-----Original Message-----
From: 	Phillips, Marc  
Sent:	Wednesday, September 26, 2001 4:11 PM
To:	Woods, Trevor
Subject:	1/22/01 Memo to Jim Prentice

FYI. If you do meet with Jim Prentice, I thought you would be interested in the memo I sent to him back in January. It was sent via Lotus Notes so I copied the text from that message below.


Mike Terraso forwarded a question from you about the worth of emission credits if the methanol plant is shut down and the credits are sold on the open market. The new Houston non-attainment regulations that apply to the generation of emission credits just appeared in the Texas Register on January 9, 2001 so the value of the credits are very speculative at this time. However I will attempt to make some educated guesses about the value of the credits. Under the new rules, emission credits can be created by the shutdown of the methanol plant for nitrogen oxides (NOx), volatile organic compounds, (VOCs) and carbon monoxide (CO).

Under the new rules there are three types of emission credits that would apply to the methanol plant. They are 1) Emission Reduction Credits (ERCs), 2) Discrete Emission Reduction Credits (DERCs) and 3) "allocations" under the new cap and trade program. As an example, if you shut down an emission source that emitted 100 tons/year of a pollutant you can obtain 100 tons/year of ERCs as long as no new rules are passed that would require further reduction of the emissions. If you shut down the same source, you can obtain 100 tons of DERCs each year until new rules are passed that would require further reductions. ERCs and DERCs for NOx and VOC are not new and were available under the old trading rules. ERCs and DERCs for CO are new under the new rules that just passed. Allocations under the cap and trade rules are new and (for now) only apply to NOx emissions. Allocations are allotted each year to a location and form the basis for their cap. They are based on historic operating hours and the new NOx limits (e.g., 0.5 grams/hp-hr for engines and 0.01 lbs/MMbtu for the reformer) and a company must buy allocations every year if they are over their "cap" and can sell allocations every year if they are under their cap. If a plant is shutdown, you would receive allocations and could sell them to other companies. Since reductions under the cap and trade program start in 2004 it is anticipated allocations would begin to have value in 2004.

After review of the data for the methanol plant, it appears that you would have approximately 500 tons/year of VOC ERCs or DERCs, 150 tons/year of CO ERCs or DERCs, and 85 tons/year of NOx ERCs, DERCs, or allocations, if you shut down the plant. You would have to make the determination whether the ERCs, DERCs or allocations (for NOx only) have the most value if you sell the credits. It is anticipated that ERCs, which are a one-time creation, will generally have a reduced value in future years because they cannot be used in the cap and trade program. Allocations and DERCs can be created every year and will be needed every year by companies for compliance.

The value of VOC ERCs under the old rules typically were about $3,000/ton so the value of 500 tons/year of VOC could be $1,500,000. I would not anticipate a great change in the value of VOC ERCs under the new rules.

CO ERCs and DERCs being new have no history, and I could not find anyone that could even make an educated guess as to their value, but since the CO rules are not anywhere near as stringent as the NOx and VOC rules, I would not anticipate that their value would be that great.

The value of NOx ERCs under the old rules were about $3,500/ton. Under the new rules, the expense of putting on new controls such as selective catalytic reduction (SCR) is anticipated to be very great which should drive up the price of NOx credits. Remember that companies will have to make the decision to either purchase credits or put on controls, whichever is most cost effective. TNRCC has estimated that allocations could be worth as much as $50,000/ton (which would place the value of the 85 tons of NOx credits at over $4,000,000) under the new rules, but most in industry do not believe they will be worth that much. A value of $3,000-25,000/ton of NOx is conceivable which would value the NOx allocations available from a shutdown at $255,000 to $2,125,000. Keep in mind that the value of credits will be driven by market forces such as supply and demand and the cost of controls. Also remember that allocations are needed every year so this would be an annual revenue stream for Enron.

Since the cap and trade program is so new and the way the rules will be implemented is still being sorted out by TNRCC, I would suggest that this information should be updated at a later date.

If you have any questions, give me a call at 713-646-7646.


Marc N. Phillips
Director, Regulatory Technical Analysis
713-646-7646 (cell 713-594-6919)
marc.phillips@enron.com