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To:jeff.skilling@enron.com, kenneth.lay@enron.com, steven.kean@enron.com
Subject:FW: "BLAME CANADA" - Some Thoughts on the Cali... PART 1
Date:Mon, 2 Jul 2001 08:29:29 -0700 (PDT)


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From: firstcall.notes@tfn.com@ENRON [mailto:IMCEANOTES-firstcall+2Enotes+40tfn+2Ecom+40ENRON@ENRON.com]
Sent: Monday, July 02, 2001 2:18 PM
To: Koenig, Mark
Subject: "BLAME CANADA" - Some Thoughts on the Cali... PART 1


10:45am EST 02-Jul-01 Bear Stearns US (K. Winters,R./D. Franson,R. 212 27) REI
"BLAME CANADA" - Some Thoughts on the Cali... PART 1

Robert K. Winters 212 272-6844 rwinters@bear.com 6/28/01
Robert D. Franson 212 272-6196 rfranson@bear.com

Subject: Industry Overview
Industry: Wholesale Energy


"BLAME CANADA" - Some Thoughts on the California Energy Crisis, the FERC
Settlement Negotiations and Wholesale Energy Companies

***"BLAME CANADA" - Curiously Absent in the California Debate

***MOVING BACK FROM THE PRECIPICE - Will the FERC Settlement Process Prevent
Governor Davis from Leading the Industry (and the State of California) Over the


There are admittedly a lot of numbers floating out there with respect to the
California Power Crisis. The administrative law judge (ADL) for the FERC,
Curtis L. Wagner Jr., is currently knee-deep in these numbers and allegations
as he attempts to reach a settlement between the various sides of this issue
during a compact 15-day settlement period mandated by the FERC. The deadline
for this settlement if July 9th - if no settlement is reached, the FERC has
threatened to impose its own solution, which would most likely lead to a
protracted legal battle that could play out over several years.

California Dreaming $9 Billion - But Where Does the Number Come From? One
thing does appear to be clear here - no one, including Judge Wagner, appears to
have any idea where this $9 billion number, which Governor Davis and his
compatriots keep quoting, comes from. According to the information we have
obtained, the total amount of "Estimated Wholesale Revenues Above Competitive
Market Baseline" (pre and post Oct 2000) for the generators over which the FERC
has jurisdictional control is around $4.75 billion. However, as has already
been pointed out many times, the FERC can only order refunds from Oct. of last
year onward due to a Federal law which requires a filing for refunds to be made
within 60 days of the purchases - the CA. ISO didn't begin appealing for
refunds until Dec. of 2000. Therefore, looking at the Oct.-Feb. time period,
the amount involved appears to be more like $2.61 billion for generators over
which the FERC has jurisdictional control. For all generators, the numbers
look more like $3.8 billion for the Oct.-Feb. time period and $6.8 billion for
the entire period - May 2000 through Feb. 2001.

It's worth noting that none of the generating companies know where any of these
numbers from the CA. ISO come from and what the bases of any of these
calculations are. For now these numbers appear to be just another data point
in the negotiations, although they clearly do appear to undermine the
California's position on the $ 9 billion refund its demanding. Judge Wagner
has already appeared to put out one data point in the negotiations, stating at
the outset that the California is owed refunds (of course, California hasn't
paid its bills yet on this issue, so calling this a refund is a bit
disingenuous) of perhaps a billion dollars or so (according to the Wall Street
Journal). We believe that this represents one line of demarcation being set
out by the judge early on to encourage both sides in this debate. Known
reserves, or quoted reserves, taken by generators or wholesale energy companies
involved total more than $1 billion, and of course that doesn't include
everyone since there are a number of generators involved who aren't or haven't,
disclosed any information.

Reserved Amounts, Amounts Owed to Generators by CA. ISO, Alleged Overcharge
Computed by CA. ISO - No Wonder Investors Having Been Steering Clear. Based on
our conversations with investors over the past several weeks, it appears that
many investors see good value in some of the wholesale energy companies and
independent power producers at current levels, but the problem is the political
uncertainty. Emerging Markets political psychology has now become a part of
valuing these companies as it relates to the "third world" nature of the
California power system. This is in line with what we began to warn investors
about several weeks ago with respect to this crisis, but it also could
represent an excellent buying opportunities in certain names. We continue to
believe that somehow, someone (or something, in the case of the FERC) will
eventually lead us back from the precipice from where Governor Davis has been
taking this issue. Alongside a potential resolution of this case through the
current settlement negotiations, strong second quarter earnings from these
companies could also provide a catalyst.

If we were to assume that the ultimate settlement figure were to be less than
this "floated figure" by Judge Wagner at the outset of this settlement process,
then on the face of it the generators would appear to be more than fully
reserved on this issue. However, that assumes that a settlement can be reached
in the allotted 15 days, that is not more than $1 billion, and also assumes
that each companies established reserves, or lack of reserves, proves to be in
line (this last area being the most doubtful). As an example, Enron (ENE -
Attractive Rated) has, according to the company, booked reserves on this issue
of $435 million while it claims to be owed $570 million by the CA. ISO.
However, the alleged overcharge by Enron by the CA. ISO is only $39 million.
Enron, it would appear from these numbers, could stand to make a windfall from
these settlement negotiations. On the other hand, Reliant (REI - Not Rated)
appears to have reserved just $39 million but claims to be owed $358 million by
the CA. ISO. The CA. ISO, however, appears to be claiming that REI overcharged
it by $750 million, although realistically the figure here we should focus on
is $378 million based on the Oct, 2000 - Feb., 2001 time period. The problem
is of course, no one knows how the CA. ISO's figures were calculated, let along
Governor Davis has lifted his $9 billion figure from.

Breaking Down the Numbers. In the enclosed excel file we have broken down
information (where available) for the various wholesale energy companies and
independent power producers with respect to alleged overcharge by the CA. ISO,
the reported EBIT for these companies in fiscal year 2000, the amount that
these companies have claimed is owed them by the CA. ISO and the approximate
reserves each of these companies has taken with respect to this issue. In many
cases, these are obviously not hard data points since they can't be readily
located in filings by these companies with the SEC. Some of the figures come
from various public statements made by the heads of these companies, or are
lifted from articles where they were attributed to someone at these companies.
. Attached File (Please Request File Separately in the Case of First Call

The Camouflaged Canadians. It has been interesting to read through articles
regarding the California Power crisis, and even to watch "supposedly" well-
researched documentaries that are expected to present a "balanced" thorough
account of what has been and what continues to happen in California and
throughout the Western United States. This is a complicated subject, a
complicated chain of events which has led to this crisis, but it is still
stunning at times to see major issues missed by the press, or ignored by the
California Governor's office, in assessing this issue. More often than not,
the hydroelectric system in the Pacific Northwest and the integral role it
plays in supplying California power during the summer doesn't get adequate
attention, nor does the hydro system of our neighbors up north. You want to
know who has made the most money yet off the California Power Crisis - look
north. For obvious political and legal reasons, Governor Davis in California
has pointed the finger solely and continually at Houston, Texas. However,
perhaps Governor Davis and/or the rest of California should perhaps focus some
attention on Canada if they want to determine who gained the most from this
crisis. Through the first three-quarters of 2000, BC Hydro's net income
increased by close to $860 million on a y/y basis. According to info we have
seen related to the California ISO calculations regarding potential
overcharges, that appears to be the single largest amount of money made from
the California Energy Crisis (we have assumed for now in this statement that
California would deem all of the increase in profit on a y/y basis to be
illegally gained, which is admittedly an overstatement, but then again these
figures for BC Hydro don't include fourth quarter results for 2000 whereas the
Ca. ISO comparison figures do). Fourth quarter results for BC Hydro are not
expected to be reported until somewhere on July 9-11, but we would expect the
fourth quarter to be a "whopping number". The attached excel sheet provides
more data, but the quarterly net incomes for BC Hydro and % y/y increases were
as follows; 1Q00 - $306 million, up 147% y/y; 2Q00 - $658 million, up 306% y/y;
3Q00 - $362 million, up 100% y/y; 4Q00 - ?.

According to the information we have been able to find, it looks as if BC Hydro
announced two rebates to their Canadian customers during 2000 which look to
total around $1.5 Billion. Canadians don't vote in California's 2002
Gubernatorial race, nor will they be allowed to vote in the 2004 Presidential
Election in this country. And although we're not lawyers, it seems that is
would be more than a little difficult for Governor Davis to sue Canadians and
their ratepayers for a return of these rebates. Perhaps we quibble, but it
would appear to be selective prosecution on the part of the California
politicians. But then again, perhaps California's attorney general has a "jail
partner" in mind as well for the head of BC Hydro.

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