I discussed with Ted and David, and they agree with Oliver's analysis below, 
so Chris, let's go ahead and report on the $20MM loss against UK Gas in 
today's notifications.  Then perhaps you can work with James to adjust DPR 
reporting accordingly going forward.

Thank you,
Cassandra.


---------------------- Forwarded by Cassandra Schultz/NA/Enron on 12/06/2000 
03:28 PM ---------------------------


Oliver Gaylard@ECT
12/06/2000 02:55 PM
To: Cassandra Schultz/NA/Enron@ENRON
cc: David Port/Market Risk/Corp/Enron@ENRON, James New/LON/ECT@ECT, Ted 
Murphy/HOU/ECT@ECT 

Subject: Re: Loss Notification - "Structured Derivatives"  

Cassandra

As discussed with Ted, David and yourself the loss should not be looked at on 
its own as it is due to movements in two markets.

The UK power price curve shifted and the UK gas volatility curve shifted. The 
P+L break out is as follows:

UK Power delta P+L      $38MM
Spread options (Structured derivatives) gamma P+L  $(20)MM
Spread options (Structured derivatives) vega P+L  $(23)MM
UK Gas  vega P+L      $4MM

If prudency releases are stripped out I think if we allocate P+L to the 
correct books we get the following total P+Ls exluding reserve releases:

UK Power       $18MM
UK Gas        $(20)MM (Excludes reserve release of $17MM)

Therefore we only have a loss violation in UK gas. This is not trying to 
avoid the $42MM loss notification, I am only trying to represent the loss 
that reflects the true risk in the books of Europe.

Please hold off on the issue of a notification until it is decided that only 
a loss notification is issued for gas.

Rgds

Oliver


   


From:  Cassandra Schultz @ ENRON                                              
               06/12/2000 19:55	
	
	
	                           
	

To: Michael Kass/EU/Enron@Enron, Chris Abel/HOU/ECT@ECT, James New/LON/ECT@ECT
cc: Oliver Gaylard/LON/ECT@ECT, David Port/Market Risk/Corp/Enron@ENRON, Mike 
Jordan/LON/ECT@ECT, Shona Wilson/NA/Enron@Enron 

Subject: Loss Notification - "Structured Derivatives"

Per discussion with Ted Murphy, P/L related to the Eastern spread options 
should be included in our Loss Notification monitoring in accordance with the 
Risk Management Policy.  However, my understanding is that the positions and 
VaR are captured in European Gas and UK Power, but the P/L is reported 
separately in "Structured Derivatives".  This reporting is perhaps further 
complicated by related prudencey being released in the line item European 
Gas.  

The 12/5 DPR reflects a ($43MM) loss in Structured Derivatives, and Oliver 
indicated this represents the market moving against our Eastern spread option 
position.  This is a Ken Lay level notification by any measurement standards, 
regardless of whether you compare it to the $7,500 VAR limit for Gas, or the 
$15,300 VaR limit for UK Power. Or even split it between them.

Chris, please include this loss in today's notification letters to Ken Lay 
and Jeff Skilling for the 5th.  Per Oliver, the loss was due to power price 
curve shift and gas volatility curve shift against the Eastern spread options.

Going forward, James, perhaps you could work with Oliver and the commercial 
team to determine a reasonable methodology to support the allocation of P/L 
and related DPR reporting  for these positions so we can continue to evaluate 
in compliance with the policy.

Thank you,
Cassandra.