Message-ID: <16595234.1075845530753.JavaMail.evans@thyme>
Date: Fri, 17 Mar 2000 05:58:00 -0800 (PST)
From: eric.ledain@enron.com
To: john.lavorato@enron.com
Subject: PPA auction _ TransAlta thoughts
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---------------------- Forwarded by Eric LeDain/CAL/ECT on 03/17/2000 01:57 
PM ---------------------------


Lonnie_Enns@transalta.com on 03/16/2000 07:06:35 PM
To: Eric LeDain/CAL/ECT@ECT
cc:  
Subject: 



Eric can you please forward this note to John Lavorato, I was speaking with
him this morning and I just wanted to pass my thoughts on through.  I
squeezed Ken Yewell in our office for your e-mal address.  Thanks./Lonnie
(TransAlta)

 PPA's -

John, yes you are right the negative bids will not be paid out as a lump
sum (credit issues), they will be paid out on a simple flat monthly basis (
I suppose you could use this cash flow to finance a purchase of positive
bid plants,  of course you would need to incorporate the appropriate
discounting).  Even without the alternative of taking the money and
running, you can still use the purchase of a negative value plant as a call
option on the market - the premium is the 3 month penalty payment outlined
in the auction process.

The company, Charles River Associates, has helped develop this wonderful
system (Maybe that's why their stock price has dropped 30% in the past week
- actually its earnings related, but who really knows).  The auction was
also developed by a group going by the name "Auction Design Inc" I think.

With the 13 or so PPA's and with a portion being negative we should have a
very interesting auction in the first week of July.  My understanding is
that the Minister has the unilateral right to declare the auction a success
or failure even if only 50% of the plants are bid.  To date there has been
considerable thinking around the issue of what do you do if the plants
don't get auctioned off, but I haven't heard anything concrete on
solutions.  I assume that if it's close the Minister will be forced to
declare it a success politically and then try for some re-auction for the
remaining plants and throw the rest into the balancing pool - or some
hybrid of that.

In reality it should be very easy to declare the auction a success, even if
one $400 million plant gets auctioned off the balancing pool will look
positive - the rest of the plants could then be auctioned in smaller annual
bits and the balancing pool would be used to "balance" the cash flows to
the owners.  If the balancing pool becomes negative - the DOE could add a
surcharge on EAL's tariffs and if positive - could send the cash into
general revenues.

Wish you luck - and when you win one of these I will forward to you the 5
techniques for gaming a pool.

Lonnie