I agree with your reasoning.  Mark



	Christian Yoder
	01/04/2001 03:37 PM
		 
		 To: William S Bradford/HOU/ECT@ECT, Tracy Ngo/PDX/ECT@ECT
		 cc: Mark E Haedicke/HOU/ECT@ECT, Earline Kendall/HOU/ECT@ECT, Mark 
Holsworth/Corp/Enron@ENRON
		 Subject: The Ongoing CalPX Indemnity Agreement Issue

The CalPx has written us a letter saying that if we do not sign their 
proposed indemnity agreement by January 12, we will have to post collateral 
(letter of credit) for the full extent of our exposure to them (approx 
$25million).  Implicit in this demand is the threat that if we do not post 
the collateral, they will not allow us to do any business with them.

All things considered, I recommend that we consider posting the collateral 
and that we do not sign the indemnity agreement.  This recommendation assumes 
that we want to continue to do some residual business with the CalPX.  
Obviously, if our traders don't care about doing any business with them, we 
should just call their bluff and quit trading with them, but I don't think we 
would really want to do this.

The reason why I do not think we should sign the indemnity agreement is 
because it exposes us (Enron Corp.) to the very real PX credit meltdown 
risk.  Under the PX's Surety Bond with AIG,  if creditors of the CalPX,  say, 
the big three California Utilities for example,  teetering as they are on the 
brink of insolvency,  were to default to the PX, then AIG must keep the CalPX 
whole.  If AIG pays any money to the PX, it will immediately turn to its 
indemnity agreements with all the non-defaulting participants (including 
ours)  and try to recover from them.  Although the indemnity agreements 
purport to limit  AIG's ability to recover from us to our own specific 
default with the PX,  I do not think we should rely on the wording of the 
agreement to guarantee that we would not be washed into some kind of broader 
claim by AIG in a meltdown situation.  The wording is too ambiguous.   If I 
were outside counsel, I would not write us a legal opinion saying that if we 
signed the indemnity agreement we would not have any exposure in a meltdown.  

Therefore, given the solvency crisis with the big three utilities, I think we 
should assume there will be a major payment default and  I think,  if we must 
continue to do business with the PX, we should do it on the basis of posting 
collateral for our exposure.  Such collateral would be clearly tied to our 
own default and we should be able to control our own default risk with them.  
I have asked Tracy to set up a conference call to go over this reasoning.  
----cgy