Questions - round 1

fyi
----- Forwarded by Harry Kingerski/NA/Enron on 04/17/2001 09:15 PM -----

Harry Kingerski
04/17/2001 09:13 PM

To: Scott Stoness/HOU/EES@EES, Tamara Johnson/HOU/EES@EES
cc: Leslie Lawner/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, (bcc:
Harry Kingerski/NA/Enron)
Subject: Questions - round 1

Can we discuss some of this on the morning call ...

1. Proposal is critically dependent on a forecast of market price. It is
asserted that the current market price is $300. This is based on a weighted
average of NYMEX futures for COB for on-peak and historical NP-15 off-peak
for Jan - Mar, extrapolated to the rest of the year.

Questions: COB prices are much closer to NP-15 than they are to SP-15 (which
are much lower, at least some of the time). In the real time price, we
average NP and SP 15. Why don't we average in something representative of
SP-15 when we calculate market price?
The effect of not doing this is to overestimate market price, and therefore
raise the threshold (87%) above where it should be. For example, if the
market price were estimated at $200, the real time price would apply starting
at 78%. Would we be agreeable to averaging in the NYMEX Palo Verde price as
a proxy for SP-15?
Better yet, would we say the market price for PG&E and SCE would be
separately calculated based on different weights for those two indices?
Do you see any value in doing the calculation separately for on and off peak
rather than averaging them together (I was already asked this at the
workshop)?

2. The formula for revenue sufficiency produces the perverse result that, as
market price goes up, the 87% threshold also goes up. In other words, if
market price were $1000, then the threshold is calculated at 97%. The entire
revenue requirement is then recovered over the last 3% of usage, and is very
vulnerable to elasticity.

Questions: Can we avoid this problem by simply saying, 87% is a reasonable
number to start with, we don't recommend changing this based on changing
market prices, and if market prices change radically in the future, we would
expect DWR to come up with a new revenue requirement and and so the $30
target would change? (This equates to saying the $30 is right on target with
DWR's current needs.)
Stated another way, there is no change to our mechanism for changing market
prices until or unless DWR comes in with another revenue requirement that
justifies moving form the $30 target. In the meantime, our method is
somewhat self-correcting in that the last 13% is subject to a floating
price. ok?

3. The utility cost in the formula is $65.

Questions: This would be specific to each utility, correct? In other words,
each utility would have its own market price (see #1) and embedded cost? The
$65 includes QFs, right; in other words, it's for everything other than the
net short?

Tamara and Scott - thanks for all the material you've been sending my way.
Helps very much.