Exhibit 99.422
Policy Assessment Corporation
A PROPOSAL FOR A
REAL-TIME COMPETITIVE RESPONSE SYSTEM
INTRODUCTION
The transition from a regulated to a deregulated market presents a tumultuous
time for all the companies that prospered under the "old" rules. Regulators
attempt to provide an orderly transition from the past to the future that
protects existing rights and commitments while simultaneously clearing the way
for new free-market activities. These two demands are in economic opposition and
new rules necessarily contain ambiguities and market distortions. Physical
constraints to the system insure that any definition or rule will become
ambiguous under some operating condition(1) (Hunt 1996, p. 61) and thereby allow
competitors to respond in way that dramatically changes the expected character
of the future market place(2) (Newbery 1996, p. 64). In California, significant
efforts were made to ensure the market acted as the regulators deemed
appropriate. This not only causes market distortions that can be advantageous to
some and detrimental to others, it also means that the rules probably will have
effects contrary to the desired effect. As Richard Tabors of MIT notes:"...the
market rules cannot be gotten right on the first try if the goal is a
pre-designed supervised market. The regulatory interference has prevented the
types of market mechanism ... normally seen in a commodity type market"(3)
(Tabors 1996, p. 47). From electricity deregulation experience in other parts of
the world, "the message .. is clear. It was incorrectly assumed that the new
commercial entities would continue to operate by the intent of the rules, even
if not formally stated, when the new structure began. But commercial markets are
commercial markets, profits are profits and any commercial advantage will be
taken" (Tabors 1996,
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(1) Sally Hunt and Graham Shuttleworth, Competition and Choice in Electricity,
John Wiley and Sons, 1996, p. 61.
(2) David M. Newbery, "Regulation, Public Ownership and Privatisation of the
English Electricity Industry" in International Comparison of Electricity
Regulation, Richard Gilbert, and Edward Kahn, ed., Cambridge University
Press, 1996.
(3) "Lessons from the UK and Norway," Richard D. Tabors, IEEE Spectrum, New
York, pp. 45-49.
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Policy Assessment Corporation
p. 49). The dynamics of deregulation as they relate to how competitors may act
toward each other are documented further by Wolak(4) and Backus.(5)
This proposal specifies tasks that adds the California ISO/PX simulation to and
modifies the structure of the deregulation dynamics model developed by
Systematic Solutions, Inc., to faithfully reflect the specific rules and
protocols associated with the California market of January 1, 1998. The purpose
of the effort is to ensure that competitors cannot take advantage of
opportunities that the rules provide to the undue detriment of Edison
International. The modeling system would be a tool equally applicable to all
energy-market divisions of Edison International, such as generation and the UDC.
This proposal brings together the talents of Perot System Consultants (PSC),
Systematic Solutions, Inc. (SSI), and Policy Assessment Corporation (PAC)
experts on deregulation and PX/ISO operation. To our knowledge, no other
individual or group of organizations is capable of providing the type of system
proposed.
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(4) Frank A Wolak and R.H. Patrick, "The Impacts of Market Rules and Market
Structure on the Price Determination in the England and Wales Electricity
Market, Stanford University Department of Economics Working Paper," April
1997. Available on www-path.eecs.berkeley.edu/UCENERGY.
(5) George A. Backus, The Dynamics of U.S. Electric Utility Deregulation, U.S.
Department of Energy, Office of Utility Technology, Washington D.C., August
1996.
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Policy Assessment Corporation
THE PROJECT
This project is divided into three or more phases to verify that each current
phase indicates the success of the next phase. Careful consideration of the
project goals strongly indicates minimal technical risk under all hypothesized
conditions. The changing ground of the California deregulation process, however,
indicates that certain tasks may not be needed, that some tasks may need to be
redefined and that other tasks may need to be added in Phases II and III. For
example, last minute (December) modifications to the ISO protocols would require
that our ISO simulation model be modified accordingly. This proposal provides
for the testing of the complete system in Phase I, followed by two other phases
contingent on a best guess expectation of the PX/ISO release of specifications,
an exhaustive model testing regimen, and Edison International staff training
needs.
PHASE I
The first phase, called the "functional model phase," reviews all the
information of the California ISO and PX as well as any other relevant
commission rulings to determine any areas where competitors could find
opportunities. These are translated to strategies and incorporated into the
existing strategy options within the current deregulation model framework. The
simulation of the way that the actual PX/ISO operates is also incorporated into
the model. Perot Systems Consulting (PSC) has help designed these tools for the
actual PX/ISO and are thus the most capable to make sure this project provides
valid simulations of actual PX/ISO operations. Further, PSC's intimate knowledge
of PX/ISO protocols has a particular advantage for this project.
The deregulation framework contains detailed demand, energy, financial and
physical representations of all the known potential players in the California
market. (Unanticipated entities can be added as needed.) The short-term
forecasts for California and local competitors demands are determined
endogenously so that the generation available to serve the California market can
be correctly ascertained. Phase I provides the integration and testing of all
critical components as well as determines what protocols and rules have
relevancy to future market conditions. Edison International staff will use this
framework to learn the modeling system plus gain confidence in its usage as an
operational tool. The human interface will also be modified as needed to
maximize the efficacy of using the model for bidding and other strategies. The
real-time data available from the PX/ISO will not have been determined during
Phase but will be the focus when it becomes available for Phase II. Nonetheless,
the ability of the model to simulate basic competitive strategies against human
players will be tested in Phase I to ensure that the model performs as expected.
PHASE II
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Policy Assessment Corporation
The second phase is the "operational model phase." In this phase the project
team determines the available and actual real-time data from the ISO/PX and adds
the analysis capabilities to take advantage of that data stream within the
model. Advanced statistical methods (primarily associated with the technical
analysis of commodity time series and cointegration) will be added to the model.
These sub-systems determine the statistical qualities of the prices, supplies
and demands in order to understand the underlying direction of their variance
and averages. The software should be able to detect any pattern in a
competitor's actions that may be detrimental to Edison International operations
or whether competitors are somehow directly tracing any Edison International
efforts.
In Phase III below, neural networks may be advantageous for the short-term
forecasting of price and demand. Neural nets, however, do require specific data
structures that would not yet be understood in the early days of the
deregulation.
Both Phase II and Phase III use a sophisticated confidence/validity package
called HYPERSENS. It can search essentially all the possible options to find
those real-time strategies that ensure Edison International is not disadvantaged
by the behaviors of competitors. HYPERSENS cannot only accommodate the
uncertainty in competitor behavior, generator availability, and hourly demands,
it can determine the set of options available that best meet Edison
International goals.
Because the modeling system of Phase II will have the capabilities to analyze
hourly data, test data sets will be generated for Edison International staff to
use as a means of learning and gaining confidence in the system. Any uncovered
limitations will be mitigated as appropriate. Model testing with Edison
International Staff is a significant part of the project to insure that the
model does well under anticipated and unanticipated conditions. Synthetically
produced data streams that approximate what is actually expected during the
first quarter of 1997 will be used in the testing.
PHASE III
The third phase is the "real-time implementation phase." Only after January 1,
1998 will real data be available for both analysis and real-time decision-making
purposes. The modeling system described here will need to be monitored to insure
that it produces the information Edison International expects. The system will
contain software that notifies staff of any anomalies that may jeopardize the
result's validity. Further, fail-safe" positions will be included that limit any
financial exposure during the time interval before adequate data have become
available to fully validate the system's operation. The algorithms will be
"tuned" as appropriate and enhanced features are added as required. The model
will also be benchmarked against "reference" assumption to determine its success
rate compared to equilibrium conditions. The model methodology will, by default,
certainly have the ability to determine the best bidding strategy given market
information. The only area where added care and testing must be taken is in
those strategies that respond directly to the aggressive actions of a
competitor.
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OPTIONAL FOLLOW-ON PHASES
As an intrinsic part of the system, the CIGMOD deregulation dynamics model will
allow Edison International to test the impacts of others entering the California
market (generation or marketing) or the impacts of (gas and electric) mergers,
acquisitions, and takeovers among competitors or by Edison International. This
could represent a Phase IV consulting effort. The consolidation (or dilution) of
the market changes the strategies that a company must use to insure
profitability. This effort would extend the short term (hour-to-hour to monthly)
analyses to longer time frames, thereby providing company-wide analyses of the
impacts of such longer-term strategies on day-to-day as well annual operations
and profitability. This Phase can also test competitors' financial strategies
which could impact Edison International's operations/profitability.
The ISO/PX system in California is premised on the assumption that DC analysis
is adequate to determine system requirements and behaviors. Efforts of the
project staff indicate that the AC considerations lead to significant additional
opportunities for competitors to disadvantage Edison International operations.
Some of the advanced technical efforts to increase the transfer capabilities
within WSCC may make this area the most crucial to insuring the real-time
availability of Edison International generating units. Adding AC considerations
to the proposed modeling system could represent a Phase V
The specifics of these potential Phases IV and V are not pursued further in this
proposal.
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Policy Assessment Corporation
PROJECT TASKS AND DELIVERABLES
The project phases are designed as self-contained tasks whose completion
verifies that step of the project. Phase I tasks use existing tools and convert
them to reflect the detailed California PX/ISO specifications and protocols.
Phase II tasks incorporate the data stream that will be available from the
PX/ISO as soon as it is known and verifies that that system performs well under
the expected and unexpected operational conditions of the PX/ISO. Phase III
tasks fine tune the model parameters as soon as actual PX/ISO data support such
adjustments. Further, Phase III provides support to Edison International staff
as needed to insure maximum profitability from the system. For all phases, great
effort will be made to keep Edison International staff fully cognizant of the
model's technology and the model's operation.
PHASE I TASKS
TASKS
1.) REVIEW PX AND ISO PROTOCOLS AND BUSINESS OPPORTUNITIES: This task involves a
detailed review of PX and ISO business and operational protocols and
particularly the interactions between these two entities. The main goal is to
become well versed with the ongoing changes in PX and ISO business and
operational protocols, and to become aware of which strategies are available to
competitiors in the California market. DELIVERABLE: The strategies will be
documented.
2.) IMPLEMENT THE REDUCED SCALE PX/ISO OPERATIONAL MODEL (CPXISO): This tasks
implements a reduced scale model that would closely approximate the operation of
California's PX and ISO systems. This task starts with existing full scale
models available to PAC and PSC. Included in this model will be the PX's energy
auction model, the ISO Congestion Management model, and the interaction between
these models. The full 6000 bus ISO linear programming model will be simulated
using a much smaller set of buses and nodes (approximately 100 buses). This ISO
model, even though it will be much smaller and much faster, will effectively
simulate the results of the actual ISO simulation and dispatch. Data interfaces
between PX, ISO, and deregulation model (CIGMOD) will also be developed. Data
models for external systems will also be developed in this task. DELIVERABLE: A
working version of the CPXISO system.
3.) INCORPORATE STRATEGIES INTO SYSTEM: Based on Task 1, the full spectrum of
strategies will be developed for each of the participants in the market. This
task will emphasize getting the "levers" into the model to allow for the
development of ever more sophisticated strategies. The full range of strategies
will be linked to the HYPERSENS subsystem and thereby allow the exhaustive
testing and selection of strategies under uncertain future conditions.
DELIVERABLE: Working HYPERSENS subsystem with implemented strategy levers.
4.) ADAPT PAC'S SHORT-TERM LOAD FORECAST (SLF) MODEL TO WORK FOR CALIFORNIA'S
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ENERGY MARKET: This task involves integrating and fine tuning the SLF model for
California competitors and developing interfaces with the PX/ISO operational
model. The system will forecast hourly demands for all players in and out of
California. The SLF model produces hourly load forecasts for the next 7 days
based on the historical loads, the historical weather, and the weather forecast.
It re-estimates the relevant coefficients on a daily or hourly basis by live
links to the weather service and existing conditions. DELIVERABLE: Existing
system with SLF integration.
5.) DEVELOP INTERFACES BETWEEN CIGMOD AND CPXISO: The system interface includes
system-control, Edison International data-entry, and Edison International
bidding strategy output. The interface between the model and the operators will
automate the input of hourly data, will produce timely reports and charts which
effectively communicate the relevant information, and will facilitate the
operator's decision making process. DELIVERABLE: Existing System site tested
interface.
6.) ADD EDISON INTERNATIONAL PROPRIETARY DATA: Any proprietary data that Edison
International would like included can be added at this time. From this point
forward, the databases of the model cannot be removed from Edison International
offices without written permission.
7.) CALIBRATE CIGMOD/CPXISO MODEL TO CALIFORNIA AND EDISON INTERNATIONAL
BEHAVIOR: Data for each company and plant in the region will be incorporated
into the model. This data will be available for use in determining bidding
strategies (prices and quantities) and will be used to determine the operating
income of Edison International and each of the competitors. The data will
include capacities, heat rates, fuel prices, variable and fixed O&M, and
embedded capital costs. The CIGMOD model will be calibrated to competitor and
Edison International data. The calibration process will test the model and will
estimate critical operating and financial parameters.
DELIVERABLE: Existing model with tested simulation of all relevant companies.
8.) TEST MODEL WITH EDISON INTERNATIONAL STAFF AND UPDATE ALGORITHMS/INTERFACE:
This task will test the operation on the model to insure that the simulation of
the ISO, PX, and company financials are accurate and that the interface is
informative and easy to use. Strategies will be tested to insure that they are
simulated correctly and that the results are reasonable. The algorithms and
interface will be revised and enhanced as necessary.
DELIVERABLE: Staff training and system with enhanced interface
9.) TEST MODEL AND STRATEGIES AGAINST REALISTIC CONDITIONS: The system will be
used to test the basic strategies to determine the realistic impact of these
strategies. The growing list of strategies will be tested in several sets of
simulations. These simulations will test human strategy against human strategy
and human strategy against machine strategy to determine the effectiveness of
the strategies and to develop alternative strategies. As good strategies are
developed, counter strategies will be developed, incorporated and tested for
their robustness. The creativity of the human players will be very important in
developing new strategies. After a new strategy is developed it will be
automated and utilized by computer players.
DELIVERABLE: Fully functional system except for real-time PX/ISO analysis.
CIGMOD AND ASSOCIATED SOFTWARE: DELIVERABLE: At the beginning of the project,
the
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Policy Assessment Corporation
CIGMOD system will be implemented on the Edison International computer system
used for this project.
PHASE II TASKS
TASKS
INTEGRATION OF CALIFORNIA'S MARKET DATA INTO CIGMOD/CPXISO MODEL: This task will
determine the availability of the data from the PX and the ISO. The assessment
will include the timing of the data, the company and node detail of the data,
and the form and source of the data. Any expected or possible problems or
inconsistencies of the data will be noted and solutions proposed.
IMPLEMENT AI/STATISTICAL CODE INTO CIGMOD/CPXISO MODEL:. The data stream will be
analyzed to determine the use of the data stream in the forecasting of
competitor actions, spot market prices, and other system values. The system will
be modified to automatically analyze the data using accepted statistical and
artificial intelligence methods.
INTERFACE TO REAL-TIME SYSTEMS: . A real-time data retrieval system will be
developed to bring in the data from the PX, the ISO, and other relevant data
sources. Because Perot intimately knows the system, this task will provide
Edison International with the best understanding of the data available.
DEVELOP PORTFOLIO RULES: Portfolio rules for real-time and over-all strategies
will be developed by testing each strategy under a variety of market conditions
and competitor strategies. Portfolios as used here are defined as the
time-dependent packages of bids and demands/supply that maximize Edison
International goals.
INITIAL TESTING AND TRAINING OF EDISON INTERNATIONAL STAFF: This task will test
the operation of the system by creating a synthetic hour-by-hour data stream.
Edison International staff will conduct the test after being trained on the use
of the system. The results of the test will be used to revise and enhance the
system.
MARKET DRY RUNS: The proposed strategies and portfolio rules will be tested in
real-time to determine realistic use of strategies and the operation of the
system. Multiple sample data streams will be developed to test all aspects of
the system. The decision making process of the competitors will be split between
human players and computerized decision rules. This test will be used to further
enhance the strategies and counter strategies for Edison International in the
California market.
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Policy Assessment Corporation
PHASE III TASKS
TASKS
MONITOR EARLY USE AND FINE TUNING OF MARKET STRATEGIES AND ADDITION OF NEW AI
BASED STRATEGIES: During the first days of the deregulation, large amounts of
new information will become available. This information will be used to
immediately improve the performance of the system. The task will determine and
update any simulation sub-systems needing tuning or enhancement. This task will
also test and refine the fail-safe algorithm for bidding under the unlikely
condition that the system warns users of an ambiguous situation.
DEVELOP BENCHMARK SAVING PROTOCOLS AND MODELS: To determine the efficacy of the
system, it needs to be benchmarked against "reference" conditions. This task
will provide a secondary simulation that has the market acting according to
assumed economic considerations such as marginal costs pricing or the existing
trends in the market. A continuous accounting record of wins and losses will be
maintained in the system.
ONGOING SUPPORT EDISON INTERNATIONAL STAFF: The PX/ISO protocols and rules will
probably change regularly in the early period of deregulation. Further, new
commission rulings must be expected. This task provides Edison International
staff assistance in updating the systems and its data bases to reflect new
conditions. Further, it provides assistance in strategy development when the new
rules change the nature of the market operation.
Edison International will be provided all software associated with the proposed
modeling system, its documentation and all required training on use, operation,
and modification. The specific strategies developed with Edison International
and the associated proprietary Edison information will be for the exclusive use
of Edison. The pre-existing software and generic algorithms and model it
contains is a general purpose tool, as such it is not subject to exclusive use
terms.
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Policy Assessment Corporation
PROJECT TEAM
The project team is composed of experts from Policy Assessment Corporation
(PAC), Systematic Solutions, Inc. (SSI), and Perot System Consulting (PSC).
Information on PAC, SSI and their products are provided in Section 2 of this
document. Information on PSC is provided in Section 3. For the purposes of Phase
I, Perot Systems Consulting and Systematic Solutions, Inc. are subcontractors to
Policy Assessment Corporation. Because the later Phases may change slightly in
scope due to changes in PX/ISO protocols or California commission rulings, the
relationship among the staff may change for later Phases.
The primary staff for this project include:
DR. GEORGE BACKUS (PAC): 20+ years of experience in electric utility planning
and simulation, including direct electric deregulation experience in the U.K.,
knowledge of S. America and Australian deregulation, and direct experience in
U.S. oil and gas deregulation.
JEFF AMLIN (SSI): 20+ years of experience in electric utility planing and
simulation including over 10 years of experience in simulating electric utility
deregulation, decision making under dynamics uncertainty, and accurate short-
and long term forecasting.
DR. PAUL GRIBIK (PSC): 20 years of experience in utility operations and planning
within California. He is a key player in the development of the ISO protocols
for California fully cognizant of transmission congestion issues. He has
assisted the California utilities and WEPEX in developing a methodology to
manage and price transmission congestion that will maximize the economic use of
transmission while providing nondiscriminatory access.
DR. DARIUSH SHIRMOHAMMADI (PSC): 20+ years of experience in electric utility
planning and operations including extensive experience in electric restructuring
and power flow issues. He is also fully cognizant of the California PX/ISO
design and operation.
DR. HEMANT LALL (PSC): 20 years of experience in mathematical programming and
modeling, including real-time data flow and neural network issues.
DR. DAVID AZOFF (PSC): Extensive experience using neural networks to forecast
prices and dynamics in the UK generation markets.
Other experts within the respective companies of the primary staff are also
available for this project. The resumes of the primary staff are provided in
Section 4 of this document.
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Policy Assessment Corporation
PROJECT COST ESTIMATES
The purpose of this project is to develop a real-time software system that
maximizes Edison International profitability after January 1, 1998, despite the
action of existing and new competitors in the California marketplace. Edison
International-specific transactions could exceed $50,000,000 per day. Positive
variations in supply and demand, price, and costs conditions could have
significant benefits to overall profitability in the deregulated environment.
Phase I would extend from June 1 to September 15, 1997. Phase II would extend
from September 15th or earlier until December, 31, 1997. Phase III would extend
from January 1, 1998 to June 30th 1998 or longer.
Policy Assessment Corporation proposes a price not to exceed $850,000 for Phase
I as defined (including travel expenses). The work for Phase I is to be
completed by September 15th, 1997 providing work begins on June 1st, 1997. This
price will remain valid until Midnight, June 20th, 1997.
Invoicing is to be done in 3 parts based on these milestones:
1) Completion of Tasks 1-3 of Phase 1
2) Completion of Tasks 4-6 of Phase 1
3) Completion of Tasks 7-9 of Phase 1
Each invoice will represent one-third of the project cost.
Phases II and III are herein estimated for budgetary purposes only. Depending on
protocol and rule changes, Phase II would require $500,000 to $750,000 of
effort; Phase III would require $500,000 to $950,000 of effort (including travel
expenses). Please note again that Phase III assumes six months of part-time
technical support to Edison International staff on system use and operation. The
total project then has a cost range of $1,850,000 to $2,550,000.
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