Message-ID: <23916922.1075862099510.JavaMail.evans@thyme> Date: Tue, 25 Sep 2001 05:46:27 -0700 (PDT) From: mary.schoen@enron.com To: trevor.woods@enron.com, e.taylor@enron.com, jason.kaniss@enron.com, rika.imai@enron.com, scott.affelt@enron.com, vince.middleton@enron.com Subject: A contrarian's view of the NOx markets Cc: lisa.jacobson@enron.com, gus.eghneim@enron.com, marc.phillips@enron.com, stacey.bolton@enron.com, jeff.keeler@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: lisa.jacobson@enron.com, gus.eghneim@enron.com, marc.phillips@enron.com, stacey.bolton@enron.com, jeff.keeler@enron.com X-From: Schoen, Mary X-To: Woods, Trevor , Taylor, Michael E , Kaniss, Jason , Imai, Rika , Affelt, Scott , Middleton, Vince X-cc: Jacobson, Lisa , Eghneim, Gus , Phillips, Marc , Bolton, Stacey , Keeler, Jeff X-bcc: X-Folder: \MTAYLOR5 (Non-Privileged)\Taylor, Michael E\Inbox\mary schoen X-Origin: Taylor-M X-FileName: MTAYLOR5 (Non-Privileged).pst I recently sent out an e-mail that discussed the potential affects on the NOx markets due to the delayed implementation of the Section 126 rules. Joel Bluestein of Energy and Environmental Associates has heard a contrarian view of what might happen to OTC NOx prices floating around in the market. I thought it important to pass along. Please let me know your thoughts, and if there is some further analysis we might work on to clarify any of these arguments. Buyer Beware. This contrarian view is based on the current future value of 2004 and 2005 SIP call allowances. These future allowances are currently going for $5000 to $6000 in the market. If this is an accurate value, then OTC sources should save their 2003 allowances to sell them in 2004. It also means that current vintage allowances, moved into the next phase would also have a much higher value, even after being prorated through the compliance supplement pools. If '04s are really worth $5000, then after a 3:1 discount in the compliance supplement pool, current vintages would be worth $1670 or three times their current value. The other thing is that the Phase II vintages are flow controlled, but once they are moved into Phase III, they will not be flow controlled, at least initially. So the strategy for this year and next under this view would be: - use all of the ''99 vintages, since they will expire. - use the current year vintages this year and next - save the flow controlled vintages to transfer into Phase III, - conserve allowances in 2003 and use them all in 2004. The value of all of these allowances would then be keyed to the expected 2004 price - significantly above the current market. All of this hinges, however, on the validity of the 2004 price expectation. If the market follows past history, the 2004 price could be much lower by the time 2004 actually rolls around. If that happens, the banked allowances could have little value and the strategy may have been a poor choice. One has to take two views of this perspective. - A power plant operator with compliance obligations in 2004 is more concerned with the actual outcome in 2004. If the 2004 price is actually lower, it changes their choices not only for allowances but for compliance technology. (but can they wait to make their compliance decision?) - For the traders, it is more an issue of forecasting where the market will be. It's possible that this alternative view will start to prop up the market in the next year despite the continuing surplus of allowances. This will depend on continuing expectations in the market.