Message-ID: <19818577.1075846347588.JavaMail.evans@thyme> Date: Fri, 27 Oct 2000 08:40:00 -0700 (PDT) From: tim.belden@enron.com To: john.lavorato/corp/enron@enron.com, dave.delainey@enron.com, mike.swerzbin@enron.com, robert.badeer@enron.com, sean.crandall@enron.com, tim.belden@enron.com, jeff.richter@enron.com, diana.scholtes@enron.com, tom.alonso@enron.com, mark.fischer@enron.com, john.forney@enron.com, paul.choi@enron.com, john.malowney@enron.com, holli.krebs@enron.com, greg.wolfe@enron.com, chris.foster@enron.com, stewart.rosman@enron.com, kim.ward@enron.com, debra.davidson@enron.com, tim.belden@enron.com, lester.rawson@enron.com, john.zufferli@enron.com, james.steffes@enron.com, mary.hain@enron.com, christopher.calger@enron.com, dave.parquet@enron.com, phillip.allen@enron.com, vladimir.gorny@enron.com, monica.lande@enron.com, elliot.mainzer@enron.com, tim.heizenrader@enron.com, cooper.richey@enron.com, stephen.swain@enron.com, susan.mara@enron.com, steven.kean@enron.com, mark.palmer@enron.com Subject: Price Caps Cc: debra.davidson@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: debra.davidson@enron.com X-From: Tim Belden X-To: John J Lavorato/Corp/Enron, Dave Delainey, Mike Swerzbin, Robert Badeer, Sean Crandall, Tim Belden, Jeff Richter, Diana Scholtes, Tom Alonso, Mark Fischer, John M Forney, Paul Choi, John Malowney, Holli Krebs, Greg Wolfe, Chris H Foster, Stewart Rosman, Kim Ward, Debra Davidson, Tim Belden, Lester Rawson, John Zufferli, James D Steffes, Mary Hain, Christopher F Calger, Dave Parquet, Phillip K Allen, Vladimir Gorny, Monica Lande, Elliot Mainzer, Tim Heizenrader, Cooper Richey, Stephen Swain, Susan J Mara, Steven J Kean, Mark Palmer X-cc: Debra Davidson X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Heat wave X-Origin: KEAN-S X-FileName: skean.nsf 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.