Message-ID: <9656335.1075856589556.JavaMail.evans@thyme> Date: Fri, 5 Jan 2001 02:41:00 -0800 (PST) From: alex.huang@enron.com To: vince.kaminski@enron.com, stinson.gibner@enron.com, vasant.shanbhogue@enron.com Subject: Re: The consultant's model for Gary Hickerson's group Cc: alex.huang@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: alex.huang@enron.com X-From: Alex Huang X-To: Vince J Kaminski, Stinson Gibner, Vasant Shanbhogue X-cc: Alex Huang X-bcc: X-Folder: \Vincent_Kaminski_Jun2001_5\Notes Folders\C:\Technote\Mail\Projects X-Origin: Kaminski-V X-FileName: vkamins.nsf The model is supposed to be a real option model to capture the value of power plants of Gencos. It is to give trader a better insight as to whether the market is overvaluing/undervaluing certain Genco stocks, and trader can act accordingly. I'm still trying to find out how trader is supposed to use it. Modeling details: The model takes in all Gencos' locational power forward prices and fuel forward prices, and uses GARCH model to simulate one year daily prices, and then uses a hourly profile to convert them into hourly prices. GARCH model parameters are estimated by the consultant using and separate model and are updated twice a year, and it does not matter whether the simulation starts in January or September. Using these prices, it will determine whether a unit at a particular location will be dispatched or not depending on A) spread of power and fuel prices, and B) whether the start-up cost can be recovered during 8 operation hours. The unit can be dispatched at minimum and peak levels. Fixed O&M, SOX and NOX (I don't know what the last two stand for) are taken into consideration. With the simulated dispatch schedule, the model calculates the value that can be generated by this unit, then sums it up across all units. The final value is the average of 100 simulations. And it takes about 16 hours to run for about 200 units. After our conversation, the consultant promised to look into A) how to make the model more flexible, say, to allow a different time horizon, B) reduce spreadsheet overhead by doing calculation one unit a time and not saving all the intermediate information (as of now it saves everything on the spreadsheet). Assuming the GARCH process is modelled correctly, I believe the methodology is OK, though it does not capture most of the optionality. My concerns are: Whether the price processes are modelled correctly. I have to get more details before making any conclusion. 100 simulations are way too few. Unless we convert the algorithm to C, I don't see how spreadsheet can handle more simulations. I guess that's why they contact us. But again, if Enron's buying the model from the consulting company, why should Enron do their job for them? How trader's going to use the model output. For this I phoned Jeff (the associate who initiated all these) and am still waiting for his returning call. A related questions why the model horizon is one year. We can either Oversee the conversation, but not doing actual coding for them. Or Redo the model for them. (The problem still remains that how trader's going to use the output). But in view of the Great Wall of China separating the business units, should we do it? As of now I have a simulation model taking start-up cost, fixed O&M, rump-up delay into consideration. It simulates monthly prices (using GBM) and takes 2 minutes 40 seconds to run 10,000 simulations for one unit for ten years (120 time steps). It can use forward-forward vol and incorporate seasonality into it (I understand this is debatable). (One interesting observation is that when using forward-forward vol simulation, the standard deviation is about 0.5%, while standard deviation using forward vol is about 2%. Also, incorporating seasonality increases the value by about 1.6%). Since most of the time-cost occurs in price simulation, and we are to simulate about 20 price processes, I hope the full model (if we build it) will take a couple of hours to run for 200 units. The main task will be interfacing, i.e., getting data from data base, and outputting the results. This is where I need most help if I am to do it. Please advice the course of action. I am supposed to talk to Michelle Cisneros today. p.s. I never promised to oversee a programmer in our group (see the message below). Best, Alex ---------------------- Forwarded by Alex Huang/Corp/Enron on 01/05/2001 08:58 AM --------------------------- Jeff M Gray 01/04/2001 To: Gary.Hickerson@enron.com, Michael.W.Bradley@enron.com, Michelle.D.Cisneros@enron.com, Jaime.Gualy@enron.com cc: alex.huang@enron.com, kskinner@ftenergy.com, cseiple@ftenergy.com Subject: FW: Project timeline Ken and I worked up the following timeline and refined the trading methodology a bit this morning. We also met with Alex Huang from Vince's group, and explained the model and coding tasks. Ken and Alex have arranged to speak by phone on Monday, and meanwhile Alex is coordinating within the research group. Alex will oversee a programmer within his group, while interfacing regularly with us. 1/4 Kickoff 1/11 Complete spreadsheet, table, and database structures (RDI). 1/17 Complete software coding for the Pricemaker component of the model (RDI and Enron Research), and begin testing (Enron Research). 1/22 Complete software coding for the Dispatch portion of the model (RDI and Enron Research), and begin testing (Enron Research). 1/22 Complete financial trader "user" interface, within the Access environment (RDI). 1/22 Complete collection and delivery of unverified generating-unit data from RDI databases (RDI). Begin verification process (RDI). 1/29 Complete all charts and reports accessible from the user interface (RDI). 1/29 Complete compilation of consensus EBITDA forecasts for all operations other than merchant generation (Enron Financial Trading). 2/9 Complete code testing (Enron Research). 2/9 Deliver verified and quality-checked generating-unit data (RDI). 2/9 Complete the model, begin testing the trading methodology, and train users. 2/16 Finish training, testing, and final QC. jeff