Subject: ACE SRAC
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked]
Date: Tue, 28 Nov 2000 05:53:00 -0800 (PST)

Mike and Frank,

Attached is a revised quote for options relating to the ACE deal.  The 
changes include actual Daily MW Production from Gray and also a hedge ratio 
of 10.522 mmbtu's/MW.  I calculated the hedge ratio 2 ways.  First I put the 
SRAC formula in excel (tying to the Aug'00 SRAC calculation from SoCal 
Edison) and I increased the price of natural gas by $1 and noted the 
difference in the SRAC power price.  That resulted in an increase in the SRAC 
of $1.0522 cents/kwh or converted to $10.522/mwh.  I also looked at a change 
in mark-to-market profit based on a hedge of 10.522 mmbtu's for every 1 MW.  
So for every 1 mwh you need to hedge 10.522 mmbtu's.  Next I took the SRAC 
formula below:

     Pn = {PBase + (PBase * (GPn - GPBase)/GPBase * Factor)} * TOU

    Where   Pn = SRAC price
     PBase = Base Enery Price $2.0808 cents/kwh (constant)
     GPn = current Socal index
     GPBase = Base Gas Price $1.3975/mmbtu (constant)
     Factor = % change in enery price affected by gas price .7067 (constant)
     TOU = time of use (i.e. Summer on peak = 1.4251)

If you look at just the piece that moves (GPn) and calculate a $1 
increase:    ($2.0808 * ($1 - $1.375)/$1.375 * .7067) = 1.0522. 

Gray had calculated the heat rate by taking the SRAC price divided by the gas 
price.  This heat rate moves depending on the level of gas (decreases with an 
increase in gas price).  This is a correct  calculation for the heat rate, 
however, to calculate the hedge delta, the above calculation should be used 
and this hedge delta stays constant no matter the level of gas price.

Please call with any questions or concerns.  My number is (713) 853-6247.  
Thanks.

John