Re:

Thanks, Jeff. I will give to Ken.

Rosie

From: Jeff Dasovich on 02/20/2001 05:38 PM
Sent by: Jeff Dasovich
To: Rosalee Fleming/Corp/Enron@ENRON
cc: skean@enron.com, Richard Shapiro/NA/Enron@Enron=20
Subject:=20

Hi Rosalee:
Steve Kean asked that I send you this note for transmittal to Ken Lay. Mr.=
=20
Lay may receive a call from David Freeman regarding on-going power=20
negotiations between the California Department of Water and Enron, but it i=
s=20
not certain that he will call. In the event that he does phone, we would=
=20
like to make sure that Mr. Lay gets this information prior returning the=20
call. Thanks very much for your help.

All the best,
Jeff

Mr. Lay:

As you know we've been working very hard with David Freeman trying to hamme=
r=20
out a power deal with CDWR. The big issue getting in the way of the deal=
=20
continues to be credit. I've attached the summary of the credit issues and=
=20
possible solutions to the problem that was included in the email to Senator=
=20
Brulte last week. As part of the ongoing efforts to resolve the credit=20
issues, Chris Calger of the Portland office sent a letter to David Freeman=
=20
yesterday. That letter is also attached. In sum, the letter:

expresses our commitment to continue working together to resolve the credit=
=20
issues,and,
requests payment for power previously delivered to CDWR and pre-payment for=
=20
any new deliveries.

In response, David Freeman phoned Chris Calger expressing dissappointment=
=20
that 1) we had yet to sign a power deal with DWR, despite your meeting with=
=20
Dave Freeman and Mike Peevey a couple of weeks ago, and 2) we would make a=
=20
power deal contingent upon a) payment for power previously delivered to DWR=
=20
and b) pre-payment for any future deliveries. Freeman suggested that we=20
could sign the deal for 200 MWs of power now, but then back out of the deal=
=20
if CDWR fails to get adequate credit provisions in place within the next fe=
w=20
weeks. Given the political climate in California, we are of course not=20
anxious to sign a deal today that carries significant credit risk and=20
announce later that we are backing out of the deal, since doing so would=20
place the Company in a very uncomfortable political position. Instead, we=
=20
continue to suggest that it's best for all parties to have the credit issue=
s=20
resolved up front.

You may receive a call from David Freeman seeking to discuss these issues=
=20
further. As you know, the credit issues are significant and we are working=
=20
hard to overcome those issues. But in the current climate, where the=20
Governor and the Legislature are actively discussing a complete takeover of=
=20
the electric industry in California, getting the contract issues right is=
=20
critical.

Regards,
Jeff Dasovich

SUMMARY OF CREDIT ISSUES FROM BRULTE EMAIL

Credit Concerns Regarding Authority Granted to DWR in AB1X to Purchase=20
Electricity on Behalf of the Utilities=20

Enron responded to the RFP issued by DWR to enter into power contracts with=
=20
suppliers.
Enron is in active discussions with DWR to establish contract terms with th=
e=20
goal of entering into a power purchase agreement as soon as possible.
However, ambiguities contained in AB1X have created significant credit risk=
=20
concerns that need to be resolved in order to finalize contract terms.
We understand that the lion=01,s share of counterparties share Enron=01,s c=
redit=20
risk concerns.
Enron has proposed several options for resolving the credit risk issues and=
=20
is working with DWR to arrive at a solution that is mutually agreeable to=
=20
both sides and that might serve as a template for power purchase agreements=
=20
going forward.

Summary of the Source of the Credit Risk Issue

Ambiguous Ratemaking Authority
The language in AB1X is ambiguous as to whether DWR has any authority to=20
charge California ratepayers for the costs of purchasing power. From our=
=20
analysis of the bill, the language in AB1X appears to leave intact the=20
California PUC=01,s exclusive jurisdiction over ratemaking in California. =
As=20
such, suppliers have no assurance that the PUC will agree to include in rat=
es=20
adequate charges to cover DWR=01,s costs of power purchases.

Ambiguous Regulatory Authority Regarding Contract =01&Prudence=018
The language in AB1X leaves open the possibility that the California Public=
=20
Utilities Commission could determine that power purchases made by DWR are=
=20
=01&imprudent.=018 On the basis of such a finding, the CPUC could then ref=
use to=20
allow DWR to collect from ratepayers the costs associated with its power=20
purchases. Consequently, suppliers have no assurance that the PUC will agr=
ee=20
to include in rates the charges to cover the costs of power contracts that=
=20
DWR has entered into with suppliers.
=20
Ambiguous Language Regarding the Ratemaking Mechanism that Will Be Used to=
=20
Recover DWR=01,s Costs of Power Purchases
In addition to the ambiguity regarding ratemaking and regulatory authority=
=20
noted above, the language in the bill is equally ambiguous with respect to=
=20
the specific ratemaking =01&mechanics=018 that AB1X directs the PUC to empl=
oy to=20
permit DWR to recover its power purchase costs. Based on our analysis, it i=
s=20
extremely difficult to determine how the PUC would design the rates to ensu=
re=20
DWR recovers its power purchase costs. Moreover, as currently drafted, it =
is=20
difficult to determine whether AB1X would even permit the PUC to include in=
=20
rates all of the charges necessary to fully recover DWR=01,s power purchase=
=20
costs. Again, this ambiguity raises significant credit risk concerns since=
=20
suppliers have little assurance that DWR will have the ability to recover=
=20
from ratepayers the costs of purchasing power.

Options to Resolve Concerns Regarding Credit Risk=20

We have been working diligently with DWR officials to resolve the credit ri=
sk=20
issues. We have identified three options:

Amend AB1X
The amendments, which are attached to this email, would clarify that a) the=
=20
PUC would accept as =01&prudent and reasonable=018 all purchase costs incur=
red by=20
DWR, and b) the PUC is obligated to include in rates the charges necessary =
to=20
ensure that DWR fully recovers its costs of power purchases. This is the=
=20
preferred option, though we understand that the there may be some political=
=20
challenges standing in the way of amending AB1X. (See attached file=20
entitled, =01&AmendAB1X.doc=018.)

Clarify the Ambiguities in AB1X through an Order Issued by the PUC, and=20
through Contract Language
This is the option that we are currently working with DWR officials to=20
implement. However, it is more complicated and could take significantly mo=
re=20
time to implement than the "legislative" fix. We have attached electronic=
=20
copies of the talking points related to the order that the California PUC=
=20
would need to issue under this option. (See attached file entitled,=20
=01&cpuctalkingpoints.doc.=018)

Make Use of Other Instruments Designed to Address Credit Risk
As indicated in our letter responding to DWR=01,s RFP, we are willing to ac=
cept=20
other forms of credit from DWR. Those options include a letter of credit,=
=20
cash prepayment, or an acceptable form of collateral. DWR officials have=
=20
indicated to us that DWR prefers to pursue the second options. That is, DWR=
=20
prefers to clarify the ambiguities in AB1X through a PUC order and through=
=20
contract amendments.

LETTER FROM CHRIS CALGER TO DAVID FREEMAN

February 19, 2001

S. David Freeman, Advisor to the Governor
California Department of Water Resources
1416 =01) 9th Street
Sacramento, California 95814

FAX# (213) 897-9560

Re: Proposed Short-Term CAISO Firm Energy Sale

Dear Mr. Freeman,

As we described in our Response to Notice and Invitation to Bid dated=20
February 6, 2001, Enron Power Marketing Inc. (=01&EPMI=018) and its affilia=
tes are=20
prepared to provide California Department of Water Resources (=01&CDWR=018)=
various=20
power and power-related products. At this time, however, EPMI and CDWR are=
=20
not in agreement with respect to the form of contract and the credit suppor=
t=20
required to enter into long-term transactions. In response to your request=
=20
of February 14, 2001, EPMI proposes that CDWR consider a short-term firm=20
energy transaction. =20

EPMI is prepared to offer to CDWR CAISO Firm Energy under the attached EEI=
=20
Agreement and Confirmation Letter subject to (i) the payment in full by CDW=
R=20
to EPMI on or before February 21, 2001 for deliveries of power already made=
=20
by EPMI to CDWR; (ii) confirmation that CDWR will pay EPMI in full for the=
=20
new power deliveries according to the schedule described in the attached=20
Confirmation Letter; and (iii) CDWR will in good faith consider the followi=
ng=20
proposals described in our Response To Notice and Invitation to Bid dated=
=20
February 6, 2001:

a) Unit Contingent Power supply from Pastoria Energy Facility
b) Firm Power Supply from Market Sources
c) Hourly Demand Response Program

The amounts due from CDWR to EPMI are described below:

DATE DESCRIPTION NET SALES
JAN CDWR $578,870.00
JAN CDWR $4,913,100.00
FEB CERS $6,014,000.00
FEB1-17 Block Forward $2,502,000.00
Total: $14,007,970.00

The above amount can be wire transferred to:

BNK: Bank of America
For: Enron Power Marketing, Inc.
ABA: Routing # 111000012
ACCT: #375 046 9312
Confirmation: Enron Power Marketing, Inc.
Credit and Collections
(713) 853-5667

If we find that payment has been made, we will be able to offer a firm pric=
e,=20
and if we are in agreement at that time, we will sign and forward the=20
attached documents. On Friday, February 16, 2001, the price for the power=
=20
described in the attached Confirmation Letter was $270 per MWh. The price =
is=20
subject to change based on market conditions and will need to be revised an=
d=20
confirmed prior to execution of the attached Confirmation Letter. =20

EPMI is available to discuss this proposal at your convenience and we will =
be=20
available on Tuesday, February 20, 2001 to discuss the amounts payable=20
described above. We are prepared to continue working with you and your te=
am=20
to establish a Master Agreement with sufficient credit support to enable us=
=20
to enter into other agreements that best meet your power purchase needs. =
I=20
can be reached at (503) 464-3735.

Yours Truly,

ENRON POWER MARKETING, INC.

Christopher F. Calger
Managing Director