FYI
---------------------- Forwarded by Nicholas O'Day/AP/Enron on 05/01/2001 
10:56 AM ---------------------------


Nicholas O'Day
04/30/2001 12:01 PM
To: John Sherriff
cc:  

Subject: EPower Regulatory situation

John, after two preliminary meetings with EPower project managers on 
regulatory issues and several discussions with Carey, it is clear that a lot 
of work needs to be done on the regulatory front for EPower. For a start, we 
need to go back and address the fundamentals:
 the implications of Japan's deregulating market on forward power prices
 the permits required for construction and operation of power plants and 
related facilities, and the time needed  to obtain those permits
 the ability to access the transmission network at the preferred sites in a 
timely and cost effective manner

Over the next few weeks, I will be undertaking a comprehensive regulatory 
review and will develop a lobbying strategy to address each of the barriers 
to timely development of EnCom's projects. Having said that, there is a real 
possibility that the permitting process cannot be shortened within an 
acceptable time frame, or that an assessment of forward power prices suggests 
that under certain scenarios it would be uneconomical to proceed with 
development of one or more of the projects.

Forward Power Prices. EPower is currently using a projected forward power 
price for 2007 and beyond based on the price paid by TEPCO to IPPs in 
1995/96. Deregulation is inevitable in Japan and international experience 
suggests that a period of significantly lower wholesale power prices will 
likely follow, particularly given that Japan is likely to be in generation 
surplus until at least 2010.

Permitting. EPower has indicated that it recently discovered that the 
permitting process for Aomori project will take 7 years to complete, without 
a significant lobbying effort. Prior to that, EPower believed that permitting 
would take 3 years. Again, EPower based the 3 year permitting estimate on the 
estimates of bidders in the 1995/ 96 IPP program. However, most of the IPP 
proposals involved repowering of existing plants which reduced the permitting 
time. In addition, the IPP program commenced prior to the introduction of the 
current environmental laws.    

Transmission Access. EPower has said that Chugoku Electric advised them that 
it will take approximately 10 years and in the order of US$200m to connect 
the proposed Ube plant to the transmission system. In addition, we have 
preliminary indications that Tohoku Electric are looking at a similar time 
frame to connect the Aomori project to the grid.

We have already started to address the transmission access issue. EPower 
acknowledges that it needs a better understanding of the dynamics of the 
transmission system to address in a meaningful way the concerns raised by the 
utilities on connection to the transmission system. Both EPower and Enron 
Japan have sufficient primary information on the transmission system for 
David Mason in the London office to develop a dynamic model. Armed with the 
information from the model, together with a more thorough understanding of 
the rules of connection to the transmission system, we aim to be in a 
position to negotiate in a more meaningful way with the relevant utilities.

Project Valuation. These issues have a direct bearing on what I understand 
EnCom's value proposition to be - to take first mover advantage in Japan to 
build, own and operate power plants in Japan more efficiently than the 
incumbents. After almost twenty months operating in Japan, it may be timely 
for EnCom to review this proposition.

I have proposed to Carey that in conjunction with the regulatory review that 
he arrange for a reassessment of Encom's projects using a robust and 
objective approach with input from  Ariga (Domestic plant development),  Andy 
Foote/ Ed Cattigan (International plant development) and Jane McBride 
(legal). As part of that reassessment, I have suggested that EPower price the 
typical risks associated with project development  - financing, construction, 
commodity, operating, market, legal, regulatory and political risk with a 
view to making a financial assessment of each project on a best case, worst 
case and mid case scenario. 

The aim is to lay all the development risks out now so that we can make an 
informed decision on projects and quickly assess the implications of events 
as they arise through the course of project development.

John, it would be good to talk about these issues prior to the EPower 
conference call on Wednesday. Today is a holiday in Japan, but feel free to 
contact me at home or alternatively, I will be in the office Tuesday. My 
contact numbers are as follows:

Work 813 5219 4583
Home 813 52610539
Mobile 8190 2733 4795

kind regards