---------------------- Forwarded by Mary Hain/HOU/ECT on 12/19/2000 08:31 AM 
---------------------------


Alan Comnes
12/18/2000 04:58 PM
To: Mary Hain/HOU/ECT, paul.kaufman@enron.com
cc: tbelden@enron.com, smara@enron.com, bob.badeer@enron.com, 
greg.wolfe@enron.com, steve hall@enron 
Subject: Re: Summary of FERC's 12- 15 order on California Markets  

The following are  some  notes and questions regarding FERC's December 15 
Order intended to supplement Mary's notes distributed over the weekend.

1. Penalty on Underscheduled Load 

a. Penalty threshold

The FERC stood by its Nov 1 recommendation to impose a penalty on all SC's 
that underschedule by more than 5%.  The only change relative to November 1 
is that the FERC will allow SC's with loads 200 MW or less to have up to 10 
MW imbalance without penalty.  EPMI as a power marketer, has a highly 
variable load, I assume.  Do we need to seek clarification from FERC or ISO 
on how ISO will measure the load (annual average, annual peak, monthly peak?) 
used to determine whether the applicable penalty threshold  is 10 MW or 5%?  
Guidance from traders would be appreciated.

b. Estimated bills
FERC allows the ISO to implement a blended "automated/manual" process to 
implement the ISO's load imbalance penalty.  To simplify the settlement 
process, the ISO is allowed to institute estimated billing procedures on a 
temporary basis.  Does EPMI have a serious problem with being billed on an 
estimated basis?

2. Documenting Incremental Seller Costs, Including Opportunity Costs

The FERC order raises important issues with regard to documenting our costs, 
which will be required on all sales to the ISO or PX effective on 1/1/01.  In 
its discussion of the $150/MWh breakpoint, FERC states: "In recognition of 
the unworkable complexities that the opportunity cost concept introduces in 
the ISO real-time imbalance market, we will eliminate it."  Enron will 
undoubtedly raise the impermissibility of opportunity costs in its rehearing 
request.  Among other things, EPMI will  argue that opportunity costs are a 
legitimate economic cost, that such costs are used in transmission pricing, 
and that without such costs the FERC is essentially taking 
generator/marketers back to cost-of-service ratemaking

This being said, EPMI must operate without the benefit of using opportunity 
costs as a basis for documenting above-$150/MWh accepted bids effective 
1/1/01.

As noted in the list of information that must be reported by Enron (see 
Mary's summary or p. 59 of the FERC order), sellers that have not generated 
their own power can report "purchase price".  Is West Trading prepared to 
document every above-$150/MWh sale to the ISO or PX with an associated 
"purchase price?"  In addition, other costs that clearly apply to a 
marketer--such as transmission access costs, transmission losses, expected 
replacement power costs, start-up/no-load costs--are not allowed on the 
list.  (We should not the omission of these costs in our petition for 
rehearing.)

In several places in the order, the Commission states that sellers should be 
allowed to earn reasonable profits but little guidance is given.  The only 
concrete guidance I found was in Massey's concurring opinion which identified 
$25/MWh as a "reasonable capacity adder."

Accepted bids below $150/MWh do not require documentation.  The preliminary 
opinion from our discussion today was that such bids are in a &safe harbor8 
zone and it appears that refund risk on such transactions is much less.