Jim,

Answers in Blue




James D Steffes@ENRON
04/12/2001 11:30 PM
To: James W Lewis/HOU/EES@EES
cc: Scott Stoness/HOU/EES@EES, Richard Shapiro/NA/Enron@Enron, Scott 
Gahn/HOU/EES@EES, Harry Kingerski/NA/Enron@Enron, Susan J Mara/NA/Enron, Jeff 
Dasovich/NA/Enron@Enron, Leslie Lawner/NA/Enron@Enron, Vicki 
Sharp/HOU/EES@EES, Mike D Smith/HOU/EES@EES 
Subject: Pros & Cons of EES Filing Testimony in Rate Case

Jay --

I wanted to talk with first thing on Friday about our decision to weigh in 
with testimony in this case.  Forgetting the question Legal may or may not 
have (let's assume they don't have any concerns) about Scott testifying, it 
is still my opinion that we should not file testimony. I will adjust my 
schedule to meet with you.

First, I assume that you have already marked your book to the Lynch 
"thoughts" on rate design and revenue allocation included in the initial 
Order.   I make this assumption, because the loss to EES has already occurred 
and our goal now is to try and bring back some of the value by (a) focusing 
on revenue sharing and (b) rate design.  Scott indicates that the loss could 
be $100MM with bad outcomes on the 2 key issues.  My purpose of EES' activity 
is to try and minimize that number.  I feel that a quiet but forceful role in 
the case is the best vehicle given our recent troubles in CA and before the 
CPUC.  We have a reserve set aside for the actual outcome of the rate case.

Second, I am not sure that Govt Affairs is comfortable with Scott's model of 
rate design.  While tiering of rates is on the table, the question of demand 
reduction payback under his framework could result in customers using 70% of 
their load and paying nothing.  That hardly makes sense.  Now maybe we just 
don't understand, but putting in testimony that is unclear or confusing isn't 
going to win the day before the CPUC.  When we talk with you this morning, we 
should be able to get you comfortable.  If we cannot agree, then we should 
sit down with Don and Janet. 

Third, most of our victory will come from aligning with the big users.  If we 
are supporting / defending our own testimony (which they haven't seen), I 
think that our ability to work through a Settlement will be limited.  Our 
goal is to "pick and choose" from the best solutions proposed while trying to 
highlight other options through cross-examination (granted, this may be very 
hard).   We should have a list of the best to worst outcomes for Enron and 
should work to get the best possible outcome. 

Fourth, someone may try to get EES to weigh in on the allocation of these 
costs to DA customers.  We have agreed not to take on that issue.  Scott 
doesn't get to use the Fifth Amendment to not answer. Let's discuss strategy

Scott and his team is preparing testimony.  Give me a call.  If Scott and you 
are intent on moving forward, we'll do as you see fit within the other 
constraints. 

Jim

---------------------- Forwarded by James D Steffes/NA/Enron on 04/12/2001 
11:12 PM ---------------------------
From: Leslie Lawner on 04/12/2001 05:58 PM
To: Richard Shapiro/NA/Enron@Enron, Mike D Smith/HOU/EES@EES
cc: Scott Stoness/HOU/EES@EES, Harry Kingerski/NA/Enron@Enron, James D 
Steffes/NA/Enron@Enron, Tamara Johnson/HOU/EES@EES, Robert 
Neustaedter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Jeff 
Dasovich/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON 

Subject: pros and cons

Here is the list of pros and cons for Scott Stoness filing testimony in the 
CPUC rate design case (testimony due tomorrow, hearing set to begin next 
Monday).  We have a call into Mike Smith to get legal's view.

Pros of filing testimony:

Getting out on the table a demand reduction program and a market-based 
pricing mechanism

Favorable "strawman" proposal can move direction of CPUC decision in our favor

Insurance policy in case no one files a proposal we like

Can be withdrawn before hearing if we have other proposals we can support

Could give us leverage to participate in settlement negotiations 

Easier to make case through direct testimony than on cross exam.

Cons of filing testimony:

We get in a position of having to defend our position and loose ability to 
throw support behind other positive proposals (alone or in combination) 

We open ourselves to cross examlination and discovery  (Scott Stoness will be 
supporting witness and could have information we would not want revealed).

Enron is not very popular these days and filing/testimony could fuel more 
negative press

Additional Enron resources will be used (Scott's time, Tamara's time)

Market dysfunction may help ENA's position



Scott Stoness estimates that there is a $50 million risk if dollars are not 
apportioned properly to each rate class, but this is an issue that a number 
of parties will likely be addressing in their testimony.  He estimates that 
there is an additional $50 million at risk if CPUC's seasonal rate design is 
adopted as opposed to his two-part real time pricing proposal.  $100 million 
potential loss if Lynch proposal does not solve the problem for the winter of 
2001-2002 and anothe rate increase is needed in November.