Michael - I pulled this out of one of the memos I just forwarded to you.  Let me know if you have questions.

The next phase of control (or lowering in the total amount of allowances in the cap) for the OTR Trading Program goes into effect in 2003.  Despite the delays in the broader NOx SIP Call process, the OTR states have filed their SIPs targeted to start in 2003 that include the standard provisions of the SIP call structure.  One of those provisions is that allowances banked from Phase II (the current OTR Program) can only move into Phase III (2003) via the compliance supplement pools (CSP).  The total compliance supplement pool for the OTR is only about 25,000 tons.

At the current pace of banking, we could have 80,000 to 100,000 tons of allowances in the bank by the end of 2002.  These would be discounted or prorated by the states to the CSP level to move into 2003.  Nominally then, allowances left at the end of 2002 would be discounted by as much as 4 to 1 moving into 2003.

There is another twist, however.  The 1999 vintage allowances are not allowed to move into 2003 at all.  They will expire at the end of 2002.  There are probably about 35,000 1999 vintage allowances in the system.  That leaves about 50,000 to 70,000 allowances left to move into 2003 - still a 2 or 3 to 1 discount factor.  Those allowances in the CSP probably will not be subject to flow control in 2003, though flow control is likely to come in to play in 2004.

Finally, in order to be in the compliance supplement pool, allowances must be in compliance accounts.  So traders like Enron will either need to sell all of their inventory at the end of 2002 or find a place to park it in a compliance account in order allow the allowances to pass through to 2003.  Since the prorating is done on a state-by-state basis, where the allowances are parked will be important as well.

The value of these banked allowances obviously depends on the value of allowances in 2003.  The OTR is relatively clean and will not require major new investment to meet its 2003 emission cap.  Thus, the 2003 price for the OTR NOx allowances may not be as high as the $4000/ton that people are currently paying.  If it's only $2000 to $3000/ton then the discounted value of today's allowances is probably less than $1000 - maybe a lot less.

Bringing all of this together:  At the end of 2002 there will be a large bank of allowances.  Some of them will expire with zero value at the end of 2002 if not used.  The remainder must be parked in the right place to avoid expiration.  Even then they will be heavily discounted going forward.  The allowance price in 2003 is likely to be relatively low.


Mary Schoen
Environmental Strategies
Enron Corp
415.782.7803 (phone)
415.782.7854 (fax)

 -----Original Message-----
From: 	Taylor, Michael E  
Sent:	Monday, October 15, 2001 12:57 PM
To:	Schoen, Mary
Subject:	NOx OTR to SIP CALL

Mary,

How will OTR allowances roll into the NOx SIP CALL program?  

Thanks,
Michael Taylor
Coal and Emissions Trading
Enron Global Markets
(713) 853-1885