 ,
 Steve:
Here's a substantially more cleaned-version, with attachments.  There's a=
=20
hard copy on your chair.

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

=09Jeff Dasovich
=09Sent by: Jeff Dasovich
=0902/15/2001 05:56 PM
=09=09=20
=09=09 To: jdasovic@enron.com
=09=09 cc:=20
=09=09 Subject:=20

Jim:
It was a pleasure speaking with you yesterday.  Based on our conversation,=
=20
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=20
to remove those impediments.

A description of the credit issues that continue to impede DWR=01,s ability=
 to=20
sign contracts with power suppliers, and options to resolve them. Two=20
possible options for addressing the credit issue are 1) a California PUC=20
order clarifying that DWR will recover its power purchase costs through=20
rates, and 2) an amendment to AB1X designed to accomplish the same goal.  I=
=20
have attached talking points regarding the California PUC order and propose=
d=20
amendments to AB1X.  We believe that an amendment to AB1X is the preferable=
=20
option.

Our assessment of the supply/demand picture in California.

Our suggestions for a legislative package designed to solve both the near-=
=20
and long-term electricity crisis in California.  We will deliver to your=20
office tomorrow detailed legislative language.  In those materials we will=
=20
also identify existing bills that we believe can easily accommodate our=20
proposed language.

I hope that the information is useful.  Please do not hesitate to contact m=
e=20
if you would like to discuss these materials further, or if there is anythi=
ng=20
else that I can do to assist you.

Regards,
Ken



Contact Information to Discuss Interest Expressed by Native American Tribes=
=20
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=20
step in the right direction.  Utility stand-by charges have always been=20
designed by the utilities to protect their monopoly position, extract=20
monopoly prices from customers, or both.  But there is no reason to limit t=
he=20
elimination of these charges to generation facilities that are less than=20
1MW.  These limits will only lengthen unnecessarily the time it takes for=
=20
California to close the significant gap between supply and demand and reduc=
e=20
the risk of black outs this summer.  We would propose lifting the cap by=20
offering amendments to SB27X, which is designed to facilitate development o=
f=20
distributed generation.
=20
Excessive delays and costs related to interconnecting facilities with=20
investor-owned and municipal utilities

Solution:   The Governor=01,s executive order regarding interconnection is =
a=20
step in the right direction=01*D-D-26-01 requires utilities to complete=20
interconnection studies within 7 days.  California should ensure that this=
=20
requirement applies to all generation facilities, including distributed=20
generation.  In addition, the financial conflicts the utilities face when=
=20
interconnecting generation facilities are simply too powerful to overcome=
=20
through executive orders or other regulations.  To the greatest extent=20
possible, California should shift control over interconnection away from th=
e=20
utility and place that control with the California ISO.  This could be=20
accomplished through amendments to SB 27X.

Permitting and Air Quality Issues
Developers of distributed (i.e., =01&on-site=018) generation that is 50 MWs=
 or=20
greater must receive certification from the California Energy Commission an=
d=20
therefore face all of the impediments to development that large-scale=20
generation faces. =20

Solution: California should ensure that the executive orders (D-22-01 thru=
=20
D-26-01) issued by the Governor to expedite plant siting and maximize plant=
=20
output apply equally to smaller scale, =01&distributed generation=018 facil=
ities.=20
In addition, distributed generation that is less than 50 MWs continues to=
=20
face local opposition.  The State should ensure that local, parochial=20
interests cannot block otherwise beneficial distributed generation projects=
. =20
These objectives could be accomplished through amendments to SB27X.

3. Credit Concerns Regarding Authority Granted to DWR in AB1X to Purchase=
=20
Electricity on Behalf of the Utilities=20

Enron responded to the RFP issued by DWR to enter into power contracts with=
=20
suppliers.
Enron is in active discussions with DWR to establish contract terms with th=
e=20
goal of entering into a power purchase agreement as soon as possible.
However, ambiguities contained in AB1X have created significant credit risk=
=20
concerns that need to be resolved in order to finalize contract terms.
We understand that the lion=01,s share of counterparties share Enron=01,s c=
redit=20
risk concerns.
Enron has proposed several options for resolving the credit risk issues and=
=20
is working with DWR to arrive at a solution that is mutually agreeable to=
=20
both sides and that might serve as a template for power purchase agreements=
=20
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=20
charge California ratepayers for the costs of purchasing power.  From our=
=20
analysis of the bill, the language in AB1X appears to leave intact the=20
California PUC=01,s exclusive jurisdiction over ratemaking in California.  =
As=20
such, suppliers have no assurance that the PUC will agree to include in rat=
es=20
adequate charges to cover DWR=01,s costs of power purchases.

Ambiguous Regulatory Authority Regarding Contract =01&Prudence=018
The language in AB1X leaves open the possibility that the California Public=
=20
Utilities Commission could determine that power purchases made by DWR are=
=20
=01&imprudent.=018  On the basis of such a finding, the CPUC could then ref=
use to=20
allow DWR to collect from ratepayers the costs associated with its power=20
purchases.  Consequently, suppliers have no assurance that the PUC will agr=
ee=20
to include in rates the charges to cover the costs of power contracts that=
=20
DWR has entered into with suppliers.
=20
Ambiguous Language Regarding the Ratemaking Mechanism that Will Be Used to=
=20
Recover DWR=01,s Costs of Power Purchases
In addition to the ambiguity regarding ratemaking and regulatory authority=
=20
noted above, the language in the bill is equally ambiguous with respect to=
=20
the specific ratemaking =01&mechanics=018 that AB1X directs the PUC to empl=
oy to=20
permit DWR to recover its power purchase costs. Based on our analysis, it i=
s=20
extremely difficult to determine how the PUC would design the rates to ensu=
re=20
DWR recovers its power purchase costs.  Moreover, as currently drafted, it =
is=20
difficult to determine whether AB1X would even permit the PUC to include in=
=20
rates all of the charges necessary to fully recover DWR=01,s power purchase=
=20
costs.  Again, this ambiguity raises significant credit risk concerns since=
=20
suppliers have little assurance that DWR will have the ability to recover=
=20
from ratepayers the costs of purchasing power.

Options to Resolve Concerns Regarding Credit Risk=20

We have been working diligently with DWR officials to resolve the credit ri=
sk=20
issues.  We have identified three options:

Amend AB1X
The amendments, which are attached to this email, would clarify that a) the=
=20
PUC would accept as =01&prudent and reasonable=018 all purchase costs incur=
red by=20
DWR, and b) the PUC is obligated to include in rates the charges necessary =
to=20
ensure that DWR fully recovers its costs of power purchases.  This is the=
=20
preferred option, though we understand that the there may be some political=
=20
challenges standing in the way of amending AB1X.  (See attached file=20
entitled, =01&AmendAB1X.doc=018.)

Clarify the Ambiguities in AB1X through an Order Issued by the PUC, and=20
through Contract Language
This is the option that we are currently working with DWR officials to=20
implement.  However, it is more complicated and could take significantly mo=
re=20
time to implement than the "legislative" fix.  We have attached electronic=
=20
copies of the talking points related to the order that the California PUC=
=20
would need to issue under this option.  (See attached file entitled,=20
=01&cpuctalkingpoints.doc.=018)

Make Use of Other Instruments Designed to Address Credit Risk
As indicated in our letter responding to DWR=01,s RFP, we are willing to ac=
cept=20
other forms of credit from DWR.  Those options include a letter of credit,=
=20
cash prepayment, or an acceptable form of collateral.  DWR officials have=
=20
indicated to us that DWR prefers to pursue the second options. That is, DWR=
=20
prefers to clarify the ambiguities in AB1X through a PUC order and through=
=20
contract amendments.

4. California=01,s Supply-demand Picture Heading into Summer 2001

Both the California Energy Commission and Cambridge Energy Research=20
Associates (CERA), a private sector energy think tank, have issued reports=
=20
showing that California faces a severe supply-demand imbalance.  They diffe=
r=20
only on how much and how soon additional supply will be made available.  Al=
l=20
credible sources agree that supply will be very tight throughout the Summer=
=20
of 2001 and that unless a solution is found immediately, blackouts are=20
likely. =20

CEC and CERA both forecast that California will be short of supply this=20
summer by approximately 5,000 MW.   These numbers are in line with our=20
estimates.  California=01,s supply base currently has a 6% capacity margin,=
 well=20
below the average 15-20%, which is recommended for reliable system operatio=
n=20
in the West.  Since the West relies more heavily upon hydroelectric power=
=20
than other regions, reserves are particularly important, owing to the=20
unpredictability of the weather and the dry year the West has experienced t=
o=20
date. In the event of a low rain and snow period, the system must possess t=
he=20
flexibility to respond to the reduced availability of power supply. =20
California=01,s very low reserve margin makes it especially susceptible to =
this=20
requirement. =20

Other reasons for reduced supply for the Summer of 2001 include the early=
=20
draw-down of reservoirs in the continual effort to manage California's seve=
re=20
supply-demand gap; emissions restrictions on existing plants; and a reduced=
=20
number of customers who can be curtailed under their contracts with the=20
utilities.  Cambridge Energy Research Associates asserts that at the curren=
t=20
pace of siting, permitting and construction, adequate supplies will not be=
=20
added to correct the market imbalance until 2003 at the earliest.

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

5. Suggested Package of Legislative Proposals Designed to Solve California=
=01,s=20
Electricity Crisis

This email offers an overview of our proposed legislative solution.  We wil=
l=20
deliver to your office tomorrow specific legislative language and existing=
=20
bills that we believe can accommodate our proposals.

As we have suggested throughout the crisis, any solution to California's=20
crisis must focus on four issues:

Increase supply
Decrease demand
Establish a truly competitive retail electricity market
Return California=01,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. =
=20
Enron and others have completed the entire process in other states in less=
=20
than a year.  In California, it takes about six years, or longer.

The Governor=01,s executive orders and Senator Sher=01,s siting reform legi=
slation=20
are steps in the right direction.  Our suggested amendments can improve tho=
se=20
efforts by further addressing the difficulties that project developers face=
=20
in securing air emission reduction credits to meet the air permit=20
requirements included in the CEC's certification requirements.  Enron=01,s=
=20
proposal seeks to streamline the process for 1) obtaining credits and 2)=20
transfering credits between air districts.  In addition, it creates an=20
innovative emissions reduction bank to allow project sponsors to fund=20
emissions in advance of obtaining certification, and permits the affected a=
ir=20
districts to use those funds to finance projects that will produce the=20
required reductions in pollution emissions.

Decrease demand=01*Legislative Vehicle:   AB31X (Wright)
Because of the delay in getting a solution in place in California, closing=
=20
the supply-demand gap through energy conservation and efficiency offers the=
=20
best chance of avoiding blackouts this summer.  This can be accomplished mo=
st=20
effectively and quickly in two ways:

Buy-down demand
California is tapping into an enormous amount of money from the General Fun=
d=20
to finance DWR=01,s power purchases.  California could likely reduce demand=
 more=20
economically by running an auction to determine the payments businesses wou=
ld=20
be willing to receive to reduce their demand for a sustained period (e.g.,=
=20
through the summer months).  DWR could easily run an on-line auction to=20
determine the price it could pay for these demand reductions.  To=20
participate, businesses would be required to have the metering equipment=20
necessary to monitor and verify that they are actually achieving the=20
reductions.  Enron has developed an on-line auction software package, =01&D=
eal=20
Bench,=018 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=
=20
for hour-ahead power in real time.=20
Real-time metering systems for baseline demand and voluntarily curtailment=
=20
verification.
Settlement process that allows for market clearing prices of energy to be=
=20
paid for load reduction (=01&Negawatts=018).

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

=01&creation=018 of additional summer peaking capacity in California, parti=
cularly=20
in the short term, without requiring construction of additional generation=
=20
resources.
reduction of  peak or super-peak load on the over-stressed California=20
electric system, thus potentially reducing the overall cost of electricity =
in=20
the state.
fostering of demand elasticity without subjecting customers to the full ris=
k=20
of hourly market price volatility by passing market price signals to=20
customers and allowing them to voluntarily shed load and be compensated for=
=20
responding.=20

We estimate that we could generate a summer 2001 on-peak demand response in=
=20
excess of 400 MW during certain high cost hours, and a demand response for=
=20
summer 2002 on-peak hours that could exceed 1000 MW.  We further estimate=
=20
that the market response to this program from all ESPs could be 2 to 3 time=
s=20
that amount.  We recommend that the State of California provide rebates=20
directly to customers to fund the installation of advanced metering and=20
control systems that would support load curtailment implementation.

Establish a truly competitive retail electricity market=01*Legislative vehi=
cle:=20
SB27X
The only customers who were protected from price volatility in San Diego we=
re=20
customers who chose Direct Access and signed fixed price deals with energy=
=20
service providers.  Ironically, AB1X takes that important option away from=
=20
customers and businesses.  It is critical that AB1X be amended to remove th=
e=20
prohibition against Direct Access.

Enron's legislative proposal would give customers freedom to enter into a=
=20
direct access transaction, while simultaneously addressing the Department o=
f=20
Water Resources' concerns about stranded power costs that might result from=
=20
customer migration. =20

In addition, California will only achieve a competitive retail market when=
=20
the utility is removed completely from the procurement function.  Procureme=
nt=20
is not a utility core competency, as evidenced by the dire financial=20
condition in which the utilities now find themselves.  California should=20
therefore begin immediately to phase the utility out of the procurement=20
function entirely, with the goal of having all customers served by a=20
non-utility provider within 36 months.  To execute the transition, Californ=
ia=20
should hold a series of competitive solicitations over the 36-month period =
in=20
which competing service providers would bid for the right to serve segments=
=20
of utility load.

Return California=01,s Investor-owned utilities to solvency=01*Legislative =
vehicle:=20
AB18X
Utility bankruptcy will not increase supply and it will not decrease demand=
. =20
In short, bankruptcy does nothing to solve California=01,s supply-demand=20
imbalance.  In addition, bankruptcy increases the likelihood that consumers=
=20
and businesses will bear the significant financial risks of having Californ=
ia=20
State government assume the role of =01&electricity buyer=018 for an extend=
ed=20
period of time.  Finally, bankruptcy will undermine both investor confidenc=
e=20
in California's energy markets and the private sector's willingness to=20
participate in that market.

California can return the utilities to financial solvency by implementing a=
=20
series of staged rate increases.  California should design those rate=20
increases with the dual goal of returning the utilities to solvency without=
=20
=01&shocking=018 the economy or household budgets For example, California c=
ould=20
amortize the recovery of the utilities=01, past debt over a 5-10 year perio=
d. =20
In addition, the magnitude of the rate increase can be reduced in two ways:=
=20
First, the utilities could absorb some portion of their existing debt in=20
recognition of the risk they accepted when they agreed to the structure of =
AB=20
1890.  Second, California can =01&net=018 the revenues the utilities have r=
eceived=20
from selling electricity into the Power Exchange against the debts they hav=
e=20
accrued due to the retail price cap.
jdasovic@enron.com, skean@enron.com, richard.shapiro@enron.com, 