



Date: Wed, 28 Feb 2001 06:49:00 -0800 (PST)
From: steven.kean@enron.com
To: bernadette.hawkins@enron.com
Subject: Ken Lay's email to Sen. Brulte
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----- Forwarded by Steven J Kean/NA/Enron on 02/28/2001 02:48 PM -----

Jeff Dasovich
Sent by: Jeff Dasovich
02/16/2001 08:49 AM

To: Sandra McCubbin/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON,
MDay@GMSSR.com, Hedy Govenar <@mail.acom2.com> @ ENRON, Scott Govenar
<sgovenar@govadv.com>, Paul Kaufman/PDX/ECT@ECT, James D
Steffes/NA/Enron@Enron, Harry Kingerski/NA/Enron@Enron, Richard
Shapiro/NA/Enron@Enron, skean@enron.com, mpalmer@enron.com, Karen
Denne/Corp/Enron@ENRON, BTC <BCragg@GMSSR.com>
cc:
Subject: Ken Lay's email to Sen. Brulte






Greetings All:

First, I am apologizing in advance for any typos in this email.  Schedule i
s
very tight, but I wanted to make sure that everyone had it first thing this
morning, with some back-up info that I've included below.

Attached is the email that was sent to Ken Lay's office yesterday evening f
or
delivery to Sen. Brulte.  It's of course confidential.  Few points:

I don't have Bev's email, so if you could please forward to her, that would
be appreciated.
As we discussed (Jim, Mike, Bev, Scott, Hedy) on our lengthy call on
Wednesday, I'm assuming that the plan is still to "wallpaper" Sacramento wi
th
our proposed legislation.
This email does not contain the legislation.  Mike sent the "final" version
s
of our legislation out yesterday, except for the siting piece, which I
believe Brian Cragg of Mike's office is finalizing today.
You'll note that we promise Senator Brulte in the email that we'll deliver 
to
his office today the proposed legislation.  Again, based on our call on
Wednesday, I'm assuming that we would simultaneously release the proposed
legislation to the rest of the world at the same time.
When we spoke on Wednesday, we decided that the Sacramento team would
determine to whom we would circulate the proposed legislation at the same
time that we deliver the Senator Brulte. I'm assuming that you folks will
handle that end of things.  Please let us know at your convenience to whom
you've decided to circulate.
This email does, however, include a "summary" of our proposed legislation. 
But I'm not certain that the summary included in this email is the
appropriate language to distribute "to the world," or if we'll need instead
to tailor some new language.  I think we all agreed that we need a "one
pager" to accompany the legislative package so that we can communicate the
package effectively.
We also discussed the need to quickly develop a coalition to support our
proposals.  We didn't finalize that plan.  Perhaps the Sacramento team coul
d
propose a plan to do that.  Perhaps we could start with our friends in the
Direct Access coalition?
We also talked about the need at this point to engage in PR and to get the 
PR
machinery activated, also with the goal of effectively communicating our
legislative package/message.  We're in a meeting with folks today where we
can discuss getting that side of things going and Karen Denne has contacted
Marathon and they're pondering some things that we can do in the near term.
You'll note that there's a considerable amount of information about the DWR
credit issue.  As I recollect, we discussed the issue in depth on the call.
 
You note that attached to the email is a "legislative fix" to AB1X that cou
ld
solve the credit issue and an attached set of "taking points" related to a
second alternative to solving the credit issue:  a PUC order clarifying tha
t
DWR will get its money for power purchase costs.
Note also that Steve Kean reminded me that we've got to continue to push to
get the utilities out of the merchant function.  Accordingly, I've put a
brief paragraph on that issue in the note to Brulte in the last section
(legislative solution) under the topic "create a real competitive retail
market in California."  To the best of my knowledge, we don't have
legislative language on that piece yet, and it seems that we'll need to
discuss it in considerably more depth before doing so.


If you have any questions about any of the materials in the email, please
don't hesitate to contact me or Jim or Sandi to discuss.  I can be best
reached to day by pager at 888.916.7184. 

Thanks to all for helping pull this together.

Best,
Jeff

----- Forwarded by Jeff Dasovich/NA/Enron on 02/16/2001 08:27 AM -----

Jeff Dasovich
Sent by: Jeff Dasovich
02/15/2001 06:11 PM

 To: jdasovic@enron.com, skean@enron.com, Richard Shapiro/NA/Enron@En
ron,
James D Steffes/NA/Enron@Enron
 cc:
 Subject:

Steve:
Here's a substantially more cleaned-version, with attachments.  There's a
hard copy on your chair.

Best,
Jeff
----- Forwarded by Jeff Dasovich/NA/Enron on 02/15/2001 05:57 PM -----

Jeff Dasovich
Sent by: Jeff Dasovich
02/15/2001 05:56 PM

 To: jdasovic@enron.com
 cc:
 Subject:

Jim:
It was a pleasure speaking with you yesterday.  Based on our conversation,
this email includes the following:

An Enron contact to discuss developing small-scale generation on Tribal lan
ds.

Our views on the impediments to distributed generation and suggestions on h
ow
to remove those impediments.

A description of the credit issues that continue to impede DWR,s ability
 to
sign contracts with power suppliers, and options to resolve them. Two
possible options for addressing the credit issue are 1) a California PUC
order clarifying that DWR will recover its power purchase costs through
rates, and 2) an amendment to AB1X designed to accomplish the same goal.  I
have attached talking points regarding the California PUC order and propose
d
amendments to AB1X.  We believe that an amendment to AB1X is the preferable
option.

Our assessment of the supply/demand picture in California.

Our suggestions for a legislative package designed to solve both the near-
and long-term electricity crisis in California.  We will deliver to your
office tomorrow detailed legislative language.  In those materials we will
also identify existing bills that we believe can easily accommodate our
proposed language.

I hope that the information is useful.  Please do not hesitate to contact m
e
if you would like to discuss these materials further, or if there is anythi
ng
else that I can do to assist you.

Regards,
Ken



Contact Information to Discuss Interest Expressed by Native American Tribes
in Installing Small-scale Generation on Tribal Lands

David Parquet, Vice-President
Enron North America
101 California Street, Suite 1950
San Francisco, CA 94111
Phone: 415.782.7820
Fax: 415.782.7851


2. Key Barriers to Distributed Generation

Excessive and Unnecessary Utility Stand-by Charges

Solution: The executive orders issued by the Governor on February 14th took
 a
step in the right direction.  Utility stand-by charges have always been
designed by the utilities to protect their monopoly position, extract
monopoly prices from customers, or both.  But there is no reason to limit t
he
elimination of these charges to generation facilities that are less than
1MW.  These limits will only lengthen unnecessarily the time it takes for
California to close the significant gap between supply and demand and reduc
e
the risk of black outs this summer.  We would propose lifting the cap by
offering amendments to SB27X, which is designed to facilitate development o
f
distributed generation.

Excessive delays and costs related to interconnecting facilities with
investor-owned and municipal utilities

Solution:   The Governor,s executive order regarding interconnection is 
a
step in the right direction*D-D-26-01 requires utilities to complete
interconnection studies within 7 days.  California should ensure that this
requirement applies to all generation facilities, including distributed
generation.  In addition, the financial conflicts the utilities face when
interconnecting generation facilities are simply too powerful to overcome
through executive orders or other regulations.  To the greatest extent
possible, California should shift control over interconnection away from th
e
utility and place that control with the California ISO.  This could be
accomplished through amendments to SB 27X.

Permitting and Air Quality Issues
Developers of distributed (i.e., "on-site") generation that is 50 MWs
 or
greater must receive certification from the California Energy Commission an
d
therefore face all of the impediments to development that large-scale
generation faces. 

Solution: California should ensure that the executive orders (D-22-01 thru
D-26-01) issued by the Governor to expedite plant siting and maximize plant
output apply equally to smaller scale, "distributed generation" facil
ities.
In addition, distributed generation that is less than 50 MWs continues to
face local opposition.  The State should ensure that local, parochial
interests cannot block otherwise beneficial distributed generation projects
. 
These objectives could be accomplished through amendments to SB27X.

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

Enron responded to the RFP issued by DWR to enter into power contracts with
suppliers.
Enron is in active discussions with DWR to establish contract terms with th
e
goal of entering into a power purchase agreement as soon as possible.
However, ambiguities contained in AB1X have created significant credit risk
concerns that need to be resolved in order to finalize contract terms.
We understand that the lion,s share of counterparties share Enron,s c
redit
risk concerns.
Enron has proposed several options for resolving the credit risk issues and
is working with DWR to arrive at a solution that is mutually agreeable to
both sides and that might serve as a template for power purchase agreements
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
charge California ratepayers for the costs of purchasing power.  From our
analysis of the bill, the language in AB1X appears to leave intact the
California PUC,s exclusive jurisdiction over ratemaking in California.  
As
such, suppliers have no assurance that the PUC will agree to include in rat
es
adequate charges to cover DWR,s costs of power purchases.

Ambiguous Regulatory Authority Regarding Contract "Prudence"
The language in AB1X leaves open the possibility that the California Public
Utilities Commission could determine that power purchases made by DWR are
"imprudent."  On the basis of such a finding, the CPUC could then ref
use to
allow DWR to collect from ratepayers the costs associated with its power
purchases.  Consequently, suppliers have no assurance that the PUC will agr
ee
to include in rates the charges to cover the costs of power contracts that
DWR has entered into with suppliers.

Ambiguous Language Regarding the Ratemaking Mechanism that Will Be Used to
Recover DWR,s Costs of Power Purchases
In addition to the ambiguity regarding ratemaking and regulatory authority
noted above, the language in the bill is equally ambiguous with respect to
the specific ratemaking "mechanics" that AB1X directs the PUC to empl
oy to
permit DWR to recover its power purchase costs. Based on our analysis, it i
s
extremely difficult to determine how the PUC would design the rates to ensu
re
DWR recovers its power purchase costs.  Moreover, as currently drafted, it 
is
difficult to determine whether AB1X would even permit the PUC to include in
rates all of the charges necessary to fully recover DWR,s power purchase
costs.  Again, this ambiguity raises significant credit risk concerns since
suppliers have little assurance that DWR will have the ability to recover
from ratepayers the costs of purchasing power.

Options to Resolve Concerns Regarding Credit Risk

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

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

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

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

4. California's Supply-demand Picture Heading into Summer 2001

Both the California Energy Commission and Cambridge Energy Research
Associates (CERA), a private sector energy think tank, have issued reports
showing that California faces a severe supply-demand imbalance.  They diffe
r
only on how much and how soon additional supply will be made available.  Al
l
credible sources agree that supply will be very tight throughout the Summer
of 2001 and that unless a solution is found immediately, blackouts are
likely. 

CEC and CERA both forecast that California will be short of supply this
summer by approximately 5,000 MW.   These numbers are in line with our
estimates.  California's supply base currently has a 6% capacity margin,
 well
below the average 15-20%, which is recommended for reliable system operatio
n
in the West.  Since the West relies more heavily upon hydroelectric power
than other regions, reserves are particularly important, owing to the
unpredictability of the weather and the dry year the West has experienced t
o
date. In the event of a low rain and snow period, the system must possess t
he
flexibility to respond to the reduced availability of power supply. 
California's very low reserve margin makes it especially susceptible to 
this
requirement. 

Other reasons for reduced supply for the Summer of 2001 include the early
draw-down of reservoirs in the continual effort to manage California's seve
re
supply-demand gap; emissions restrictions on existing plants; and a reduced
number of customers who can be curtailed under their contracts with the
utilities.  Cambridge Energy Research Associates asserts that at the curren
t
pace of siting, permitting and construction, adequate supplies will not be
added to correct the market imbalance until 2003 at the earliest.

CERA predicts that California is likely to face approximately 20 hours of
rolling black outs this summer.  The CEC paints a considerably more
optimistic scenario, betting that California will bring an additional 5,000
MWs on line to meet peaking summer demand.  It is our view that California
should view the CEC's "rosy scenario" with considerable skepticism.

5. Suggested Package of Legislative Proposals Designed to Solve California
's
Electricity Crisis

This email offers an overview of our proposed legislative solution.  We wil
l
deliver to your office tomorrow specific legislative language and existing
bills that we believe can accommodate our proposals.

As we have suggested throughout the crisis, any solution to California's
crisis must focus on four issues:

Increase supply
Decrease demand
Establish a truly competitive retail electricity market
Return California's Investor-owned utilities to solvency

Increase supply--Legislative vehicle: SB28X (Sher)
To site and construct a power plant in Texas takes approximately 2 years. 
Enron and others have completed the entire process in other states in less
than a year.  In California, it takes about six years, or longer.

The Governor's executive orders and Senator Sher's siting reform legi
slation
are steps in the right direction.  Our suggested amendments can improve tho
se
efforts by further addressing the difficulties that project developers face
in securing air emission reduction credits to meet the air permit
requirements included in the CEC's certification requirements.  Enron's
proposal seeks to streamline the process for 1) obtaining credits and 2)
transfering credits between air districts.  In addition, it creates an
innovative emissions reduction bank to allow project sponsors to fund
emissions in advance of obtaining certification, and permits the affected a
ir
districts to use those funds to finance projects that will produce the
required reductions in pollution emissions.

Decrease demand*Legislative Vehicle:   AB31X (Wright)
Because of the delay in getting a solution in place in California, closing
the supply-demand gap through energy conservation and efficiency offers the
best chance of avoiding blackouts this summer.  This can be accomplished mo
st
effectively and quickly in two ways:

Buy-down demand
California is tapping into an enormous amount of money from the General Fun
d
to finance DWR's power purchases.  California could likely reduce demand
 more
economically by running an auction to determine the payments businesses wou
ld
be willing to receive to reduce their demand for a sustained period (e.g.,
through the summer months).  DWR could easily run an on-line auction to
determine the price it could pay for these demand reductions.  To
participate, businesses would be required to have the metering equipment
necessary to monitor and verify that they are actually achieving the
reductions.  Enron has developed an on-line auction software package, "D
eal
Bench," that it would be willing to contribute to the effort.

Use Price Signals to Incent Voluntary Curtailment
To be successful, customers need access to the following key elements:

An internet based hour-ahead price posting system to track the market price
for hour-ahead power in real time.
Real-time metering systems for baseline demand and voluntarily curtailment
verification.
Settlement process that allows for market clearing prices of energy to be
paid for load reduction ("Negawatts").

The potential benefits of an effective demand response program would includ
e:

"creation" of additional summer peaking capacity in California, parti
cularly
in the short term, without requiring construction of additional generation
resources.
reduction of  peak or super-peak load on the over-stressed California
electric system, thus potentially reducing the overall cost of electricity 
in
the state.
fostering of demand elasticity without subjecting customers to the full ris
k
of hourly market price volatility by passing market price signals to
customers and allowing them to voluntarily shed load and be compensated for
responding.

We estimate that we could generate a summer 2001 on-peak demand response in
excess of 400 MW during certain high cost hours, and a demand response for
summer 2002 on-peak hours that could exceed 1000 MW.  We further estimate
that the market response to this program from all ESPs could be 2 to 3 time
s
that amount.  We recommend that the State of California provide rebates
directly to customers to fund the installation of advanced metering and
control systems that would support load curtailment implementation.

Establish a truly competitive retail electricity market*Legislative vehi
cle:
SB27X
The only customers who were protected from price volatility in San Diego we
re
customers who chose Direct Access and signed fixed price deals with energy
service providers.  Ironically, AB1X takes that important option away from
customers and businesses.  It is critical that AB1X be amended to remove th
e
prohibition against Direct Access.

Enron's legislative proposal would give customers freedom to enter into a
direct access transaction, while simultaneously addressing the Department o
f
Water Resources' concerns about stranded power costs that might result from
customer migration. 

In addition, California will only achieve a competitive retail market when
the utility is removed completely from the procurement function.  Procureme
nt
is not a utility core competency, as evidenced by the dire financial
condition in which the utilities now find themselves.  California should
therefore begin immediately to phase the utility out of the procurement
function entirely, with the goal of having all customers served by a
non-utility provider within 36 months.  To execute the transition, California
should hold a series of competitive solicitations over the 36-month period 
in
which competing service providers would bid for the right to serve segments
of utility load.

Return California's Investor-owned utilities to solvency*Legislative 
vehicle:
AB18X
Utility bankruptcy will not increase supply and it will not decrease demand. 
In short, bankruptcy does nothing to solve California's supply-demand
imbalance.  In addition, bankruptcy increases the likelihood that consumers
and businesses will bear the significant financial risks of having California
State government assume the role of "electricity buyer" for an extended
period of time.  Finally, bankruptcy will undermine both investor confidence
in California's energy markets and the private sector's willingness to
participate in that market.

California can return the utilities to financial solvency by implementing a
series of staged rate increases.  California should design those rate
increases with the dual goal of returning the utilities to solvency without
"shocking" the economy or household budgets For example, California could
amortize the recovery of the utilities, past debt over a 5-10 year period. 
In addition, the magnitude of the rate increase can be reduced in two ways:
First, the utilities could absorb some portion of their existing debt in
recognition of the risk they accepted when they agreed to the structure of 
AB
1890.  Second, California can "net" the revenues the utilities have r
eceived
from selling electricity into the Power Exchange against the debts they hav
e
accrued due to the retail price cap.




