Based on the recent activities both at FERC (draft order) and at the CPUC
(undercollections/investigations), attached is a draft strategy to develop
a concensus position with as many parties as possible going into the next
legislative session, which begins in January 2001.  There are rumors that
the Governor may call for a special session, which would expedite the
treatment of energy issues.  Please provide any comments/concerns on this
approach asap.

Because of the undercollections the utilities that accumulated by virtue of
the rate cap for SCE and PG&E and the high summer prices, there is a strong
move by the utilities to end the rate freeze as expeditiously as possible.
However, ending the rate freeze early has serious implications for EES's
book of business in addition to the potential to expose consumers to rate
shock, a la San Diego, if the rate cap is removed prior to next summer.

In conversations with various organizations (WPTF, ARM, IEP, TURN), and
internally (Roger Yang), there may be fertile ground for negotiating a
settlement that could be supported by the aforementioned organizations,
provide utility some hope of recovery of their undercollected costs,
continue stabilized rates for small consumers through forward contracting,
providing opportunities for ENA, and defining the utilities role as serving
only residential and small commercial customers, creating marketing
opportunities for larger customers and marketers.

The components of a settlement would need to address:

1.   Rate Freeze Duration/Value of Hydro
2.   Undercollection Treatment
3.   Utility Procurement and Pricing/Default Provider

The proposal would be as follows:

1.   Maintain existing rate freeze through transition period (either
12/31/01 or 3/31/02).

a.      This gives the utilities a reasonable opportunity to mitigate
undercollection in TRA through valuation of hydro, and generation
revenues from the hydro and nuclear facilities.  It also gives the
utility time to structure its portfolio for serving its default
customers-forward contract.

b.      Maintains rate stability for consumers through tight summer
supply periods.

c.      Continues CPUC deliberative valuation of remaining generation
assets, including hydro.  CPUC recently ordered that supplemental
testimony could be filed on December 5 to adjust values to reflect
recent market events.  We think that the rate freeze cannot end without
a valuation of the assets, which is required by December 31, 2001.  This
could be a very significant mitigation piece.

2.   Provide an Equitable Outcome of the Undercollected Balance

a.      While the UDCs believe they can retro-actively effect an end to
the rate freeze, and receive full recovery of any uncollected power
purchase costs, TURN has filed saying that these power purchase costs
should be treated as a transition cost and the utilities should be given
the opportunity to recover those costs during the transition period with
the same risk exposure they have always had.  Anything still in the
account as of 12/31/01 is shareholder risk.

b.      There may be a nice middle ground here.  I think there are some
legal issues with TURN's proposal about treating current unrecovered
electricity costs as "stranded" costs.  However, there is merit to say,
let's get to the end of the transition period and net the
overcollections in the transition cost balancing account (TCBA) against
the undercollected transition revenue account (TRA).  Both SCE and PG&E
have been recording revenues from hydo, nukes, PPAs and QFs.  These
revenues, in addition to the remaining asset valuations, will provide a
substantial offset to the undercollected revenue balance.

c.      In addition, there may be additional merit to some sharing of
any remaining undercollected balance, after netting the two accounts,
between ratepayers and shareholders.  An argument can be made that the
utilities were over-exposed to the market volatility due to the lack of
forward contracting.  (Others may say that the utilities should be
responsible for the run-up in gas prices and ERCs and that ratepayers be
responsible for the balance.  Another way, may be to look at allowing
recovery of "above-cost" prices for period from June 14-Oct 2.  This
presumes that the Commission will not try to pursue disgorging profits
from marketers/generators.)  This amount could be amortized over a
several year period (3-5 years) beginning 2002.  While the sharing may
not be critical to Enron, it will be a big negotiating point between
ratepayer advocates and the utilities.

3.   Clearer definition of utilities' procurement role

a.      Define utility's roles as procurer for residential and small
commercial customers at a levelized price for fixed period of time (3-5
years).  This provides clarity to the utility on for whom they should
contract.  It will also alleviate claims about future stranded costs
when/if default role changes.

b.      Allow procurement flexibility on meeting that responsibility.
Reasonableness will be an issue.  Need to determine if we want to
propose anything or nothing.

c.      Provide only POLR service to industrial customers (flow through
of a spot market price plus retail adders).

d.      At the end of the default transition period, begin the process
of alternative default providers.

4.   Regulatory Process
|----------+------------+-----------+-----------+-------------|
| Hydro    | OII Markets| PG&E/SCE  | OII       | QF          |
|          | Whole/Retai| Emergency | Broader   | Restructurin|
|          | l          | Motions   |           | g           |
|----------+------------+-----------+-----------+-------------|
| Test.    | Subpoenas  | Comments  | Open 12/21| Ongoing     |
| 12/5     |            | 11/9;Reply|           |             |
|          |            | 11/17     |           |             |
|----------+------------+-----------+-----------+-------------|
|          |            | Likely to | Deal with | Deal w/     |
|          |            | adopt TURN| ending    | clipping    |
|          |            | accounting| rate      | capacity    |
|          |            | proposal  | freeze;   | payments in |
|          |            |           | increasing| SRAC to PX  |
|          |            |           | frozen    | price       |
|          |            |           | rates,    |             |
|          |            |           | etc.      |             |
|----------+------------+-----------+-----------+-------------|
| Final    | ?          | Decision  | Unknown,  |             |
| Dec. 3Q01|            | by 12/21  | possibly  |             |
|          |            |           | 2-3Q01    |             |
|----------+------------+-----------+-----------+-------------|