Not necessarily for purposes of discussion on the SCE call, but for later
reference if we have to fight SCE over the justification for their crediting
proposal, I want to chime in with my critique of SCE's analysis.

First of all, their example does not properly characterize the obligations
of the direct access customers.  A Direct access customer (with the same
hypothetical load as in the SCE example) did not pay the same $60 toward
SCE's procurement costs and transition recovery, they paid a lesser sum, $60
minus the actual PX costs for that billing cycle.  What the direct access
customer paid (assuming the PX costs were $30), was a contribution directly
to CTC transition cost recovery, in this case $30.

When the price of energy exceeded the 6 cents in bundled rates for
procurement and transition cost recovery, the utility does begin to build an
undercollection from its bundled customers, and the entire $80
undercollection in the SCE example relates to the cost of power purchased
for the bundled customer but not recovered in rates.

The same is NOT TRUE for the direct access customer.  The negative credit
provided to the direct access customer is the same as the underrecovery from
the bundled service customer, in this case $80.  However, for the direct
access customer, this amount has nothing to do with power purchased by the
utility for the DA customer, and represents essentially a credit against
amounts overpaid toward the utility's CTC recovery in earlier periods.

This is one of the many perverse effects of the residual CTC collection
mechanism.  If a fixed CTC contribution had been established from Day 1,
direct access customers could have continued to pay that fixed contribution,
also pay their $40 share of the utility T&D costs, and would not have had
any role in creating the utility's undercollection.  However, because the
CTC calculation was a residual calculation:  the generation component of the
frozen rates less the actual PX costs = CTC (which later became negative)
direct access customers' contribution to CTC was dependent on the utility's
procurement risk in the market compared to the generation component in
frozen rates.  This was also consistent with the notion contained in AB 1890
and the Edison MOU that the utility bore the risk of power price volatility
in recovering its CTC.

In order for direct access customers to contribute to CTC symmetrically with
bundled customers, when bundled customers no longer contributed to CTC
(because of high power costs) and in fact REDUCED the CTC collected (the
power cost undercollection was to have been paid first before CTC was
booked, but the PUC did not properly account for this until it adopted the
TURN accounting adjustment), then the CTC contribution of direct access
customers had to be proportionately reduced, and that is the function of the
negative CTC credit.

Thus, a reduction in the CTC contribution of direct access customers to
ensure they paid the same proportionate share of CTC as bundled customers is
NOT a matter which SCE is entitled to recover after the fact because they
sustained an undercollection of power costs.  The undercollection of power
costs was entirely their risk, and direct access customers paid their fair
share of CTC and that is all they had to pay, period.  The fact that they
paid less than SCE expected because the high power costs generated a lot of
negative CTC credits at the end of the transition period is one more risk
that the utilities assumed when they selfishly and foolishly promoted a
residual CTC calculation instead of a fixed transition cost recovery system
as was used in most other states.  SCE is entitled to NO recovery of its
undercollection from direct access customers.

As you can tell, I am more than willing to discuss this ad infinitum.  If
you have questions, please call or email.

Mike Day





-----Original Message-----
From: Steffes, James D. [mailto:James.D.Steffes@ENRON.com]
Sent: Wednesday, October 31, 2001 1:19 PM
To: Mara, Susan; Dasovich, Jeff; Mellencamp, Lisa; Tribolet, Michael;
Huddleson, Diann; Swain, Steve; Curry, Wanda; mday@gmssr.com
Subject: RE: Sue's Retort to SCE's Premise




-----Original Message-----
From: Mara, Susan
Sent: Wednesday, October 31, 2001 2:36 PM
To: Dasovich, Jeff; Steffes, James D.; Mellencamp, Lisa; Tribolet,
Michael; Huddleson, Diann; Swain, Steve; Curry, Wanda; 'mday@gmssr.com'
Subject: Sue's Retort to SCE's Premise
Importance: High


I don't agree Edison's premise -- that "direct access customers
contributed just as much to SCE's procurement costs undercollection as
bundled service customers." We need to make clear that we don't buy in
to their rhetoric.

Here's my reasoning.

DA Customers are completely different from bundled customers. SCE had to
buy power to serve the bundled load.  SCE did not buy power for DA
customers.  SCE's purchases of the power to serve the bundled load
coupled with high wholesale prices and an inability to raise rates was
the direct reason for the undercollection. I can make the argument that
the undercollection is SOLELY related to BUNDLED SERVICE.

There are two big reasons that back me up: AB 1890 and Top-down rates.
I will explain.  The utilities got what they wanted out of AB 1890 --
payments of $30 plus billion in so-called stranded costs and a real
delay in any competitive retail market until their costs were paid off.
One of the tradeoffs, however, was that the utilities were at risk FOR
HIGH PRICES in the WHOLESALE MARKET.  Everyone understood that if there
were high gas prices or bad hydro years, the utilities would be squeezed
and not collect their billions by the 3/31/01 deadline. That's the risk
they agreed to.  Now, they are claiming that they were ENTITLED to that
money and more.  This is in direct conflict with the statute. I can make
the argument that the statute requires SCE to assume this risk and
therefore any undercollection is theirs alone -- now the CPUC can bail
them out -- but that doesn't make ESPs subject to any presumed
"undercollection."

Now to the rates.  At the beginning of DA, the utilities did not want to
do a real rate case and separate the costs of the wholesale business and
the retail busness from T&D. So, they did a "top-down" calculation.
This meant that there had to be a "credit" put on the bills of DA
customers to account for the costs the utility avoided by having the
customers switch to DA. So, the PX Credit structure was a direct result
of the utilities unwillingness to unbundle specific components of the
rates.  Next, although bundled customers rates were capped, the
decisions from the CPUC made it clear that there was no similar cap for
DA customers -- their rates and bills would be whatever was charged by
their ESPs.  However, when the utilities filed their tariffs with the
CPUC, they added a cap for the PX credit that was neither proposed nor
authorized by the Commission.  Enron attacked it, but got nowhere, until
WPTF and Enron brought it up in the 1998 RAP Proceeding. Our argument
was that the bundled rates were capped but not the bills of DA customers
-- and the credit was supposed to represent the full costs the utilities
avoided by not serving DA customers.  We argued that anything less is
fundamentally unfair and anticomeptitive.  The utilities must have
thought we had a good case, because they agreed to settle. The
settlement was accepted by the Commission in the proceeding. Everyone
understood that eliminating the cap on the PX Credit was primarily to
allow the PX Credit to FLOAT ABOVE THE CAP when wholesale prices were
high. So, we have a legal right to receive the full PX Credit/Negative
CTC which is separate and distinct from any undercollection associated
with bundled customers. It seems as if we should be able to prosecute
this legal right. (keeping in mind I am not an attorney)

In summary, we have leverage and should use it.

Sue


-----Original Message-----
From: Dasovich, Jeff
Sent: Wednesday, October 31, 2001 11:12 AM
To: Mara, Susan; Steffes, James D.; Mellencamp, Lisa; Tribolet, Michael;
Huddleson, Diann; Swain, Steve; Curry, Wanda; 'mday@gmssr.com'
Subject: Proposal Edison Is Distributing to ESPs


FYI.

-----Original Message-----
From: Matt.Pagano@sce.com [mailto:Matt.Pagano@sce.com]
Sent: Wednesday, October 31, 2001 1:05 PM
To: Dasovich, Jeff
Subject: DA Credit


Hi Jeff,

Please find below SCE's proposal to settle past Direct Access Credit
issues
and determine the Direct Access Credit going forward. Please forward
this
to any other Enron participants to review prior to our conference call
with
John Fielder, November 1, 2001, 11:00 a.m. PST.

(See attached file: DA Proposal.doc)

Thanks.

Matt Pagano
Account Manager
ESP Services Division
tel-714-895-0222
fax-714-895-0347
Email-Paganomj@SCE.Com



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