DRAFT
(Febmary 16, 1998)
PROPOSAL TO ENRON
Prepared by
Perot Systems Corporation (PSC)
in partnership with
Policy Assessment Corporation (PAC)
tive-
Deregulation of the electric & gas industries combined with opening of the power
markets to competition have created an opportunity for skilled market
participants to optimize their bidding and asset positions for profit
maximization. The California market is in the early days of these changes.
Enron Capital & Trade Corporation have expressed an interest in exploring and
developing with PSC and PAC appropriate strategies and tools for seizing these
market opportunities.
Aproach
It is proposed that Enron's optimization strategies be developed through a
multi-plased effort. This approach offers maximum opportunity to explore
concepts; refine the market scenarios; test the validity of supporting systems &
tools; and, to develop related performance metrics. Decisions to progress from
phase to phase, will be determined on a valuation of benefits achieved and an
estimation of expected future return on investments. Each successive phase is
designed to build upon the other and, independently produce value to Enron. This
approach limits Enron's financial risk while affording a foundation for refining
design requirements as work is progressed.
Phase 0: Initial Seminar
Phase 0 is designed to test the concepts employed in developing optimization
strategies. The framework is a 1 1/2 day seminar used for identifying "gaps" in
the market protocols; designing scenarios and optimization strategies; and, then
framing these scenarios for testing within Enron's trading environment.
Employees of Enron, PSC and PAC will use specific examples of gaps in California
market protocols seen to offer opportunities for market optimization. This joint
team effort led by Paul Gribik, Hemant Lall and Ed Smith of PSC, and George
Backus of PAC, will closely examine 3 concrete California market examples
previously verified by PSC with the California Power Exchange/independent
Service Operator as valid illustrations of market "gaps".
The seminar will design detailed strategies and plans around these "gaps" to
reach agreement on the range of market opportunities they pose, develop
appropriate strategies for optimization and, prove the reality and soundness of
such tactics. The approach will
Confidential: Covered by Non-disclosure @ Perot Systems Corporation 1998
also illustrate how existing rules can be re-evaluated to produce new market
opportunities. One of the on-going benefits to be derived by Enron's staff is
education in the process used for examining these situations
Enron employees will share insights on existing capabilities and asset
portfolios for the purpose of plotting positions against which these scenarios
will be tested. Testing will also include analysis of any trading floor
procedural constraints which may be seen to exist. . The success of this phase
in validating the existence of "gaps" against which optimization strategies can
be mapped, as well as the realistic ability to act on such opportunities, will
form the basis for moving to Phase 1.
Phase 1
Phase 1 will be split into two parts.
Phase la greatly expands on Phase 0 by conducting a detailed review of the PX
and ISO business and operational protocols for the purpose of cataloging the
perceived "gaps" within and between these two entities. These findings will then
be prioritized in terms of their relevant impact and, once compared with Enron's
capabilities and trading portfolio, corresponding electric and gas
tactics/strategies will be designed/developed. The range of game/tactic
categories will be extensive enough to consider games associated with
generation, trading, transmission, and customers. Moves that are made
independently or in combination with other market players (across function and
across companies) will also be considered. This consideration is essential as
moves limited to trading only may not take adequate advantage of market
opportunities. Combined moves, across market functions, provide more flexibility
and higher pay-offs. Countermoves will also be addressed to examine plans for
protecting Enron from competitor actions.
Enron staff will decide on areas where Enron
* would like to focus on immediate trading-function efforts,
* would like to focus on building up alliances for combined functional or
non-Enron company efforts, and
* does not want to become involved.
Dependent upon the level of interest expressed, Phase la can also include
interactive team "war" efforts using PAC's CIGMOD software simulation models to
formally test and review the generic gaming options within the simulated frame
work of the California market place and Enron environment.
Because the rules and the market are evolving, this phase will continue to see
changes. However, the development of an exhaustive list of categories, along
with a selection of those key areas of most interest to Enron, will constitute
the completion and success of this phase.
'I.
Confidential: Covered by Non-disclosure @ Perot Systems Corporation 1998
Phase lb takes the prioritized list of opportunities converting them into
detailed concrete moves. Each tactic is formally defined in terms of specific
plant, transmission line, load, and system conditions for both gas and
electricity. The formal definition not only allows for the actual execution of
the strategies but provides the analytical formalization to operationally use
the strategies in Phase 2. Market and operational information input requirements
will also be identified and sources for obtaining this information will be
investigated.
Phase 2
Phase 2 will also be split into two parts.
This phase will convert the detailed and formalized listing of strategies into
computerized simulations of game moves in the real world. This phase will have
two sub-phases.
Phase 2a involves the creation of "study mode" computer models simulating the
California PX and ISO systems. Actual protocols and rules are carefully
detailed. Simulations will include the PX's energy auction model, the ISO
congestion management model and, define their interaction. Transmission
simulation will allow accurate constraint analysis. The HYPERSENS software is
activated as an umbrella overarching the energy-system simulation to capture the
uncertainty and impacts of competitor counter moves. Data for each company and
plant in the region will be incorporated in the model to be available for
determining bidding strategies. It can also determine those moves seen to bring
Enron the most advantage under noted operating conditions and a "pay-off matrix"
examining values for the moves, or portfolio of moves.
Phase 2b develops "real time" optimization versions of the "study mode" models
to test the system against real world, real-time data. Real PX, ISO and trading
floor, OASIS, and SC data will be used in the model to compare modeled to actual
positions. The value of transactions/positions from the simulation will also be
compared to those that actually occurred. Performance benchmarks for evaluating
future transactions will be established. This effort validates the model
capabilities to test or recommend moves in real time. Most importantly, the list
of strategies from Phase lb can be tested for value and potency within the real
marketplace. The resolution of the model would minimally be hour-by- hour.
Required interfaces for inputs of market and operational data will either be
established, or alternative arrangements made at this point.
As part of Phase 3, these models will then be fully integrated with Enron's
computer infrastructure and linked to real-time data systems. This linkage of
real time data is a task in and of itself. Data collection, transfer,
reconciliation, timing and use must be operationalized, coordinated and
verified.
Phase 3
This phase will integrate the tools and knowledge developed during the previous
phases ihto Enron's normal trading processes, systems and, operations. It is
expected that the early use of these tools with real-time data will find areas
where the system must be tuned
Confidential: Covered by Non-disclosure @ Perot Systems Corporation 1998
or modified to capture unforeseen opportunities, cope with human or data-stream
errors, recognize divergence of idealized from real operations, and prevent
inappropriate responses in ambiguous conditions. The "fine tuning" of the system
and the modification of the system and its user interface to maximize
profits/usability is a critical focus. Training of Enron staff will be integral
to this transition. This phase will include a benchmark sub-system to compare
the system-recommended performance to a "reference" baseline performance. The
changing market rules and data streams will require continued maintenance and
refinement of the system. This ongoing maintenance, consulting and technical/
software support could be considered as Phase 4 or as a separate project.
The design of the project allows for future extension of the system (for
example, to include all of WSCC in detail) or cloned (for example, to maximize
Enron profits in the UK, Brazil, US East Coast or US Midwest markets). Efforts
along these lines are considered outside the scope of this project. (Note that
the system possesses the inherent capabilities to simulate the financial and
strategic impacts of mergers, acquisitions, purchasing of facilities/generation
and the building of generation, gas-storage or transmission.)
Professional Fees
The PSC/PAC professional fees for Phase 0's "Proof-of-Concept" Seminar will be
$40,000 plus all reasonable expenses. PSC will be the prime contractor to Enron,
and PAC will sub-contract to PSC. It is proposed that Phase 0 be held on Feb 28
and March 1, 1998 at a location of Enron's choice.
Estimates and an approach to calculation of professional fees for future Phases
will be provided after conclusion of Phase 0.
Other mutually agreeable contractual or partnering relationships are not
precluded and could become part of this overall proposal.
Confidential: Covered by Non-disclosure @ Perot Systems Corporation 1998
PROPOSAL TO ENRON
Prepared by
Perot Systems Corporation (PSC)
in partnership with
Policy Assessment Corporation (PAC)
Approach
To ensure Enron comfort with and understanding of,-all aspects of the proposed
effort, it is mutually agreed that this initiativee-effei4 should be pursued
inaes a series of phases. Each proposed phase builds upon the previous phase and
independently produces value to Enron. The phasing approach limits Enron's
financial commitment tofe* each phase of the project, guarantees that a concrete
deliverable is provided at each step, and allows for project adjustment in
future phases as need dictates.
Phase 0
An initial phase, called Phase 0, will provide a 2 day seminar lead by Paul
Gribik-(PSC),- George Baekus (PAC) and Hemant Laln Ed S of PSC and George Backus
of PAC. This single task effort would closely examine 3 concrete examples (and
more by references) with to examine the detailed steps of the strategy/tactic,
prove the reality and soundness of such tactics, and most importantly,
illustrate how existing rules can be re- evaluated to produce new market
opportunities. This latter aspect will allow Enron staff to apply the "methods"
of "gaming" to recognize and execute tactics made available by the ever evolving
market rules associated with the dynamics of deregulation. To ensure realism and
validity, the examples used would be those actually evaluated within the PX/ISO
because of their potential or ready realization in the marketplace.
As part of Phase 0, PSC and PAC. would learn Enron's existing capabilities and
operations to understand immediate areas where Enron has advantages,
disadvantageous, opportunities, and limitation. The success of this phase in
verifying the existence of the claimed moves. as well as the realistic ability
to act on such opportunities. will form the basis for moving to Phase la.
Phase 1
Phase 1 will be split into two parts. Phase la, greatly expands on Phase 0 by
exhaustively cataloging the generic electric and gas tactics/strategies with a
strong emphasis on those associated with the NW and CA. The range of game/tactic
categories would be extensive enough to include those games that are more common
to other parts of the country or are common to other countries. This is done
because the rules of CA can and will change. The impacts of the new rules on
rest of the WSCC area, for example, could easily bring forth conditions that
require moves far removed from those currently available in the CA market. Games
associated with generation, trading, transmission, and customers will be
considered. Moves that are made independently or in combination with other
market players (across function and across companies) need to be considered.
Moves limited to trading only do not take adequate advantage of market
opportunities. Combined moves, across market functions, provide more flexibility
and
Confidential: Covered by Non-disclosure Perot Systems Corporation 1998
higher pay-offs. Countermoves must also be addressed to protect Enron from
competitor action and to prepare Enron for countermoves to any of its own
actions.
A review of these moves with Enron staff would delineate those areas where Enron
* 1) where Efen-would like to focus on immediate trading-function efforts,
* 2) where Effon-would like to focus on building up alliances for combined
functional
or non-Enron company efforts. and
* wd e s not DOES-NOT-want to become involved. (This last area-
would then require Enron to focus on countermoves to keep it out of these
games yet protected form them.)
Part of Phase-la can include interactive team efforts (as proposed by Paul
Gribik) to uncover -opportunities unique to Enron operations. Another approach
is to use CIGMOD to formally test and review the generic gaming options within
the simulated frame work of the CA/WSCC market place and Enron environment.
Because the rules and the market are evolvinge, this phase is never totally
completed. However, thebutrhe development of an exhaustive list of categories,
along with a selection of those key areas of most interest to Enron, will
constitute the completion and success of this phase.
Phase lb takes the generic list and converts it into detailed concrete moves.
Each tactic is formally defined in terms of specific plant, transmission line,
load, and system conditions for both gas and electricity. The formal definition
not only Wallows for the actual execution of the strategies but provides the
analytical formalization to operationally use the strategies in Phase 2.
Phase 2
This phase -will alee-converts the detailed and formalized (and ever-changing)
leflist of strategies into simulations of game moves in the real world. This
phase can also have two sub-phases.
The development of the real-time system (using existing tools) constitutes Phase
2a. The simulations here include a an exact or near etrepresentation of the
actual PX and ISO software. Actual protocols and rules are carefully detailed.
Transmission simulation would allow accurate constraint analysis. NW and WSCC
rules/limitations would be included as needed. The HYPERSENS software is
activated as an umbrella over the energy-system simulation to capture the
uncertainty and impacts of competitor counter moves. It can also determine those
Enron moves with the most advantage under noted operating conditions along with
the pay-off matrix for the moves, or portfolio of moves.
Phase 2b would test the system against real world, real-time data. Real PX, ISO
and trapding floor, OASIS, SC, and WSCC data would be used in the model to
compare what
Confidential: Covered by Non-disclosure i). Perot Systems Corporation 1998
it would have proposed to what actually happened. The value of
transactions/positions from the simulation can be compared to those that
actually occurred. This effort validates the model capabilities to test or
recommend moves in real time.. Most importantly, the list of strategies from
Phase lb can be tested for value and potency within the real marketplace. The
resolution of the model would minimally be hour-by-hour. Most probably 5-minute
real-time resolution would be needed for some processes.
Because, Phase 2 is the implementation of the Phase lb, they are inseparable
from a value perspective. As such, if Enron should decide at the end of Phase lb
to discontinue the proposed project, some of the value associated with Phase 2
would be attributed to Phase lb and duly billed as such. In other words, the
intellectual and capital investment of PSC and PAC is shared with Enron at a
discount in Phase lb under the understanding that Phase 2 will be pursued. If
phase 2 is not pursued, PAC and PSC then would need to recover the potion of
"expertise development' costs in Phase b.
As part of Phase 2b or as part of Phase 3, the model can be fully implemented on
Enron computers and linked to real-time data systems. This linkage of real time
data is a task in and of itself.. Data collection, transfer, reconciliation,
timing and use must be operationalized, coordinated and verified.
Phase 3
This phase uses the tools and knowledge of the previous phases for actual Enron
operations. The use of the systems developed systems use-must be monitored;
Enron staff must become fluent in the systems' uses and PSC/PAC technical
support must guarantee that the system maximizes Enron profitability. It is
expected almsteeA that the early use of the tool with real-time data will find
areas where the system must be tuned or modified to capture unforeseen
opportunities, cope with human or data-stream errors, recognize divergence of
idealized from real operations, and to prevent inappropriate responses in
ambiguous conditions. The "fine tuning" of the system and the modification of
the system and its user interface to maximize profits/usability becomes the
focus of the phases. The success of this phase is denoted by increasing margins
over what would have otherwise occurred. (This phase would include a benchmark
sub-system to compare the system-recommended performance to a "reference"
baseline performance.)
The changing market rules and data streams will require continued maintenance
and refinement of the system. This ongoing maintenances consulting and
technical/software support could be considered part of Phase 3 or as a separate
project.
The design of the project allows the system to be extended (for example, to
include all of WSCC in detail) or cloned (for example, to maximize Enron profits
in the UK Brazilian, US East Coast or US Midwest markets). Efforts along these
lines could be considered in other phases or other projects. They can be
performeds in parallel with the CA-system- pmay or sequentially thereafter.
(Note that the system can a-simulate the financial and
Confidential: Covered by Non-disclosure (Ei) Perot Systems Corporation 1998
strategic impacts of mergers, acquisitions, purchasing of facilities/generation
and the building of generation, gas-storage or transmission.)
Professional Fees
The PSC/PAC professional fees for Phase 0 will be $20,000 plus all reasonable
expenses. PSC will be the prime contractor to Enron, and PAC will sub-contract
to PSC. It is proposed that Phase 0 be held on Feb 28 and March 1, 1998 at a
location of Enron's choice. Other contractual or partnering relationships with
PSC or PAC are not precluded by and could become part of this overall proposal.
The professional fees for Phases 1 &2 will be provided upon conclusion of Phase
0. - Because Phase 2 is implementation of Phase lb. they are inseparable from a
value perspective. As such, if Enron should decide at the end of Phase lb to
discontinue the proposed project. some of the value associated with Phase 2
would Ibe attributed to Phase lb and duly billed as such. In other words, the
intellectual and capital investment of PSC and PAC is shared with Enron at a
discount in Phase lb under the understanding that Phase 2 will be pursued. If
phase 2 is not pursued, PAC and PSC then would need to recover the portion of
"expertise development" costs in Phase lb.
Other mutually agreeable contractual or partnering relationships are not
precluded and could become part of this overall proposal.
Confidential: Covered by Non-disclosure (H Perot Systems Corporation 1998