Proposed Enron Canada Advocacy Position on Gas Utility Hedging

Rick, do you have any concerns with the attached position I propose to take
here in Alberta?
---------------------- Forwarded by Robert Hemstock/CAL/ECT on 04/27/2001
08:23 AM ---------------------------

From: Robert Hemstock 04/26/2001 04:56 PM

To: Aleck Dadson/TOR/ECT@ECT, Harry Kingerski/NA/Enron@Enron, James D
Steffes/NA/Enron@Enron
cc: Patrick Keene/NA/Enron@Enron, Susan M Landwehr/NA/Enron@Enron, Daniel
Allegretti/NA/Enron@Enron
Subject: Proposed Enron Canada Advocacy Position on Gas Utility Hedging

As I have previously advised, there is an AEUB hearing scheduled to commence
next week in Alberta that will address the issue of Atco Gas hedging the
price of its default supply offering to customers in Alberta. I am trying to
finalize my instructions to our counsel on the position Enron Canada will
advocate in relation to utility hedging of default gas supply.

Atco is the primary gas utility in Alberta serving in excess of 90% of the
natural gas customers in the province. Based on the terminology that was
recently used by Dan Allegretti and Sue Landwehr in their memo to Dave
Delainey of April 13, 2001 's I would describe the Alberta gas market as an
"open access jurisdiction" as Atco has existing transportation rates that
allow "core customers" (residential, commercial, and institutional consumers)
to purchase the commodity directly from a retailer.

For the purpose of this hearing it is beyond the AEUB's jurisdiction to
replace Atco as the default service provider by mandating the selection of
one or more default service providers through a competitive bidding process.
Also, in separate hearings the AEUB will be considering the issues of: 1)
more complete unbundling, and 2) the treatment of natural gas production
assets that are presently subsidizing Atco's gas costs.

Given that Enron is in the process of reconsidering its position on utility
hedging and, more particularly, we have a vision of EES "sleeving" products
to customers through the regulated utility, I thought I better brief you on
the position I would like to advance in relation to Atco Gas being mandated
to hedge default supply for its core customers:

Atco should not be directed by the Board to use financial hedging to fix the
price of natural gas supply to its core default customers as this could
impede the development of the competitive retail market and/or delay entry of
new retail participants
the development of a competitive and functional retail market is in the
interests of core customers. With the entry of new retailers will come a
variety of new commodity pricing and term offerings
the pace of entry on new retail market participants should not be a function
of what will ultimately prove to be favorable or unfavorable hedging
decisions made by the incumbent default supplier (i.e. unfavorable hedging
decisions may actually accelate the development of a retail market subject to
this being impeded by the introduction of exit fees to mitigate the stranded
costs that may result from poor hedging decisions and subsequent customers
exercising choice).
it is adminstratively cumbersome and difficult for the Board to approve
hedged rates as it would have an obligation to assess and make determinations
respecting Atco hedging decisions.
commodity price choices should be made by the customer who will be subject to
the risks and benefits of this decision. The decision should not be made on
behalf of all default customers by their default service provider
the Board should focus its attention on the following two issues rather than
on mandating hedging: 1) directing more frequent (rather than seasonal)
default service commodity rate adjustments so Atco's actual monthly gas costs
are more closely reflected in its default service rates; 2) the upcoming
unbundling proceeding where the Board should ensure that unbundling
principles are adopted that will result in Atco's default supply commodity
costs not being subsidized by improperly functionalized costs from other
distribution business functions.

I apologize for the short notice but your advice on whether my position is
okay would be appreciated by tomorrow.

Regards,

Rob