on this BS position due to the logistical issues and look back
audit rights that VEPCO has.
$2 million against the MJMUC (inside Associated Electric Coop) 40 MW 7x24
short position in a transmission constrained market area with absolutely no
liquidity. We have this position marked against the Entergy curves, however,
physical delivery is a major issue which creates curtailment (and LD$)
uncertainty.
$5 million against the OPPD 110 MW daily shaped call (with hourly
flexibility) that is nearly impossible to hedge cleanly. OPPD is in
Southern MAPP (Nebraska) and delivery risks are significant. The total deal
is in our books at negative $25 million (10/2/00 curves) and we potentially
have an additional $5 million of exposure due to illiquid nature of MAPP,
scalar risk, and physical delivery risk.

We have several other customer deals that have hair, however, they are
generally more manageable from a physical delivery standpoint. Each of the
deals above are in illiquid markets with delivery problems and scheduling
flexibility for the counterparty that is incosistent with the current power
trading market. For these generic reasons and the specific issues outlined
above, I am recommending Schedule C prudency for the amounts indicated
above.
From my standpoint, it is prudent and appropriate to use $20 million from gas
accrual gains to finance these prudency positions.

Let me know your thoughts. Thanks.