FW: FW: Open items for MDEA

-----Original Message-----
From: Rorschach, Reagan
Sent: Thursday, May 24, 2001 12:52 PM
To: Fairley, David
Subject: RE: FW: Open items for MDEA

From: Mann, Kay
Sent: Thursday, May 24, 2001 12:13 PM
To: Rorschach, Reagan; Fairley, David; Kroll, Heather
Subject: Re: FW: Open items for MDEA

1. Need details re item 1 below. Please suggest language (band of
acceptability, etc) which I will massage and incorporate.
[Rorschach, Reagan] Heat rates for given output from each machine are
incorporated in the bogey model. We will establish these for contract
purposes in the exhibit that specs out all owned assets. Those are the rates
that we will discuss/modify each quarter.
[Fairley, David] Even though tweaking heat rates in the stack model
periodically (at least to be discussed quarterly) is subjective, MDEA would
always want to be as accurate as possible because the the inaccuracy causes
the incorrect quantity of gas to be nominated, so they underburn or overburn
for the day, which would get expensive if the extent of the inaccuracy were
very much. They wear the risk on this. Being short or long delivered gas
presents a variety of ways in which MDEA has to pay for costs to get in
balance. Therefore, any desire that they might have to improperly shift the
"bogey" to pay us $2 - 4 less per MWh, costs them more in gas imbalance costs.

6. Do I have the latest draft of Marketing/Risk policies? [Rorschach,
Reagan] Yes
[Fairley, David] Sent via e-mail 5-21, but will re-send that e-mail for
convenience.

7. Bogey calc only addresses gas. What if the fuel of choice is fuel oil?
Does the fuel cost and heat rate change?
[Rorschach, Reagan] heat rates change when switching to fuel oil. That info
is not available from MDEA. If the opportunity presents itself, we will
evaluate on a event specific basis and agree to the actual cost of
production. [Fairley, David] The rule of thumb that we will use to look
at the Stack Model when burning oil vs. gas is about a 5% improvement in
heat rate with oil. Cost per MMBtu is whatever we plug into the model,
whether gas or oil, and prices change daily and intraday anyway, so price
changes don't bother us. Since the oil is coming out of their tank, there is
no concern about gas imbalance cost, therefore agonizing very much about heat
rate modifications when using oil vs. gas is not really very practical.

Please point me to the defn of profit by cutting and pasting from wherever it
is. I did a quick search and couldn't find it, but I didn't do a page turn
to locate it.
[Fairley, David] It is in the last exhibit, MDEA EPMI Incentive Fee
Calculation, Exhibit XX, attached. I'm not sure that Section 13 and Exhibit
XX work well together. They were drafted at different times. I will send
any comments on this in the morning. (The only thing that we have changed in
this group of exhibits attached is the revised asset management services
description that was e-mailed with the Marketing Strat. and the Trad & Risk
Policy).

Thanks,

Kay

From: Reagan Rorschach/ENRON@enronXgate on 05/24/2001 11:38 AM
To: Kay Mann/Corp/Enron@Enron
cc:

Subject: FW: Open items for MDEA

-----Original Message-----
From: Fairley, David
Sent: Thursday, May 24, 2001 11:15 AM
To: Rorschach, Reagan
Subject: RE: Open items for MDEA

-----Original Message-----
From: Mann, Kay
Sent: Wednesday, May 23, 2001 5:06 PM
To: Rorschach, Reagan; Kroll, Heather; Fairley, David; May, Tom
Subject: Open items for MDEA

[Fairley, David]

Here are issues which I'm unclear about, all of which impact the drafting of
the agreement:

1. How are we setting the heat rate? Do we have the GADS (?)? Is it a daily
average, weekly average? Flat rate? Adjusted? If so, how often?
[Fairley, David]
Each utility is obligated to provide the heat rate information to use in the
appropriate Exhibit and the Stack Model. As conditions change the utilities
must update this info. We are tracking heat rates based on actual fuel
usage. Services and Orig agreed yesterday to add language that requires a
quarterly review of heat rate data to determine if the assumptions being used
are satisfactiry -- it can never be exact, but it should be accurate within a
band of acceptability. No GADS. Heat rates will be adjusted in the model as
often as necessary to account for significant changes such as hotter ambient
temps..

2. Are we comfortable that there are no permit restrictions?
[Fairley, David]
Yes, their units are too small. We have discussed this with the customer,
and with our internal air permit guys.
[Rorschach, Reagan] They have Title V permits, and they are faxing them to
us today. They have no run hour limitations on gas, however, they are
limited on oil. Will need to get that summary to Kay as soon as possible.

3. We have determined that we won't deal with fuel oil, right?
[Fairley, David]
We won't buy and sell fuel oil. We may dispatch on oil at start-up, or we
may switch to oil and sell the gas if profitable, which constitutes a Product
transaction with the resulting profit split.
[Rorschach, Reagan] We need to state that MDEA and Cities are responsible
for maintaining fuel oil supplies.

4. We aren't making money on gas, right?
[Fairley, David]
We make money on gas two ways. The first is outside the contract, and is
basicly any internal profit on re-sale of gas to the Cities. The second way
we can make money on gas is when the gas trade is in the form of a Product
trade, and those procedures apply.

5. Do we have a defn of costs that we like yet, and if so, how does it fit in
to the picture?
[Fairley, David]
Yes, will send separately.

6. Is there an up-to-date set of exhibits?
[Fairley, David]
The Marketing Strategy, the Trading and Risk Policy, and the Description of
Asset Management have been upated. The other Exhibits have not been
modified. The Marketing Strategy and Trading & Risk Policy have been
discussed at length with MDEA (MDEA commercial, not legal), and their
comments/questions incorporated.

7. It would help if theh commercial part of the team could send me the
following, in words and/or formulae:

The defn and method of establishing the bogey (target production cost)
formula can be an exhibit, which would be great for the commercial team to
work on.
[Fairley, David]
Thought we had this covered in the definitions and obligations of the
parties. Will look at it again. Conceptually, MDEA, Services Group, and
Orig are in full agreement, so we need to make sure that the contract
language is clear enough.
[Rorschach, Reagan] See attached exhibit detailing the calc with an example.

Are we determined how we should deal with imbalances (part of cost of
power)?
[Fairley, David]
There are three considerations on this: (1) who wears imbalance exposure?,
(2) who manages imbalances (hourly type activity), and (3) who pays for
imbalances? Imbalances are billed by Entergy directly to MDEA under their
Network Services Agreement. EPMI's hourly desk manages the load/resource
items hourly, but MDEA has the exposure (physical and price) to imbalances.
Weather/load changes, and fluctuations in supply create hourly imbalances
(they happen, they are uncontrollable, and we fix them) which EPMI's hourly
desk manages as part of the imbalance service described in the definitions
and obligations of the parties. A different section in the contract states
that MDEA wears the exposure.

How are we setting the bogey? Formula? [Fairley, David] The bogey is
set when the load projection and stack models are run each day. Both parties
participate by providing certain necessary info and discussing results and
planning the day's activities.
[Rorschach, Reagan] Records of bogey decisions will be archieved

Subject to audit? [Fairley, David] Yes, but they would be auditing
something that is jointly derived each day. Frankly, they would like to have
less involvement; ie, they trust us to do it all, but we are requiring them
to participate and buy in every day.

Two bogeys or one (gas and oil)?
[Fairley, David]
One bogey for power. Gas is an input for determining the bogey.
[Rorschach, Reagan] Bogey set day-ahead.

What is defn of profit? I think I have the general idea, but a sentence or
two would be helpful as a reality check.
[Fairley, David]
This is in the pricing calc's. Should we have a definition?

What costs are included on the buy and sell side [Fairley, David] see cost
definition being provided separately.

Re stack model: a sentence or two describing what it is and how it is used.
[Fairley, David] See definition in my mark-up's to the main agreement.

Updated exhibit on facilities, contracted resources, operating limits.
[Fairley, David] Services and Orig are reviewing these, but other than what
was mentioned above, probably no changes unless you see a specific area that
is a problem.

What information does MDEA need for us to provide in order to split
costs/profits? Are we clear that Cities buy gas, MDEA buys/sells power?
[Rorschach, Reagan] I will be getting exhibits of the reporting both daily
and monthly. We need to make sure to limit our info providing
responsibilities to those reports.

It would be great if I could get one set of answers to these
questions/issues, which has commercial buy in all around.

Thanks,

Kay << File: Bogey Calculation Method.doc <<