Attached is a brief proposal for economics arguments against the CPUC's 
proposal for load based price caps.  Obviously, these arguments would also 
apply to the ISO Board's recent decision.
---------------------- Forwarded by Mary Hain/HOU/ECT on 10/27/2000 03:00 PM 
---------------------------
   
	Enron Capital & Trade Resources Corp.
	
	From:  "Seabron Adamson" <seabron.adamson@frontier-economics.com>             
              10/27/2000 10:58 AM
	

To: <mary.hain@enron.com>
cc: <rcarroll@bracepatt.com>, <James.D.Steffes@enron.com> 
Subject: Motion for Interim Relief by CPUC



Mary:

cc: Ron, Jim

I have had a quick read-through of the CPUC Motion, as requested. There
would appear to be two salient points.

1) CPUC asks for FERC to impose strict load-differentiated price caps. These
would be imposed using a formula based on "margina1 heat rates" times an
index gas price. So the maximum cap would be around $100 and the minimum
could be quite low off-peak - more like $30-40/MWh. Needless to say this
does not recognize the opportunity costs of power in other markets. It was
also completely make redundant any trading into California. The prices would
rise immediately to the low caps, so there would be no incentive for anyone
to enter into any commerical hedging arrangements. The mechanism is
basically similar to the old SRAC QF contracts, but without the capacity
payments.

2) CPUC asks that FERC require all jurisdictional generators AND marketers
to offer forwards contracts for a substantial portion of their capacity at
FERC regulated rates and conditionns for 18-36 months. They claim these are
like the UK and Australian "vesting contracts", but these involved
significant capacity or options payments as well. CPUC request that all
generators and marketers should be instructed to begin preparation of
cost-based filings (how this would actually work is not stated).

Needless to say the implementation of any of this would be wiping out the
market for up to three years, and eliminating any potential profits from
current long positions in the market.

The schemes they have proposed have numerous problems - even if the
objectives were desirable - so there is plenty to poke holes in. The
decision on whether to file any response to me would seem to be based on
whether these issues will be completely addressed in FERC's order, making
the CPUC Motion irrelevant. If there is any chance that the CPUC could be
taken seriously their motion should be opposed, as the restrictions on the
market are quite onerous. Any players with long positions in the market
would stand to lose quite a bit under the proposed capped rates at these
levels.




Seab



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Seabron Adamson
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