Re: Index Transactions

----- Forwarded by Elizabeth Sager/HOU/ECT on 07/13/2000 04:23 PM -----

Tim Belden
07/13/2000 02:32 PM

To: Elizabeth Sager/HOU/ECT@ECT
cc: Kevin M Presto/HOU/ECT@ECT
Subject: Re: Index Transactions

Calling brokers to find out what prices would have been is an impossible
task. I agree with your assessment. Unfortunately, caps are not disruptions
but have become a normal course of business.

From: Elizabeth Sager on 07/13/2000 01:41 PM CDT
To: Kevin M Presto/HOU/ECT@ECT, Tim Belden/HOU/ECT@ECT
cc:
Subject: Index Transactions

EPMI is entering into more and more transactions that are settled against a
floating, published index price. Our physical contract does not currently
provide for what happens if the published source is not available or is
otherwise materially changed. Under ISDA for financial trading, this is
addressed as a Market Disruption Event (MDE). Under ENA's standard contract
for financial trading, there is included as a MDE "the imposition of trading
limits on the range within which the price of the commodity may fluctuate".
What this may mean is that if a cap is imposed on power prices, then in lieu
of using the capped price to determine the floating price, you would be
required (under ISDA) to eventually get brokers to determine what the price
would have been without the cap.

I want to add language to our physical contracts that addresses material
changes/disappearance of the published prices that would mirror the financial
trading terms and doubt whether we would want to make the imposition of a cap
on power prices a MDE. If you treat the imposition of a cap (say in CA of
prices to $500 or in NEPOOL to $1,000) as a MDE, then we would be required to
secure quotes as to what the price would have been without the cap each time
that a pricing date trades at the cap level. This only seems fraught with
litigation risk to me. Alternatively, if caps are not deemed a MDE, then you
would always settle against the published prices, even if they are
"artificially" determined after the trade was entered into. While caps are
not appealing, I think it would be better to not have the imposition of caps
be considered a MDE. I have spoken with the financial trading group and they
will follow our lead on this. So, depending upon what you both think, we
will make sure that financial and physical power are treated the same on this
issue.

Thanks for your thoughts.