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<title>SEMC Northeast Energy Review and Forecast - August 24, 2000</title>
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<td width="100%" valign="middle">7<a name="top"></a><img src="../images/pmamagsm.gif" alt="PMA Online Magazine" border="0" align="right" width="229" height="100"></td>
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<td width="80%" valign="top"><p align="right"><font face="Arial" size="2">(<em>originally
published by PMA OnLine Magazine: 2000/09/02)</em></font></p>
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<p style="margin-right:.5in;tab-stops:.5in" align="center"><b><font face="Arial" size="5"><span style="font-size: 26.0pt; mso-bidi-font-size: 10.0pt"><br>
NORTHEAST ENERGY REVIEW <br>
AND FORECAST<br>
</span></font><span style="mso-bidi-font-size: 10.0pt"><font face="Arial" size="4">August
24, 2000</font></span></b></p>
<center>
<p class="MsoPlainText" align="center"><b style="mso-bidi-font-weight:normal"><span style="font-size:14.0pt;mso-bidi-font-size:10.0pt;font-family:Arial;mso-bidi-font-family:
"Times New Roman"">SPOT MARKET ELECTRICITY ACTIVITY</span><span style="font-size:9.0pt;mso-bidi-font-size:10.0pt;font-family:Arial;mso-bidi-font-family:
"Times New Roman""><br>
NEW ENGLAND & NEW YORK<o:p>
</span></b></p>
</center>
<blockquote>
<blockquote>
<p class="MsoPlainText" align="left"> </p>
</blockquote>
</blockquote>
<p class="MsoBodyText" align="left" style="text-align:left;text-indent:0in"><b style="mso-bidi-font-weight:normal"><span style="font-size:14.0pt;mso-bidi-font-size:
10.0pt;font-family:Arial;mso-bidi-font-family:"Times New Roman""><span style="mso-spacerun: yes">
</span>NEW ENGLAND and NEW YORK FORWARD MARKET COMMENTARY<o:p>
</o:p></span></b><span style="font-size:12.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial;mso-bidi-font-family:"Times New Roman""><o:p>
</o:p>
</span></p>
<p class="MsoBodyText" align="left" style="text-align:left;text-indent:0in"><br>
<span style="font-size:12.0pt;
mso-bidi-font-size:10.0pt;font-family:Arial;mso-bidi-font-family:"Times New Roman"">Forward
prices in New England and New York have been active during the several weeks
since our last survey period.<span style="mso-spacerun: yes"> </span>The
predominant theme driving forward prices for most of July and August has
been the generally lackluster spot prices (with the exception of some high
prices in Zone J in New York) that resulted from the mild and wet weather.<span style="mso-spacerun: yes">
</span>Though most forward prices have recovered over the last 10 days or
so, prices were generally under pressure for the balance of July and the
first two weeks of August.<span style="mso-spacerun:
yes"> </span>The September forward for NEPOOL is currently trading at
$46.00, ($5.00) lower since our last letter but $3.00 higher than its July
25th $43.00 low.<span style="mso-spacerun: yes"> </span>In somewhat of
a contrast, the NEPOOL Q4 forward has stood its ground and is actually a tad
higher over the last seven weeks and is also currently trading around
$46.00.<span style="mso-spacerun: yes"> </span>In New York zone A,
however, Q4 prices continued to decline due to the unseasonably high
precipitation levels seen in the northeast this summer and that forward is
now trading around $30.50.<span style="mso-spacerun: yes"> </span>Further
out the curve, New England Cal 01 peak reached a low of $48.00 on July 25<sup>th</sup>
before recovering to its current level of $53.00.<span style="mso-spacerun: yes">
</span>It is worth mentioning that this is still substantially lower than
the $63.50 price posted on May 31<sup>st</sup>.<span style="mso-spacerun: yes">
</span>In New York, Cal 01 in Zone A traded as low as $36.00 in the last
week of July and first week of August before rebounding to the $40.00 level.<span style="mso-spacerun:
yes"> </span>The Winter (JAN-FEB 01) forward in NEPOOL rose $1.25 to
$55.50 and actually highlights the flattening of the Cal 01 curve since
Jul-Aug for Cal 01 declined $12.00 to its present price around $80.00. <o:p>
</o:p>
</span></p>
<p class="MsoBodyText" style="text-indent:0in"><span style="font-size:12.0pt;
mso-bidi-font-size:10.0pt;font-family:Arial;mso-bidi-font-family:"Times New Roman"">There
are many things going on in the market and it is at a juncture where it is a
bit disjointed and we do feel that it is a market that is quite difficult to
call.<span style="mso-spacerun: yes"> </span>With that said, we will
try and highlight some of the issues that may influence forward prices over
the next few weeks, and give our opinion on the market�s direction.<span style="mso-spacerun: yes">
</span>To start, one of the longer-term bullish items is the August 31st
termination of the Hydro-Quebec power contract with the NEPOOL utilities.<span style="mso-spacerun: yes">
</span>While power will continue to flow over the lines, it is probably safe
to assume that the prices will more than likely be higher and more closely
aligned to the prevailing market prices.<span style="mso-spacerun: yes">
</span>As mentioned above, the predominant driver of forward prices has been
the mild and wet weather.<span style="mso-spacerun: yes"> </span>The
fact that forward prices continue to move off spot weather surprises us but
also presents opportunities.<span style="mso-spacerun: yes"> </span>While
it makes sense that water levels could influence prices in the short term,
it really should have minimal effect on prices for 2001 and possibly might
not be that large an influence (at least not as a bearish factor) on the
fourth quarter.<span style="mso-spacerun: yes"> </span>The run
of the river facilities have been running at record levels and realistically
their output will probably fall (giving a slight boost to prices everything
else being equal) over the next year if a more typical weather pattern
ensues. It is our inclination that the most important item of the summer is
the fact that the mild summer weather in the northeast did not allow the
market to see what peak load growth was year on year.<span style="mso-spacerun: yes">
</span>We believe that some sustained hot weather (whether occurring during
the balance of this year or next summer) would reveal that there has been
some significant growth in load.<span style="mso-spacerun: yes"> </span>We
only have to point to the low 1999 summer prices in the Western Interconnect
to show that the past is not necessarily the prelude to the future.<span style="mso-spacerun: yes">
</span>If the current forward fuel curve stays intact and assuming that the
proposed Congestion Management System is not operational by next summer, we
think that being able to buy NEPOOL Jul-Aug 01 below $75.00 will provide a
chance to accumulate power at reasonably attractive prices.<span style="mso-spacerun: yes">
</span>The chart below (showing cal 01 peak prices vs. cal 01 gas prices) is
very interesting to us.<span style="mso-spacerun: yes"> </span>It
indicates that the New England electricity forward curve has been acting
primarily on emotion and somewhat independent of fuel pricing.<span style="mso-spacerun: yes">
</span>Though over the very long-term (2 years and out) we see gas prices
gaining relative to electricity prices, in the short-term (next 3 months) we
see a reversal of that recent trend (gas expensive to power) and would be
long the 2001 electricity peak forward versus the 2001 forward gas strip.</span><span style="font-size:14.0pt;
mso-bidi-font-size:10.0pt"> </span><o:p>
</o:p>
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<p class="MsoNormal"> </p>
<p class="MsoNormal"><b><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial"><span style="mso-spacerun: yes">
</span>NEPOOL INTERMEDIATE HEAT-RATE GENERATOR OPTION STRATEGY<o:p>
</o:p>
<br>
<br>
</span></b><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial">This strategy is designed to protect intermediate generators
from being priced out of the September market due to high natural gas and
fuel oil prices.<span style="mso-spacerun: yes"> </span>The risk (or
assumptions) in this strategy is two-fold.<span style="mso-spacerun: yes">
</span>Firstly, the generating unit must be available to produce power to
cover the short position on the September $45.00 daily call.<span style="mso-spacerun: yes">
</span>Secondly, there is fuel risk if the spark spread moves in such a way
so that the generating asset is incapable of producing power at a low enough
price to cover the call exposure at the $45.00 strike price.<span style="mso-spacerun: yes">
</span>The September $45.00 put provides downside revenue participation at
50% of the plants generating capabilities if it is priced out of the market
as a result of high O&M costs while the September $60.00 daily call
provides upside for the generator on highly profitable outlier days.<o:p>
</o:p>
</span></p>
<p class="MsoNormal"><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial">For a 50Mw plant in NEPOOL:<o:p>
</o:p>
</span></p>
<p class="MsoNormal"><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial">Buy<span style="mso-spacerun: yes"> </span>25Mw $45.00
daily puts @ $6.00<span style="mso-spacerun: yes">
</span>(These prices represent theoretical values that these options<o:p>
</o:p>
<br>
Sell<span style="mso-spacerun: yes"> </span>50Mw $45.00 daily calls @
$5.50<span style="mso-spacerun: yes"> </span>would
likely trade at) <o:p>
</o:p>
<br>
</span><u><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;mso-bidi-font-family:
Arial;font-weight:normal;mso-bidi-font-weight:bold">Buy 50Mw $60.00<span style="mso-spacerun: yes">
</span>daily calls @ $2.50<span style="mso-spacerun: yes"> </span><o:p>
</o:p>
<br>
</span></u><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial"><span style="mso-spacerun: yes">
</span>Net
cost<span style="mso-spacerun: yes"> </span>$0.00<o:p>
</o:p>
</span></p>
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<p class="MsoNormal"><span style="font-size:11.0pt;mso-bidi-font-size:10.0pt;
font-family:Arial">If you have any questions concerning this option trade or
would like to discuss how a strategy might reduce risk or enhance a revenue
stream, please feel free to contact us at 630-482-2451. </span><span style="font-size:14.0pt;
mso-bidi-font-size:10.0pt"><o:p>
</o:p>
</span></p>
<hr>
<p class="MsoNormal" style="margin-left:1.0in"><font face="Arial" size="3">The
contents of the current Strategic Energy Management Corp. newsletter
�Northeast Energy Review and Forecast� found here represents excerpts.<span style="mso-spacerun:
yes"> </span>If you would like to receive the complete newsletter please
click on <a href="http://www.strategicenergymgmt.com/">www.strategicenergymgmt.com</a>
and go to the current newsletter section of our website.<span style="mso-spacerun: yes"> </span></font></p>
<p class="MsoNormal" style="margin-left:1.0in"><font face="Arial" size="3"><span style="mso-fareast-font-family: Times New Roman; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SA">All
information contained within this document is deemed to be from reliable
sources. Strategic Energy Management Corp. makes no representations with
respect to any aspect of its accuracy, completeness, or timeliness.
Strategic Energy Management Corp. disclaims liability to any person or
entity in regards to errors, omissions, or decisions based upon any
information contained within.</span></font></p>
<p class="MsoNormal" align="center"><span style="font-size:14.0pt;mso-bidi-font-size:10.0pt">Strategic
Energy Management Corp.<br>
</span><span style="font-size:14.0pt;mso-bidi-font-size:10.0pt">Phone:<span style="mso-spacerun: yes">
</span>630-482-2451<o:p>
</o:p>
<br>
Fax:<span style="mso-spacerun: yes"> </span>630-482-2452<o:p>
</o:p>
<br>
</span><font face="Arial"><span style="font-size:14.0pt;mso-bidi-font-size:10.0pt">
e-mail: <a href="mailto:[email protected]">[email protected]</a></span></font><span style="font-size:14.0pt;mso-bidi-font-size:10.0pt"> </span></p>
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