FYI- PACE is the Progressive Conservative Party Advisory Committee on Energy.  
----- Forwarded by Aleck Dadson/TOR/ECT on 06/19/2001 05:49 PM -----


	david.matthews@cgc.enbridge.com 06/19/2001 01:07 PM 	   To: Aleck.Dadson@enron.com  cc: pbudd@powerbudd.com, betmuir@lindsaycomp.on.ca, callow@sympatico.ca, artistic@primus.ca, bob@algonquinpower.com, iedc@bmts.com, jonesd2@tdsecurities.com, hkondratas@umagroup.com, blittle@uniongas.com, iedc@bmts.com, harrisme@est.gov.on.ca, mcgeejs@csolve.net, jmorning@globalserve.net, dan.pastoric@ontariohydroenergy.com, rperdue@enterprisecanada.com, rpower@powerbudd.com, john.hastings@est.gov.on.ca, Mike.Krizanc@est.gov.on.ca  Subject: Re: PACE presentation	




Aleck:  Thanks very much for going above and beyond the call of duty to respond to my questions.  I really appreciate you taking the time to bring me up the learning curve on the complexities of the new market place.  I will pass your comments on to the rest of the PACE members for their consideration and comment.  Our report to the Minister will be much better positioned as a result of your efforts.  Dave 




	Aleck.Dadson@enron.com   06/19/2001 12:37 PM  	                 To:        david.matthews@cgc.enbridge.com          cc:                  Subject:        Re: PACE presentation	




Dave, Here is my response to the concerns raised in your e-mail below
regarding exports from Ontario to the connected US markets:
 
                         a) Remember that the rules and policies under
development at the IMO will ensure that load in Ontario will not be cut in
order to support export transactions (in other words, Ontario, like most US
systems, has adopted a "native load" preference).
 
                              b) Remember also that the Ontario market
clearing price will be set by the offers and bids within Ontario.
Scheduled external demand will move us up the bid stack but cannot, for
instance, set the Ontario price by offering  lets say  $1,000 MWh. The
price paid by all internal and external  load (leaving aside the issue of
congestion) will    be set by the marginal bid in Ontario.
 
                                                                  c)
Remember also that the scope for  economic export transactions will be
limited by the impact of the export and wheeling tariff  ($1 MWh),
liability for uplift (estimated at approximately  $4  MWh), and the IMO
administration fee (estimated at $1MWh),  plus any wheeling/admin charges
applied by the connected markets.
 
                                                                  d)
Perhaps most importantly, remember that congestion costs will be charged in
respect of export transactions from the Ontario zone (assume low cost) to
an external intertie zone (assume high cost). A buyer from the Ontario spot
market in the external intertie zone will pay the aggregate of the Ontario
market clearing price plus the applicable congestion costs. Those
congestion costs are calculated as the difference between the Ontario price
(low cost) and the price in the external zone (high cost).  Two
features/implications of this regime are worth noting. First, the liability
to pay congestion costs will by itself reduce the scope for export
transactions of the scope and level you fear. (Though one can buy
transmission rights - TRs - which will provide a complete hedge against
congestion costs.)  Second, the congestion costs collected under this
regime will, after funding the hedge held by the holders of TRs, be applied
to reduce the revenue requirement of the transmission owners.  (In other
words, the surplus flows back to reduce the transmission rates that Ontario
consumers would otherwise pay).
 
                                                                  Hope this
helps you and your colleagues on the PACE.  Happy to answer any other
questions that you may have.
 


                    david.matthews@cgc.en
                   bridge.com                   To:     Aleck.Dadson@enron.com
                                                cc:     pbudd@powerbudd.com, betmuir@lindsaycomp.on.ca,
                   06/15/2001 03:06 PM          callow@sympatico.ca, artistic@primus.ca, bob@algonquinpower.com,
                                                iedc@bmts.com, jonesd2@tdsecurities.com, hkondratas@umagroup.com,
                                                blittle@uniongas.com, iedc@bmts.com, harrisme@est.gov.on.ca,
                                                mcgeejs@csolve.net, jmorning@globalserve.net,
                                                dan.pastoric@ontariohydroenergy.com, rperdue@enterprisecanada.com,
                                                rpower@powerbudd.com, john.hastings@est.gov.on.ca
                                                Subject:     Re: PACE presentation
 





Aleck:  Thanks for getting back to me so quickly.  One point that I forgot
to mention was the impact of external demand.
 
At the same time that Ontario generators would be trying to sell into
higher priced US markets, marketers serving US customers would be trying to
buy lower cost power in Ontario to ship south.  As you pointed out, both
groups would need to take into account the costs of wheeling and exporting
the power.  However, if the price differential between the Ontario and US
markets was sufficient to offset these costs, electricity would flow to the
US until the price differential for delivered power was eliminated.  If
demand exceeded supply in the US market by an amount equal to or larger
than the US intertie capacity, and Ontario was the lowest-cost supply
alternative, the total demand for Ontario power (from native and foreign
sources) could exceed Ontario supply under extreme weather (as shown in the
table below).  Under these conditions, the price in Ontario would be bid up
by the US market imbalance.  Alberta would have had a similar problem with
its BC intertie, if it hadn't decoupled its market pricing so that the
market clearing price for Albertans is set only by local demand.
 
A second and perhaps more critical issue, is the technical capability of
the Ontario market.  Despite the rosy reports from the IMO, some market
participants have experienced IMO failures during testing and most MEUs
have indicated that they cannot be ready for a November opening.  Many
people feel that the risk of system failure must be eliminated or reduced
to a manageable insignificant level, before the market can be opened.
 
I would appreciate any additional thoughts you care to share on these
points.
 
Thanks,
 
Dave
 
|-------------------------------|
|  Potential Market Conditions  |
|-------------------------------|
| MW                            |
|-------------------------------|
| Winter Peak Capacity          |
| 26,700                        |
|-------------------------------|
| Winter Peak Demand*           |
| (24,600)                      |
|-------------------------------|
|             Surplus Supply in |
| Ontario                       |
| 2,100                         |
|-------------------------------|
|                               |
|-------------------------------|
| Intertie Capacity             |
|-------------------------------|
|            Out of Ontario     |
|-------------------------------|
|                  NY Interface |
| (2,450)                       |
|-------------------------------|
|                  Michigan     |
| Interface                     |
| (2,400)                       |
|-------------------------------|
|                  Minnesota    |
| (150)                         |
|-------------------------------|
|             Into Ontario      |
|-------------------------------|
|                  Quebec       |
| 1,408                         |
|-------------------------------|
|                  Manitoba     |
| 190                           |
|-------------------------------|
|                               |
| Surplus/(Shortfall)           |
| (3,402)                       |
|-------------------------------|
|                               |
|-------------------------------|
| Net Surplus/(Shortfall)       |
| (1,302)                       |
|-------------------------------|
| * Extreme Weather Forecast    |
|-------------------------------|
 





                    Aleck.Dadson@
                   enron.com            To:
david.matthews@cgc.enbridge.com
                                        cc:
                   06/14/2001           Subject:     Re: PACE presentation
                   12:27 PM
 






David, here are some observations in response to your questions: a) You are
correct that we would expect Ontario-based generators to pursue economic
export opportunities in the connected US markets but we stress that the
economics of such exports will be affected not only by the comparative
generation costs, but also the cost of Hydro One's export and wheeling
tariff, the IMO uplift and related charges charged to all load (including
exports), transmission costs in the connected market, and any congestion
costs arising in the event that the intertie between Ontario and the
connected market is congested.  Everything else being equal, this means
that on average, power will trade within Ontario at a discount to prices in
the U S connected markets. b) With respect to volatility, it has to be
conceded that electricity is the most volatile of commodities. Having said
that, the period of most serious volatility is the summer months. Moreover,
we think it can be fairly said that volatility and price swings are
moderating in the Eastern Interconnect largely as a consequence of the
decrease in fuel costs (i.e. natural gas prices)  and extensive new
generation build - PIRA estimates that in Summer 2001 the year to year
increase in  available generation resources in the Eastern Interconnect is
about 30,000MW. This all adds up to increased price stability.   Again, my
colleague, Garrett Tripp, and I would be ready to meet with your group at
any time to go over these questions and our analysis in more detail.  Give
me a call if you would like to meet to discuss these points.   416 865
3707.  Regards, Aleck
 



                    david.matthews@cgc.en
                   bridge.com                   To:
Aleck.Dadson@enron.com
                                                cc:
                   06/13/2001 05:50 PM          Subject:     Re: PACE
presentation
 





Thanks for the report.  It helped to validate the PACE conclusion that
there is sufficient supply to open the market without precipitating another
California.
 
The report mentions that imports would not set the MCP in Ontario and that
energy savings would be possible even if peak market demand was met by
imports, while in another section it concludes that Ontario could rely on
higher-priced imports to meet demand.   The first two points seem to
contradict the results from the IMO test runs, which indicate that the US
markets will set the clearing price in Ontario 90 percent of the time,
putting upward pressure on electricity prices in our market.  If prices are
higher in the adjacent markets, Ontario generators can be expected to
export power to the more lucrative markets rather than bidding into the
Ontario market, resulting in higher prices for Ontario since prices are
determined on the margin.  Price volatility and extreme price swings were
also identified as concerns by MEUs.
 
Were any of these concerns addressed in your presentation and are there any
comments you can share?