Sean,

Here are my initial answers and I encourage others to provide me with their thoughts.
 -----Original Message-----
From: 	Crandall, Sean  
Sent:	Tuesday, July 03, 2001 12:46 PM
To:	Belden, Tim; Comnes, Alan
Subject:	Comments on order

Here are some questions/comments I have regarding the ruling.

1.  How does the cap apply to index prices.  If the DJ-PV index settles at $120 and the cap is $98, do parties selling index have to adjust there price to $98?

Depends on the term off the deal and when it was confirmed.  If the deal is longer than 24 hours in length or was negotiated in advance of day of/before, the price is not capped.  If you do a "spot" deal (as defined by FERC) and agree to use the  index price, you will need to condition it to be the lower of index or the cap.

2.  Would financial products (swaps) be affected by the cap?

[Mark Hall]  I believe not.

3.  There has to be less ambiguity with respect to day ahead cash markets.  For example, assume it's a Monday and the ISO is under normal conditions and the price is $92.  Then assume on HE 14 the ISO declares a stage one and the price clears at $100 and the price is $100 for the rest of the day.  Tuesday assume the price is $85 during the first few offpeak hours, but the Wednesday forecast shows identical conditions as Monday.  What is the day ahead cash cap trading Tuesday for Wednesday?
Is it $85 or $100?  One could make the argument that it should be $100 because it is reasonable to assume they will be in a stage one real time on Wednesday, but at the time cash is traded they are not in a stage one.
[Mark Hall]  
See my seperate note where we got sympathy but little hard clarification from FERC.  

It seems to me the easiest way to solve this problem would be to have an independent market organization declare what the day ahead cash market price was before the cash market traded.  So for the example, they may recognize it's likely a stage 1 $100 cap will be in effect on Wednesday, so they'll set the cap at $100.  The market will know before hand and there will be no ambiguity.  More efficient market, less litigation.

Enron is very concerned about giving CAISO discretion to set the cap and will raise this issue on re-hearing.  There must be some way to set the cap so that it is known at the time business is transacted and that its computation is easily verified.
4.  What about call options?  If a generator owns a call option at $125, the cap is $100, but the market is actually trading $150, does the generator have the right to exercise the option?  What if the generator has a plant that he can fire up at $150.  Does the generator have to wait until the price hits $150?  Seems like the strike price on an option would be an easily demonstrable expense.  And would there be a difference between a marketer owning an option and a generator owning an option?
[Mark Hall]  
We should talk more about this, especially if you would like Enron to raise this on rehearing.  The order is basically silent on options.   The generator must make power available at its marginal cost.  I do not think the cost of an option is an allowable expense unless it can be traced back to an actual generator costs. If a marketer calls and option and then has the power it must sell below the cap, so I think in your example the FERC order reduces the value of the option.