---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 12/17/99 
03:17 PM ---------------------------


Clayton Vernon@ENRON
12/15/99 10:42 AM
To: Vince J Kaminski/HOU/ECT@ECT
cc:  
Subject: gas prices

Vince-

1. We can detect "hoarding" of pipeline capacity as an elevated basis against 
the actual inflow.

2. We can detect "market power" by dissociating the seller from the buyer, 
distinguishing between the physical "cost" in gas to run the generators and 
the transmission cost in dollars, i.e. the basis.

3. (As you noted) We can detect "storage" as the difference between inflow 
and consumption.

It appears to me there are two time series needed for a straightforward model 
of gas prices: flow rates at interconnects (from telemetry) and spot-market 
prices. There is an elevated basis reflecting pipeline companies monopolizing 
capacity, as well as hoarding of capacity by contracts. The dynamics of gas 
prices reflect consumption demand changes due to changes in expectations for 
the weather, as well as their impact on two highly strategic behaviors: 
hoarding of pipeline capacity and storage of gas.  We can "calibrate" the 
price elasticity of demands for consumption and storage, and the price 
elasticities of demand for transmission, as well as the extent of hoarding, 
from the two sets of numbers mentioned: flows and prices.  What the basis 
trader needs to understand are the incentives, and disincentives, for storage 
and capacity-hoarding, in terms of the calibrated price-elasticities, and 
each of these are as-if exotic call options at the consumption hub.  Finally, 
flows are "explained" by the model, and can be imputed from prices if 
necessary, resulting in a purely stochastic model of the basis in terms of 
the weather.

I believe the problem is quite tractable, and I would like to proceed with a 
model.

Clayton