Re:

----- Forwarded by Jeff Dasovich/NA/Enron on 11/07/2000 01:35 PM -----

Jeff Dasovich
Sent by: Jeff Dasovich
11/07/2000 01:19 PM

To: Steven J Kean/NA/Enron@Enron
cc: David Parquet/SF/ECT@ECT, James D Steffes/NA/Enron@ENRON, Joe
Hartsoe/Corp/Enron@ENRON, Mary Hain/HOU/ECT@ECT, Paul Kaufman/PDX/ECT@ECT,
Peggy Mahoney/HOU/EES@EES, Richard Shapiro/NA/Enron@ENRON, Sandra
McCubbin/NA/Enron@ENRON, Sarah Novosel/Corp/Enron@ENRON, Susan J
Mara/SFO/EES@EES, Tim Belden/HOU/ECT@ECT
Subject: Re:

Dave Parquet and I spoke with Smutney of IEP re: herding the cats.

In true "swedish hostage syndrome" fashion, Smutney informed us that none of
IEP's members has screamed about the FERC-proposed cap. He added that the
"industry" is under siege and that "just saying no" to price caps isn't
politically tenable. He also said that he hadn't planned on mentioning price
caps in his remarks. We expressed concern that it would be hard for the head
of California's generator association to avoid the topic.

We stressed the importance of having IEP disagree with FERC's cap proposal
and offered the following message points:

Price caps have failed in the past and they'll fail again.
FERC's and California's immediate goal ought to be to make the bold reforms
necessary to create real, competitive markets and eliminate the need for
price caps altogether.
The most important reforms include:
Reforming California's siting laws to permit entry of supply---best way to
undermine "high" prices is easy entry by competitors
Reforming the PUC review of utility purchases
Give the utilities financial incentives to purchase efficiently (i.e.,
similar to California's gas market, where a benchmark is set and the IOUs
profit or lose on the basis of whether the IOU does better or worse than the
benchmark). It ain't rocket science, and it works.
The CPUC gets out of the way and stops the practice of "after-the-fact"
reviews of power purchases.
Creating a retail market
If California/FERC adopt these reforms, the need for caps will vanish.
FERC got a lot right in the order, but the price cap proposal is flawed.
Price is too low to incent development of peakers---well-functioning,
efficient markets require peakers.
Information disclosure provisions are too costly and unnecessary.
Disincents energy efficiency.
IEP written comments will offer suggestions on how to remedy the flaws in the
proposed cap.

Smutney was comfortable with these points and is open to hearing more from us
today and tomorrow. If folks have comments on these points, or have others
we should discuss with Smutney, don't hesitate.

Best,
Jeff