1. Why does Eastern want more generating capacity?
As an REC, Eastern buys power from the pool at PPP which is more volatile than the price they can sell to consumers. It is exposed to risks in the power prices fluctuation. Vertically integrated into the generation business will reduce Eastern’s overall risks in power prices fluctuation. The more generating capacity Eastern has, the less overall risk it will face.
Eastern wants to benefit from potential arbitrage opportunities between gas and electricity markets through vertical integration, combing gas supply with gas-fuelled electricity generation. With major revenue generated from regulated electricity distribution business, Eastern would need more generating capacity to facilitate arbitrage.

2. What prevented Eastern from increasing its own electricity generation capacity?
The regulation prevents RECs from vertical integration by setting limits of generation capacity to each RECs. Eastern’s generation capacity is capped at 1,000 MW. With existing capacity of 850MW, Eastern is unlikely be able to aggressively increase its own electricity generation capacity.

3. What were the main reasons for Enron to enter into the agreement with Eastern to receive gas and supply the value of electricity rather than operate simply as an independent power plant (IPP)?
An IPP needs four contracts to transfer various risks in the project. One of the contracts is power purchase agreement (PPA), which would eliminate electric price risk. Without PPA, an IPP would become a merchant power plant (MPP) which retains gas and/or electric price exposure. In U.K.’s deregulated market, Enron’s counterparty for the PPA agreement would be private companies. However, private companies were reluctant to sing long term PPA contracts because they had lost money when technological changes lowered generating costs before the contracted