Re: Update - Alberta Power Pool Rule Changes

Thanks

Robert Hemstock@ECT
11/16/2000 11:39 AM

To: Steven J Kean/NA/Enron@ENRON, Richard Shapiro/NA/Enron@Enron, Aleck
Dadson/TOR/ECT@ECT
cc: Rob Milnthorp/CAL/ECT@ECT, TMcLaren@GPC.CA, tburns@gpc.ca
Subject: Re: Update - Alberta Power Pool Rule Changes

Thanks for your comments Steve.

The legal arguments are one piece of our 5 point action plan (it relates to
action items 2,3, and 4) that I outlined in my November 13 e-mail to the
group. Action item #1 (and I agree this must be our primary focus) is to
communicate to the Alberta Government: i) Enron's views on what mistakes are
being made by governments in other jurisdictions in response to high price
levels, and ii) Enron's plans for Alberta if the Alberta Government "stays
the course" and does not interfere in the market. We are hopeful this can
be done through Milnthorp and Delainey meeting with Premier Klein and/or
Minister Cardinal. If such a meeting isn't possible we will simply have to
get the message through to them via lower level officials in the Alberta
Government.

On Tuesday Rob Milnthorp left messages for Premier Klein, the Premier's Chief
of Staff, and Minister Cardinal, and the Cardinal's Deputy Minister, Ken
Smith. I also spoke to Larry Charach of the ADRD. The speaking points
that we prepared to guide us through these calls are as follows:

Enron understands that electricity prices in Alberta are an important issue
for the Government

Enron has concerns with a number of recent rule and market design
developments in the electricity market

Enron feel that it would be helpful for the President and CEO of Enron North
America and Rob M to sit down for a brief meeting with the Premier and
Minister Cardinal to:

1) Explain Enron's current plans to expand commercial operations in both the
electricity and natural gas sectors;

2) Express Enron's concerns that the Alberta electricity market "may not
indeed be open for business" given recent developments, including:

(i) The MAP and its adverse effect on the PPA Buyers and the "no harm"
commitment;

(ii) Power Pool rule changes of the sort recently proposed will irreparably
damage existing suppliers such as Enron, the ultimate effect of which will
undoubtedly be the lack of development of much needed new supply and longer
term high prices for consumers.

3) Express Enron's willingness to draw on our experience in other markets and
explain our vision of how the Government can work through this difficult
period in the shortest possible time frame.

Ken Smith returned Milnthorp's call this morning and Rob Milnthorp advised
that he covered each of the above speaking points and the conversation went
very well. Smith asked him "what would you do if you were us?" and Rob
replied that the Government must stay the course as the alternatives will
make the situation worse. Rob also told Smith that Enron's preference is to
continue to work with the Government on these difficult issues and Enron
"doesn't like sending letters that threaten legal action to the Government or
the Power Pool", especially since we share a common vision on electricity
restructuring with the Alberta Government. Smith indicated that with the
Alberta Legislature back in session it would be difficult to get a meeting
for us with the Premier but he would try to do so and would get back to
Milnthorp.

Whether we get a meeting with the Premier, or not, we still need to prepare a
new briefing note for the government within the next week and at the very
least Rob Milnthorp and I can meet with Larry Charach and Ken Smith to walk
them through this document. As you say, our document must focus on "the
adverse effect on consumers" and the implications of the Government moving
off the strategy it continues to publicly support (the Premier said again
this week in question period that the problem is that we are short supply)
which is to "allow the market to work".

Regards,

Rob

From: Steven J Kean@ENRON on 11/15/2000 07:13 PM CST
To: Robert Hemstock/CAL/ECT@ECT
cc:
Subject: Re: Update - Alberta Power Pool Rule Changes

congratulations!

One thing to add to the arguments: we have to make the adverse effect on
consumers the centerpiece of our arguments. We need the legal arguments too,
but this is fundamentally a political and consumer protection driven
discussion. We have to be prepared to demonstrate that the key to Alberta
reducing prices is allowing new generation to enter and to do that you have
to allow a true market price to be posted. California has seen the
cancellation of numerous projects while they remain desparate for new supply
because they have tried to artificially constrain prices. That's not good
for consumers. If they need a lower cost solution for consumers (or
protection from price volatility in the meantime) they need to "outsource"
the residential supply business in blocks for fixed price bids.

Regardless of how we frame the arguments, or the solutions, however, we have
to make the public policy/ consumer protection arguments the center of our
written and oral presentations.

Do you agree?

Robert Hemstock@ECT
11/15/2000 06:28 PM

To: Rob Milnthorp/CAL/ECT@ECT, John J Lavorato/Corp/Enron@Enron, Derek
Davies/CAL/ECT@ECT, Tim Belden/HOU/ECT@ECT, John Zufferli/CAL/ECT@ECT, Steven
J Kean/NA/Enron@Enron, Aleck Dadson/TOR/ECT@ECT, Richard
Shapiro/NA/Enron@Enron, Peter Keohane/CAL/ECT@ECT, Eric
Thode/Corp/Enron@ENRON, Mark Palmer/Corp/Enron@ENRON, TMcLaren@GPC.CA,
seabron.adamson@frontier-economics.com, tburns@gpc.ca,
aleck.trawick@blakes.com, dpef@blakes.com
cc:
Subject: Update - Alberta Power Pool Rule Changes

Dale McMaster called this afternoon to advise that the Power Pool Council
agreed to delay any decision on the recently proposed rule changes (importers
excluded from setting pool price and dispatch risk) for a period of two
weeks. During this two week period Dale has been asked to obtain stakeholder
input into ways to address concerns about whether the spot price in the
Alberta Power Pool is a product of interaction among competitiors in a
efficient market.

In our discussions with the Power Pool and ADRD today and yesterday Enron
expressed its willingness to work with the Power Pool to provide feedback on
suggested rule changes but has also made it clear that we do not agree with
the premise that there is a "problem" that requires "emergency" amendments to
the Pool rules. Our position has been that Alberta is short supply, and
significant changes to the rules and/or market design will only discourage
new generation development.

Dale McMaster had just left the Power Pool Council meeting when he called and
had not yet put much thought into how to define the issue he has to address
and what the process will be. We discussed the process and it appears he
will likely receive comments from stakeholders at large and also assemble a
small committee of 4-5 stakeholders (which would include Enron) to work with
the Power Pool to consider possible changes to the Pool rules. Dale said he
would try to pull together a "terms of reference" document that would define
the mandate of the small committee by tomorrow.

After my call with Dale McMaster, Peter Keohane and I spoke to Aleck Trawick
and we have asked Blakes to assist us in three areas:

1) Once the terms of reference of this small committee are released (and
assuming Enron is asked to participate on the committee) Blakes will assist
us with preparing a letter that states that Enron's participation does not
represent acknowledgement or agreement that the Power Pool Rules must be
amended to address the concerns of some stakeholders about real time pricing
in Alberta and that Enron's participation on the committee is on a without
prejudice basis;

2) Enron needs to obtain the final memo from Frontier Economics in which
Frontier provides its opinion on how the proposed rule changes: i) would
introduce price discrimination into the Alberta electricity market, ii) would
be contrary to the development of an efficient, fair and openly competitive
market for electricity, iii) would compromise the independence of the Power
Pool, and iv) would have the expected effect of artificially depressing the
real time price of electricity in Alberta. Once Blakes receives a copy of
the Frontier Economics memo, they will prepare a memo for Enron advising: i)
whether the two week process of consultation by the Power Pool is in
accordance with the standards required of the PPC as an administrative
tribunal operating in Alberta; and ii) whether such rule changes offend the
provisions of the EUA;

3) Blakes will advise Enron of the possible avenues of recourse (i.e. appeal
to the AEUB, and/or legal action in the Court of Queen's Bench) in the event
the proposed rule changes (or similar changes) are approved by the PPC at the
end of this two week period. GPC and Eric Thode will also be consulted on
this issue and obviously input from all those within Enron working on this
project will be sought prior to any decision being made to pursue any
possible legal remedies.

Please advise if you have any comments.

Regards,

Rob