From: tim.belden@enron.com
To: john.lavorato/corp/enron@enron.com, dave.delainey@enron.com, mike.swerzbin@enron.com, robert.badeer@enron.com, sean.crandall@enron.com, tim.belden@enron.com, jeff.richter@enron.com, diana.scholtes@enron.com, tom.alonso@enron.com, mark.fischer@enron.com, john.forney@enron.com, paul.choi@enron.com, john.malowney@enron.com, holli.krebs@enron.com, greg.wolfe@enron.com, chris.foster@enron.com, stewart.rosman@enron.com, kim.ward@enron.com, debra.davidson@enron.com, tim.belden@enron.com, lester.rawson@enron.com, john.zufferli@enron.com, james.steffes@enron.com, mary.hain@enron.com, christopher.calger@enron.com, dave.parquet@enron.com, phillip.allen@enron.com, vladimir.gorny@enron.com, monica.lande@enron.com, elliot.mainzer@enron.com, tim.heizenrader@enron.com, cooper.richey@enron.com, stephen.swain@enron.com, susan.mara@enron.com, steven.kean@enron.com, mark.palmer@enron.com
Cc: debra.davidson@enron.com
Date: 2000-10-27 15:40:00+00:00
Subject: Price Caps

The following summarizes recent price cap events in California.  I think that 
I have most of it right.  If there is anything wrong or missing please let me 
know.  Please don't share the attached spreadsheet with anyone outside of 
Enron.

Regards,
Tim

New Cap Specifics
On 10/26/2000 the ISO Board passed a motion by a vote of 13-10 to implement a 
new price cap methodology.
The new methodology will become effective 11/3/2000 or as soon thereafter as 
can be implemented.  CAISO staff has indicated that it will be difficult to 
achieve that start date.  They have not yet indicated what an achievable date 
might be.
The new price cap methodology will remain in place until:
Comprehensive market changes have been implemented and the market has proven 
to be workably competitive under a variety of load conditions.
Either FERC or the ISO board orders its removal.
Cap prices will be based on the average NYMEX L3D settlement average and the 
following heat rate table:
  Load Level  Heat Rate  4.00 Gas Example Cap
  <25 GW   10,775   $43.10
  25 GW to 30 GW 14,175   $56.70
  30GW to 35 GW  17,225   $68.90
  35GW to 40 GW  27,225   $108.90
  >40 GW   $250/MWh  $250/MWh
Caps will be rounded up to the nearest $5/MWh increment.
Demand bids and demand responsiveness programs are exempt from these caps.
The ISO will post the price caps for each load level at least 48 hours prior 
to the beginning of each calendar month.  Based on the ISO's two day-ahead 
system load forecast, the ISO will post hourly caps at least 24 hours prior 
to the hour of delivery.

FERC Context
FERC has delegated cap authority to the CAISO until 11/15/2000.
The ISO has asserted that they don't need FERC authority since it is a bid 
cap rather than a sales cap.  FERC regulates sales, not purchases, of 
electricity and therefore can regulate sales prices but not purchase prices.
The ISO has filed with FERC for an extension of the price cap authority.  
FERC has to rule on the filing by 11/18/2000.  (Note that this is 3 days 
after their authority expires)
FERC will release its proposed order on 11/1/2000 based on the results of its 
206 investigation of the California wholesale power markets.  We don't know 
what they will find or what they will propose.
The proposed order will have a 30 day comment period, after which FERC will 
likely issue a final order.  FERC will be accepting oral comments on 
11/9/2000 in Washington.  Enron still has to determine who will provide oral 
comments.
Many companies have filed at FERC advocating or opposing a litany of price 
caps, cost based rates, and market redesign recommendations.
It is likely that the price caps approved by the ISO board will go into 
effect.  How long they will remain in effect will depend on whether FERC 
extends the ISO price cap authority and whether the final order stemming from 
the current 206 investigation stipulates a specific price cap policy.

Impact of Price Caps
The attached spreadsheet contains a table of likely maximum monthly prices at 
different gas price levels.  We think that this is the highest that markets 
would clear since it assumes that each hour clears at the cap.  It is hard to 
say whether actual prices would clear significantly lower than the cap 
because we don't know whether sellers will offer below the cap or at the 
cap.  The assumptions behind our analysis are detailed in the bullets below.
Take actual historical loads from 1999 and 2000.   
Calculate implied price cap for each hour using actual historical load, new 
price cap methodology, and a range of gas prices.
Divide historical hours into peak and off-peak buckets.
Calculate average price for each month for peak hours and off-peak hours.  
For example, we have two years worth of data for the months of January 
through September.  Each month has approximately 400 hours.  for January 
through September, we took approximately 800 observations for each month (400 
from each year) and calculated a simple average of all of the individual 
observations.
We created a peak table and an off-peak table.  The table shows the 
calculated implied cap based off of the acutal loads at varying gas prices 
for each month.  This value represents what the month would clear at if each 
hour cleared at the cap (based on historic loads).  While any given hour 
could be above this value, our calculation estimates the likely monthly 
average cap value!
The blue shading indicates what the caps would be given current (10/27/2000 
NYMEX) forward prices.  The yellow shading indicates those forward power 
prices which are in excess of the proposed cap.