EXHIBIT 99.371

The pricing mechanism that ISO proposes to use in its Rational Buyer methodology
for the ancillary services market has serious flaws:
- -        the prices are not market-clearing prices
- -        the prices are not marginal-cost-based prices (they do not reflect the
         way in which the costs that ISO incurs change as the requirements are
         changed slightly)
- -        the capacity ISO buys from each supplier and the prices it sets may not
         be in equilibrium - the suppliers may wish to change their bids in
         response to the prices
- -        prices for a single ancillary service may differ for buyers and sellers
         - it drives a wedge between buyers and sellers that will open further
         arbitrage opportunities.

The pricing mechanism proposed will invite gaming behavior by the suppliers.

ISO proposes to use a process to select providers and set prices that will
minimize the PAYMENTS it makes to providers of ancillary services GIVEN THE BIDS
SUBMITTED. By using prices that are not market-clearing prices (i.e. that leave
open arbitrage opportunities), ISO is ignoring the fact that suppliers will
adjust their bidding strategies to extract more profit once they gain experience
with the behavior of the market.

Suppose that a provider selling spinning reserves notices that ISO's Rational
Buyer mechanism often pays higher prices to providers of nonspinning or
replacement reserves. Since the market will be repeated daily, he will soon
learn to reduce the quantity of capacity that he bids for spinning reserves and
increase the quantity that he bids for nonspinning or replacement reserves.
Similarly, suppose that he notices that ISO's Rational Buyer mechanism often
charges higher prices to consumers of nonspinning or replacement reserves. He
will soon learn to reduce the quantity of capacity that he bids to ISO for
spinning reserves and sell nonspinning reserves or replacement reserves directly
to the consumers to skim some of the price difference as profit. When suppliers
change bidding strategies so as to restrict artificially the use of their
capacity, the restrictions will reduce the efficiency of the ancillary service
market and drive prices higher.

The mechanism is also needlessly complex and will produce a "black box" solution
that will not be transparent to the participants. ISO mentions that the Rational
Buyer mechanism will consider N(4) combinations of bid prices. If ISO receives
bids from N = 500 resources, this would result in 62.5 billion combinations. The
sheer numbers will make it almost impossible for a participant to verify that
the results are rational and fair. This is particularly true for a provider from
whom ISO buys capacity to provide a high quality ancillary service at a lower
price than ISO is paying for a lower quality ancillary service.

ISO's Rational Buyer Mechanism will likely not produce efficient market-clearing
prices in any given auction. This would be acceptable if the fashion in which
providers adjust their bidding strategies would tend to drive the prices toward
market-clearing prices over time. However, the prices can move in an unstable
fashion as suppliers change bidding strategies. Consequently, it seems unlikely
that the prices will converge to efficient prices over time.


ISO could achieve an efficient and stable market by selecting ancillary service
bids to minimize costs as measured by the bids submitted and setting its prices
to the marginal costs of meeting the several ancillary services. This would
produce market-clearing prices. The prices would not send signals that show
arbitrage opportunities. If no one has market power, the parties should have
incentives to bid their true costs. This would result in the selection of
capacity that maximizes societal benefit and is the appropriate goal for a
public benefit corporation such as ISO.

However, ISO's goal apparently is to find the absolute minimum of the payments
it makes to providers of ancillary service capacity given their bids in a single
instance of the auction. If this is the case, ISO cannot do any better than
selecting capacity to minimize costs as measured by the bids and paying each
selected provider the price that he specified in his bid. That is, ISO would
minimize costs (given the bids) by using a first-price auction.

The consumers would be charged the average cost per MW that ISO pays for
capacity for each of the ancillary services. Since demands for ancillary
services are defined by ISO, ISO does not have to contend with elastic demand.
Without demand elasticity, average cost pricing to consumers would be adequate.

Since ISO would not be setting market-clearing prices, there will be
opportunities for arbitrage. As the auction is repeated, participants will learn
and adjust their bidding strategies to maximize their profits. However, a body
of economic theory indicates that the prices that ISO would pay under a first
price auction should tend to move toward the market-clearing prices over time.
They may not actually converge to the market-clearing prices but we would expect
them to oscillate around them. The simplicity of the auction and pricing
mechanism would facilitate transparency and allow the participants to adjust
their bidding strategies as appropriate.

ISO would still use the "product substitution" component of Rational Buyer.
However, it would replace its proposed pricing mechanism with a much simpler one
of paying providers their as-bid costs and charging consumers the average cost
of capacity procured for each service. This auction could be formulated as a
simple minimization problem with linear constraints.

ISO and its participants could garner several benefits from such a first-price
auction:
- -        Reduced development costs
- -        Enhanced market transparency
- -        A mechanism that encourages participants to devise strategies that
         clear the market.

ISO should hire an economist who is an expert in auctions (e.g. Robert Wilson)
to review its Rational Buyer proposal as well as various other options for the
ISO ancillary service market. The review should include:
- -        Rational Buyer mechanism
- -        Least-cost procurement (as measured by bids) with marginal-cost pricing
- -        Least-cost procurement with payment as-bid (first-price auction).


The consultant could help the ISO and the market participants choose a structure
that would result in an efficient and stable market for ancillary services. This
would benefit all participants in the California energy market.