Doesn't it become a free option if you can serve physically or reg-gen via utility tariff.   For example in Illinois and Ohio, wouldn't these markets create free options if the wholesale price goes below reg gen?

 -----Original Message-----
From: 	Herndon, Rogers  
Sent:	Monday, June 25, 2001 1:19 PM
To:	Black, Don
Cc:	Lewis, James; Presto, Kevin M.; Lavorato, John
Subject:	FW: Index Positions


Kevin - 

we were in the process of extracting all of these options into a separate book for ease of identification and management.  This process was stalled so that we did not create unexpected errors surrounding our current CA efforts.  However, I spoke to Don and I think we are back on track.  Jay - can we pull together this info one way or another (prioritize our top 5 positions maybe).

Also, this does not create a free option.  To the extent the wholesale prices decline to the point where they equal the assumed underlying transition supply values then we should have no losses associated with erroneous dereg date assumptions.  However, if you step in and buy the wholesale power to "mitigate" this exposure and the wholesale curve continues to drop, you could be faced with new wholesale losses - especially if dereg is stalled and we have to purchase tarriff power at a pass-through and absorb our new wholesale hedge position loss.

Bottom line:  The loss associated with blown dereg assumptions decreases as wholesale prices drop to a point - we should be in good shape here as this will definitely minimize our clean-up costs associated with these errors.  We can probably best manage this exposure by purchasing wholesale call options as we observe the wholesale curve drop below the regulated tariff energy price.

RH

 
 -----Original Message-----
From: 	Presto, Kevin M.  
Sent:	Monday, June 25, 2001 12:53 PM
To:	Herndon, Rogers
Subject:	Index Positions

Per Lavo, he would like to see ASAP the break-even price on the reg-switch options where length was booked and when wholesale goes below tariff, we can cover and re-create free option.

When can we have summary valuation of this done for East positions?