Subject: FW: Site Profile / Consumption Issues in our contracts
From: [email-masked]
To: [email-masked]
Date: Thu, 16 Aug 2001 11:30:47 -0700 (PDT)

-----Original Message-----
From: 	Avs, Mallik  
Sent:	Thursday, August 16, 2001 10:30 AM
To:	Stokley, Chris
Cc:	Richter, Jeff; Herndon, Rogers; Black, Don
Subject:	Site Profile / Consumption Issues in our contracts

Chris,

As a follow up of our conversation, here is a summary of contract issues. I have tried to organize my comments into three major categories: baseline, bands and material change language.

Where Contracts were prior to Site Profile Desk took control

Baseline: Not specified in contracts! A variety of mechanisms to build baseline post-contract including:
Calculating volumes on a forward basis, i.e first 12 months
Last 12 months prior to contract closing
Baseline volumes that grow by x%
Bands: Annual 90/110 bands, Aggregation at all levels (including utility, state and national etc.)
Material Change Language: Varied, unclear or vague language (at least in my opinion)

Where we are now

Baseline: Two basic mechanisms intended to bring clarity
Major Transactions (i.e. any deal not priced from Matrix): volumes explicitly specified in contract
Minor transactions: last 12 months prior to contract closing (with the understanding that Origination will collect 12 bills required for booking within days of contract closing; process details to be finalized)
Bands: Monthly 90/110 bands, Aggregation allowed within same utility-voltage-facility type groupings
Material Change Language: Unfortunately still unclear and inadequate (see below for our proposals). For example, the 

Where we want to be

Baseline:
Minor transactions: A process needs to be in place in Services Department to collect the 12 bills required for booking within days of contract closing.

Material Change Language: This area needs to be really beefed up. In my opinion, material language should catch risks that are not explicitly modeled and priced. At the moment, I don't see material change language accomplishing this. 

Issue 1: Protecting for long term shifts in consumption

The 90/110 consumption bands (which are set on monthly basis) we are offering right now are intended to provide normal weather and operating flexibility. With this assumption, we currently price consumption risk as a probabilistic process as opposed to pricing using the classic straddle approach (simultaneous call & put).  Any "step" changes in consumption, such as The Limited adding additional display area or Tyco Health Care Products, adding new production shifts violate this assumption.  I propose either (1) adding language that captures this "steps" or (2) price these steps explicitly. Given the lack of quality actual data the second alternative would be an educated guess at this point.  Recently I proposed (verbally to be fair) the following language to Jim Wood (Products-Origination).

If a "Material Change" (defined below) has occurred, EESO or Customer may request that the commodity pricing be restructured to account for such Material Change.  A "Material Change" shall be any intentional or unintentional change, including energy efficiency upgrades, to the processes or operations conducted at any of the Facilities or other similar occurrences that:

(i)	change a Facility Account's consumption of electricity or natural gas at such Facility Account by more than 10% of the Facility Account's Consumption Baseline over any six consecutive months (i.e. Facility Account's Actual Consumption divided by Facility Account's Baseline Consumption equals less than 0.9 or more than 1.1), or 

(ii)	change a Facility Account' s monthly on-peak usage ratio for electricity at such Facility Account by more than 5% of Facility Account's monthly on-peak usage ratio baseline over any six consecutive months.  The Facility Account monthly on-peak usage ratio equals the monthly on-peak Facility Account usage divided by the total monthly Facility Account usage.

Jim's immediate reaction was mixed. He felt that customers may feel that we are giving them volumetric flexibility on one hand and taking it back with the other. He said 80/120 on material change may be more palatable.

Issue 2: Sudden Load Swings in Short Term

Although, the monthly bands protect us on monthly volume swings, they are not very effective in preventing sudden un-planned short term load swings triggering imbalance penalties. Here the language currently in contracts that is supposed to protect us against this risk:

Notice of Operational Changes.  You agree to promptly advise us of any event reasonably known to you that may impact energy usage at any Account (e.g., equipment installations, outages, shutdowns, repairs, openings or closings, changes in operating hours) by an amount (without regard to weather-related effects) greater than either (i) 25% of the Actual Usage for such Account during the same Billing Cycle in the prior year or (ii) 2 MW (each an "Operational Change").  If you fail to notify us of an Operational Change, you will reimburse us for any Energy Imbalance Charges incurred by you or us as a result of such Operational Change.  

This language has at least three problems:
No compensation mechanism specified if customer does not deliver on this requirement.
Is 25% and / or 2 MW justifiable, especially given the differences in imbalance treatment across physical markets?
No clear process (i.e. minimum time frame for notice, contact information) specified for customer to deliver this notice

I would modify this language to something like:

Notice of Operational Changes.  Customer agrees to advise EESI at least two days (48 hours) in advance to the contacts listed in Schedule ____ by fax or e-mail of any event that may impact energy demand at any of its Accounts (e.g., equipment installations, outages, shutdowns, repairs, openings or closings, changes in operating hours) by an amount greater than either (i) ___ % of the Hourly Load for such Account during the same hour in the prior year or (ii) 0.5 MW of demand (each an "Operational Change").  If such Customer fails to notify EESI of an Operational Change, Customer will reimburse EESI for any Energy Imbalance Charges incurred by the Customer or EESI as a result of such Operational Change.  The mechanism for penalty calculation is specified in Schedule ____.
Hope this helps.

Mallik

---------------------- Forwarded by Mallik Avs/HOU/EES on 08/16/2001 10:11 AM ---------------------------
   
	Enron Energy Services  From:  Mike D Smith                           07/12/2001 10:47 AM	

To:	Mallik Avs/HOU/EES@EES <mailto:Avs/HOU/EES@EES>
cc:	 
Subject:	Form

Here is the master