Tax Lobbying Initiative for Generation Finance Vehicle

This is an interesting idea.
----- Forwarded by Steven J Kean/NA/Enron on 02/20/2001 01:09 PM -----

Mike J Miller@ECT
02/15/2001 11:06 AM

To: Steven J Kean/NA/Enron@Enron
cc: Joseph Deffner/Enron@EnronXGate, W David Duran/HOU/ECT@ECT, Jordan
Mintz/HOU/ECT
Subject: Tax Lobbying Initiative for Generation Finance Vehicle

Steve,

I'm sending this memo to you as a reminder of our one minute conversation in
the garage last night.

Background
Going back almost three years, John Stinebaugh and I started looking for a
more efficient method to finance generation projects. We explored two
avenues, creating a Master Limited Partnership ("MLP") or a Real Estate
Investment Trust ("REIT") to own the projects (with Enron as a manager). The
advantages of a MLP or a REIT structure are twofold (i) they provide direct
access to the public equity markets and (ii) they provide a lower cost of
equity capital because earnings are taxed at the "equity holder" level, not
at the MLP/REIT level, i.e., you do not have double taxation on earnings as
with a publically held "C" corporation. John and I pursued these avenues
with Jordan Mintz because we wanted to create an off-balance sheet vehicle
that would provide a lower overall cost of capital so that ENA could be more
competitive in bidding for acquisitions. The same vehicle would also have
provided another exit vehicle for the peakers or other assets that ENA was
developing at the time.

Jordan explored both MLP and REIT avenues. The MLP was quickly disqualified
because electric generation and transmission assets do not qualify as assets
that can be financed using an MLP structure. The REIT structure was more
promising to the point where Jordan had prepared and submitted a request for
a private letter ruling from the IRS allowing certain types of generating
assets to be placed into REIT. Unfortunately, the IRS ruled against our
request.

Concept
There would still be real value to Enron in having the tax laws changed to
allow generation and transmission assets to be placed into either a REIT or
an MLP. ENA holds economic interests in QF's in third party (non-utility)
vehicles. Being able to package these into an MLP/REIT would provide a good
exit strategy for these and other investments we may acquire in the future.
Other efforts, such as building/controlling transmission or
purchasing/developing coal-fired generation projects would also benefit from
access to cheaper equity capital.

The public policy benefit is pretty clear. Avoiding double taxation of
profits/dividends would lower the cost of equity capital invested in
generation and transmission assets. This in turn should have a beneficial
effect on encouraging construction of new (and badly needed) generation and
transmission assets by lowering the equity return that holders of these
assets would require. You could even take existing rate-regulated utility
generation and transmission assets and lower rates by placing these assets
into MLP's or REITS by eliminating the federal and state taxes that are
factored into rates to give utilities their after-tax allowed rates of return.

Given the recent attention on California and de-regulation in general,
creating more tax-efficient ownership vehicles for these assets could provide
a way to lower costs without having states acquire these assets and gain
financing advantages through tax-exempt bond issues.

Conclusion
Given the momentum that may be gathering for new tax legistlation, coupled
with the growing concer over energy policy, it may be a good time to float
this change in tax law. It could reasonably be argued that it would assist
in directing capital into increasing generation/transmission supply, one of
the key issues for California. Jordan can update you further on what we have
done in the past and what would need to be changed in the tax laws.

Regards,

Mike J Miller