Exhibit 99.294
March 13, 1997
Mr. Steve McMenamin, VP
Edison International
2244 Walnut Grove
Rosemead, California 91770
Dear Steve:
I have checked into many of the concerns you expressed at our meeting. I relied
some on the Perot Systems staff to ensure that my thoughts coincided with
reality. I also read the roughly 2000 pages of CPUC/CEC information on the ISO,
PX and other restructuring matters. I intended to provide you this information
prior to a meeting with you on March 19th. Because I have learned that I will
not be at the meeting, I am providing the information now. Given your time
schedule, I will attempt to keep it short and to the point.
From my understanding, your fears are well-founded. Many of the issues I have
recognized have been noted by others previously but the focus reverted to the
generators and the implication for the UDC were bypassed. Further, it appears
that contradictory facts associated with ISO and PX impacts on the UDC have been
bypassed.(1) I will only present that subset most generic and immediately
relevant to you.
PROBLEMS:
First, revenue quality meters on the generation-side combined with detailed
calculations of the transmission system cannot determine what energy was
delivered to you at a given time even after AMR analysis. The data and models
can generate an answer, but it is only one of many possible answers that are
quite sensitive to relatively minor variations of your and surrounding UDC
loads. Most importantly each moment of time is associated with a different sets
of energy and prices based on the day-ahead, hour-ahead and real-time markets.
Given the experience with price fluctuation in relatively stable US gas as well
as overseas electric markets, the revenue impacts could be significant. A simple
model can show the phenomena and Perot Systems staff can
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(1) As I read the AB-1890 documents it seemed to me there was a giant loop hole
for you. What if you really only became a wire company with only unbundled
rates for wires and billing services? You "sell" or form an agreement with a
marketer/broker to act as a supplier of last resort to serve your
customers... but they also receive all your customers, subject to retail
market dynamics form other brokers/marketers. You no longer have
responsibility for the final "rate." You only have the unbundled rates
associated with the transition costs of the generator, your "wire-use" rate
and your billing-service rate. It would seem that you are then totally free
from the uncertainty and "losses" of the market place and ISO/PX operations.
perform a detailed analysis to verify the "test-of-concept" I would provide. We
can also show the benefits of UDC metering at the UDC/transmission interconnect
as well as the accounting needed to resolve the now certain (but justified)
conflict of cost allocation between generator and UDC.
Further, I note that you can over-demand on one market (e.g. day-ahead) and
resell it on another (primarily, the real-time spot) market. To compensate for
market fluctuations, the UDC may need to play both sides of the PX market.
Again, it is relatively simple to model this phenomena, but it requires
additional features to be added to the initial model above that would show the
metering issue. Additionally, the law does not clearly prevent interaction with
a third party on the transfer of your rights of the PX energy to them. This can
be used as a de facto hedging mechanism for both you and the third (IPP broker)
party.
Although the CPUC or the Governing Board for the ISO/PX can change
rules/policies as needed to overcome "problems," these will occur only after a
problem has become untenable (after the damage is done). Further, the new rules
will necessarily multiply as problems become recognized and interfere with
previous rules. This approach to "Problem solving" implies delayed response to
problem recognition and resolution, an eclectic collection of rules that need to
be completely revised periodically, and financial risk for all participants.
These dynamics can be simulated in a model and results would strongly indicate
the need for the UDC to maintain significant cash to tolerate problems during
the resolution period. In addition, it would become clear that an accounting
mechanism in the ISO/PX structure could act as the financial buffer that makes
the inevitable limitations of the early phases of the ISO/PX survivable.
Early analysis of the ISO/PX system in California corroborates our research that
show a strong ability for generators to game the system to extract excess
profits and increase prices. These costs get passed on to a UDC that is
currently required to provide significantly reduced rates to residential and
commercial customers -- while trying to hold the market for industrial
customers. While this phenomena can be easily simulated, the secondary aspect of
the simulation may be more interesting. Although the currently written law
stipulates rate reductions, the unbundling process makes some aspects of the
rate making ambiguous and fluid. (See footnote 1.) Further, the concept of
reevaluated transition costs also provides some mechanism to pass on involuntary
(uncontrollable) costs. The resolution of any rate adjustment requires complete
justification and, therefore, a certain delay in recovery with an uncertain
level of recovery. To ensure financial solvency during the time issues are being
resolved, the requirement of a regulatory financial accounting mechanism can be
determined.
SOLUTIONS:
A model (Model-A) and documentation to clearly show the impacts of not having
instantaneous and accurate load data on UDC costs and revenues can be provided
with one person-week of effort or $10,000 plus any travel expenses. This model
would basically be a small Linear Programming (non-systems thinking) tool that
could simulate hour-to-hour uncertainty issues easily. The results from the
analysis could act as the basis for a more detailed and real-data analysis (by
possible Perot Systems).
The variation on Model-A to show the impact of alternative bidding strategies
and the overbooking of demand bids (with resale on the spot market) could be
delineated within another person-week. As a later effort, an
uncertainty/confidence package (HYPERSENS - noted in Appendix) could be used to
determine the portfolio of bids that maximize utility profits on average.(2)
A second model (Model-B) based on the "systems thinking" approach could simulate
the occurrence of ISO/PX problems, their untimely resolution, and the financial
loss to the UDC in the process. This model could indicate the
accounting/financial mechanism needed to protect the UDC from the ambiguities
and uncertainty of the early market. It would also quantify the scope and
success probability of any mechanism as a function of the regulatory
delay/threshold. Two person-weeks are needed for model development, analysis and
documentation. (As a later project, the model could be expanded to include
detailed representation of the UDC and associated utility system structures such
that it became an accurate forecasting/planning tool.)
A larger list of concrete examples where problems may occur could be developed
in five more person days ($10,000) assuming the assistance of Perot Systems
staff who have studied the ISO/PX rules/dynamics. (Their costs are included in
this estimate.) This list may include over one-hundred detailed facets where
problems may be significant. Model-A and Model-B should be able to clarify and
delineate many of the issues raised. The cost of this modeling exercise would
depend on the number of problems you would like addressed and documented.
Typically 10 to 20 issues can be simulated and documented per person-week. The
actual relationship of issues to time would depend on the problem addressed.
I hope this succinctly responds to your request. Please contact me with with any
questions or concerns.
Sincerely,
George Backus
President
encl: Resume, HYPESENS, Company Products/Background
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(2) Because the PX has a stochastic nature similar to that of the NY stock
exchange, the profits are probabilistic and the game is to win more than
is lost based on the measured variability in the market. Many techniques
are available to play this game. For all methods, a big win is improbable
but market losses can be effectively avoided under all circumstances.
Appendix 1:
Resume of George Backus
Appendix 2:
Company Background and Products
Appendix 3:
HYPERSENS Uncertainty/Confidence Package