Strategic Support Services for Participants in the Post-Restructuring
                               Electric Industry

                  "Real-Time Optimization and Market Modeling"

Introduction:

Policy Analysis Corporation (PAC) and Perot Systems Corporation (PSC) have
teamed to assist companies (electric utilities, energy service providers, power
marketers, etc.)who must leam to operate in the restructured electric industry.
Companies operating in this market will face considerable uncertainty as they
enter this new phase. California is just at the start of the process of
deregulating its electric industry. The industry structure as of 1/1/98 will not
be the final, steady-state structure. The market's rules as well as the
participants in the market will evolve over time. Consequently, the nature of
the challenges these companies face will continue to change over time, as will
the learning process.

Experience in other markets (U.K. Electric Pool, U.S. airlines, U.S. gas
industry, U.S. telecommunications industry) shows that deregulation and the
accompanying restructuring of these industries proceeds in phases. We expect
that the deregulation of the electric energy market will follow a similar path.

Roughly the steps in the de-regulation path are:

1.   Transition from a regulated market to a structured market (vertical
     utilities are unbundled and market entities such as Power Exchanges and
     Independent System Operators (PX/ISO) are created)

2.   Further accelerated deregulation of the market due to economic and
     political pressure

3.   System divestiture (further efforts to move generation, transmission,
     distribution, and energy-marketing into separate companies)

4.   Strategic and tactical maneuvering by the participants in the market

5.   Reregulation to control market behavior as reality deviates from
     theoretical expectations

6.   Massive consolidation of market participants through mergers and
     acquisitions

Experience indicates that the process should take five to six years from start
to finish.

Throughout each of the above phases, the participants in the electric market
will be presented with different threats and opportunities. A company must
anticipate these changes and position itself properly for each phase if it is to
survive, let alone prosper. This "prediction" requires an understanding of the
way the market will operate in each phase and the likely actions of its
competition. PAC and PSC bring together unique capabilities to help a company
consider its position within each stage of deregulation and to develop
strategies for operating successfully.

PAC's study of the deregulation process in many industries and several countries
has led to the development of a model that simulates the dynamics of
deregulation and which has been used to predict accurately market behavior
through the various phases of deregulation. PAC is actively engaged in studies
of the deregulation of the electric utility industry in the U.S., which analysis
has provided insights into the likely opportunities and threats that will occur
in many states, including California.

PAC's model possesses analytical capabilities and uses beyond that of simulating
the behavior of the market on a macro-level. It can also be used to assess the
competitive position of an individual company in these markets and to develop
strategies for that company. The model can then serve to evaluate the return and
risk associated within each of a possible range of "gaming" strategies which a
company may wish to consider in deciding on its market position.

Important lessons can be drawn from these theoretical studies, the "what if?"
capabilities delivered by these tools and, from the actual market experience:

o    A company must develop its operating strategies taking into account the
     range of strategies available to it as well as its Competitors. It must
     seek to balance return with risk.

o    A company must change its mind-set from operating "optimally" as a
     stand-alone entity. This leads to predictable behavior and gives
     competitors information that they can use to devise strategies to improve
     their return at the expense of the company.



Illustrating the above statements, we can examine the behavior of generators
bidding into the U.K. Pool. The generators employ bidding strategies to earn
returns that balance associated risks while considering the likely range of bids
by the other participants. For example, the U.K. generators do not simply bid
their true costs and availabilities. Examining the behavior of the participants
in the U.K. Pool and other electricity markets, one can derive insights that
will be useful in devising strategies for participants in the U.S. electricity
market.

California Electricity Market:

Experience in other deregulated electricity markets combined with simulation
models of these markets are useful for gaining insights which may suggest
strategies for companies operating in California. However, the restructured
market in California differs from other markets in several important respects,
therefore, these experiences must be customized to address California's unique
requirements

A thorough examination of the protocols that govern the California ISO/PX is the
first step in devising strategies that balance returns with associated risks.
These descriptions of these rules are in the public domain. PSC has an excellent
foundation for this work since it has been intensively studying the business
protocols that govern the ISO and PX and understands how these components of the
market interact.

To illustrate this point, the California market design is based on two
theoretical models; a simple supply curve/demand curve economic model of a
market with a single commodity and a simple non-repeated auction for a single
commodity. Theory shows that for such a simple market in which each participant
is relatively small, that the optimal strategy is to bid its "true cost."
However, even a cursory review of the protocols shows that the actual California
market structure deviates significantly from its theoretical underpinnings.

The California electric market actually consists of several markets that
interact in complex ways:

o    A progression of forward and spot markets

     --   Day-ahead forward markets, hour-ahead forward markets, and real-time
          spot markets

o    Markets for different commodities run by several different parties

     --   Forward energy markets run by the PX

     --   Forward energy markets run by other Scheduling Coordinators (SCs)

     --   Real-time imbalance energy market run by the ISO

     --   Forward transmission markets run by the ISO

     --   Markets for ancillary services such as reserves run by the ISO

     --   Ability to opt out of the ISO ancillary service markets through
          self-provision of ancillary services.

These are also not one-time auctions, rather these markets are frequently
repeated (daily or hourly). All of these factors will significantly affect a
participant's best strategy.

A participant in the California energy market will therefore face several
high-level strategic decisions. These include:

o    Whether to buy and sell energy in the PX forward energy markets or in some
     other SC's forward energy markets?

o    How to balance risk due to uncertainty in its forecasts of demands and
     market prices by bidding into the day- ahead market vs. the hour-ahead
     markets?

o    Where and how to bid a generator's capacity (the same capacity could be
     used for several mutually exclusive purposes, e.g. to sell energy into an
     energy market, to sell one or more ancillary services to the ISO's
     ancillary services markets, to self-provide ancillary service
     requirements)?.

PAC & PSC's "Real-time Optimization and Market Modeling" Service Offering is:





Comprehensive services covering:

o    Review & Analysis of the California market ISO/PX business protocols

o    Assessing competitive positions

o    Developing and simulating strategies

o    Monitoring and tracking market behavior

We will first review the ISO and PX protocols on a very detailed level to find
the opportunities available to a participant, as well as to identify the risks
to which they may be exposed. Based on this review, we will then work with the
participant to identify potential strategies that it may choose to use as well
as the strategies which its competitors may use against it. For example, our
initial evaluation of the published protocols for the real-time energy market
indicates that the behavior of this market may potentially expose a large net
buyer of energy to substantial risk. We would aid such a participant in
developing its strategies to detect and guard against such occurrences.

Reviewing the protocols provides the basic foundation for developing a range of
potential strategies. Developing workable strategies requires the further
ability to perform detailed "what if?" simulations of the market's response as
well as the ability to examine other participants' responses to these
strategies. PAC's simulation models provide the foundation for this effort. PSC
and PAC will work with the participant to refine the candidate's strategies
using the simulation tools to determine its optimal strategies for the
California market.

To continue to refine and adjust strategies to market conditions, participants
must monitor and evaluate the behavior of the markets. Participants will be able
to take advantage of the information available and published by the ISO and PX,
but they should also assimilate and analyze the valuable information arising
from its own experience in structuring appropriate bids and tracking which are
accepted and rejected. By evaluating this information, a participant will
determine whether other participants' strategies are damaging its economic
position and can develop the insights to counter such harmful actions by others
in a timely fashion. We would work with the participant to implement such a
monitoring effort.