Message-ID: <29574501.1075840877671.JavaMail.evans@thyme> Date: Tue, 13 Mar 2001 18:48:00 -0800 (PST) From: kevin.presto@enron.com To: louise.kitchen@enron.com Subject: Macro Questions Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Kevin M Presto X-To: Louise Kitchen X-cc: X-bcc: X-Folder: \ExMerge - Kitchen, Louise\'Americas\Mrha\OOC X-Origin: KITCHEN-L X-FileName: louise kitchen 2-7-02.pst I hope this gets Mark what he needs. Let me know. ---------------------- Forwarded by Kevin M Presto/HOU/ECT on 03/13/2001 03:45 PM --------------------------- George Hopley 03/13/2001 03:40 PM To: Kevin M Presto/HOU/ECT@ECT cc: Subject: Macro Questions Is the country facing sustained tight markets?: In general, capacity margins have been falling over the last few years as utilities have refraind from building baseload capacity, and others have focused on developing primarily peaking capacity. The last large building boom of coal plants ended in early 1970's and nuclear boom dropped sharply after Three Mile Island incident in 1979. During 1990's, projected capacity margins have fallen from the 15 - 20 % toward 10% and below. Outside of the California situation, NYC also poses a potential risk for this summer. If general, however, by 2002 - 2003, the amount of capacity proposed in each region more than covers normal load growth for meeting peak hour demand. Remaining question relates to performance of existing coal and nuclear stacks, also what happens during periods of persistent drought. Will voaltility and prices remain high or lessen?: To the extent that more capacity becomes merchant oriented focusing in marginal cost economics, and transmission congestion persists, increased volatility will continue, especially in ISO/pool type environments. Prices will reflect primary fuel dynamics, especially the interplay between gas and oil. The case for lower prices will reflect an overbuild scenario beyond this year, coupled with slowing economic activity and low incidence of extreme weather events. How fast can generation be added and what returns should be expected? The variability in development of greenfield capacity depends on time to permit at state or local levels. Construction time is fairly constant. In general 18 months is reasonable time frame from concept to first fire. To the extent that power plants are project financed with minimum 30 equity, returns should be consistent with other comparable project financed opportunities available to fund managers. We do not expect any more fully debt financed facilities in the near term. Can companies make major profits owning generation long term? Above average returns over time will reflect superior plant management skills and effective use of strategic market information. Portfolio approach will aid in this case. If an oversupply situation occurs in the 2003-05 timeframe, significantly lower returns on capital could materialize. Is this the time to sell generation? Because of recent market events in west, capacity has higher than historically observed values. Depending on overbuild scenario this may be an attractive time to sell capacity to those still in queue or hoping to build in near term. Recent pool experience shows that capacity owners still have significant market power How will supply demand balance change in various regions of country? Weather normalized demand growth fairly consistent at 2 - 3 % on average overtime. Future dynamics depend on economic growth, which suggests more load on coastal and in tech-concentrated areas. Short-term demand reflects weather dynamics (year 2000 a non-event for Eastern interconnect, opposite in the West!). Aggressive capacity growth suggested in NEPOOL, ERCOT, ECAR, MAIN and SPP over next two years. Will natural gas continue to capture all the growth? Virtually all capacity due on line is gas fired, however, incremental supply growth could come from investments in existing coal and nuclear stack, which can be more economic. Marketing? Growth business will appear as more interaction solicited from enduser, and rates can become more dynamic. Too late for new entrants? Most states still do not have switching of energy service providers, so still time to enter. Barriers to entry include capabilities in brand management, retail marketing, effective integration of risk management and billing ability. Will only handful of customers be big winners? To the extent economies of scale and aggregation opportunities exist, there will be success to larger players but not to exclusion of niche player existance. How diffentiated are the strategies? To date marketing is focused on lower rates and giving an alternative to existing service provider. This will have to develop beyond that. How significant is the retail opp? In markets where retail rates are high, order of magnitude limited to 10's of dollars/mwh. However gives opportunity to trade around, similar to supply asset.