Mark -

thanks for the response.

I agree with you that identifying all of the Regulatory Risks associated with 
either a specific asset (e.g., Sutton Bridge) or a trading book (e.g., UK 
gas) is impossible.  We could have 50 people spending 100% of their time 
sitting around dreaming up 'what-ifs' and still not see everything.  On the 
other hand, as your team does now, once we have been able to identify 
reasonable risks, it is more than appropriate to attempt to impute / 
calculate the potential loss and assign people to mitigate these risks.  

On the flip side of the risk coin, the process of identifying Regulatory Risk 
should also allow Govt Affairs, working with our business colleagues,  to 
identify rule changes / policy changes that could positively impact our 
bottom line.  For instance, we could push through regulatory action for a 
retail rate decrease providing EES with more commodity margin.

I don't disagree that these risks which I am trying to track are business 
risks.  But they are fundamentally the result of changes in regulatory policy 
(taxes, export/import, rates, etc.).  Because Enron is actively participating 
in many regulated or semi-regulated environments, regulatory risks are 
business risks.  

Finally, it is my understanding that Govt Affairs needs to be involved in 
assisting our business people in managing these risks.  To this end, the 
Regulatory Risk Working Group has identified the following set of 
responsibilities for Govt Affairs:

_ To identify Regulatory Risks within current assets. 
_ To analyze pending transactions for Regulatory Risks. 
_ To recommend alternative commercial arrangements to reduce Regulatory Risk.
_ To assess and compute &value at risk8 for each Regulatory Risk.
_ To develop transfer mechanisms for Regulatory Risk (e.g., insurance).
_ To propose and/or plan mitigation devices for Regulatory Risks.
_ To assign EGA and/or commercial responsibility and resources for mitigation 
efforts.
_ To review mitigation efforts against existing plans.
_ To advocate regulatory frameworks which reduce Regulatory Risk (e.g., BIT).
_ To prevent catastrophic Regulatory Risk events (> $25 MM). 
_ To report to Enron management global Regulatory Risk position. 
_ To coordinate knowledge with other risk groups within Enron.

I look forward to seeing you when you are in Houston and discussing this 
further.  Like you, I don't want to create some process that provides little 
to no value.

JDS







Mark Schroeder@ECT
02/10/2000 03:17 AM
To: James D Steffes/HOU/EES@EES
cc: Richard Shapiro/HOU/EES@EES, Steven J Kean/HOU/EES@EES, Sharon 
Killey/LON/ECT@ECT 
Subject: Re: Assignment of Regulatory Risk Responsibility for Current Assets  

yes, let's meet.  I will have Sharon try to put something in the diary.

I would suggest the hardest part is "anticipating" these changes.  here are 
some examples:  UK Climate Change Levy, even other Government Departments in 
the UK are not allowed to kow what is in the Budget until the Chancellor 
delivers it to Parliament.  Turkish fuel consumption tax, I believe, was 
modified without prior notice.  In Romania, Doug Wood met with the Energy 
Minister on the proposed Gas Decree, and 2 days later they passed another 
draft of the decree, which had been rejected before Christmas, verbatim.  Tom 
Briggs can tell you that the annual revenue formula for BG TransCo, which 
affects all of our UK assets, can swing up or down by 10% per annum, and 
cannot be predicted/modelled (we and our consultants have tried).  Decisions 
by Polish regulator to price regulate generation in Poland, notwithstanding 
our PPA, was another example.  The list goes on.  I remain a sceptic that all 
of these risks, or even many of them, can be "identified" a priori.  Once we 
fact them, we do assess/mitigate.  In Europe, I think we accept these as 
"business" risks, that the regulatory team responds to.   mcs     



James D Steffes@EES
09/02/2000 21:02
To: Mark Schroeder/LON/ECT@ECT
cc: Richard Shapiro/HOU/EES@EES, Steven J Kean/HOU/EES@EES 

Subject: Re: Assignment of Regulatory Risk Responsibility for Current Assets  

Mark --

Thanks for the additions.  I will add to the Asset / Responsibility Matrix.

The definition I have been using is that Regulatory Risk is a subset of 
Sovereign Risk (with the other element being Political Risk).  Regulatory 
Risk is a "legal" action taken by a government or its agent which modifies 
Enron's business environment, most often directly through modifications in 
the energy and communications markets, but also in broad areas such as taxes 
and export - import policies.  Political Risk is a "supra-legal" action that 
has the same impact (e.g., expropriation).

Currently the Regulatory Risk Working Group (Fiona Grant is member) is trying 
to put in place a "standard" process to review and analyze regualtory risk 
around the globe - quite an undertaking.  When I use the term Regulatory Risk 
Management, I am primarily talking about such a process.  The key elements of 
any risk management function are (1) identification, (2) assessment, (3) 
mitigation / transference, and (4) audit.  You would probably agree that the 
most difficult problem is to try and assess the impact of any Regulatory Risk 
event.  The other key goal is to have a Mitigation Plan in place with an 
assigned person to "manage" our activities so that Enron does not face an 
associated loss.

My goal is to try an have this process in place by mid-year.  That would 
include having undertaken a structured review of our current Assets (the 
reason for the original questions) and the ability to review pending deals. 

When you come over to Houston next week I would really like to sit down and 
go through my thoughts with you.  

Thanks.

JDS


 



Mark Schroeder@ECT
02/09/2000 05:48 AM
To: James D Steffes/HOU/EES@EES
cc: Richard Shapiro/HOU/EES@EES, Steven J Kean/HOU/EES@EES, Fiona 
Grant/LON/ECT@ECT, Philip Davies/LON/ECT@ECT 
Subject: Re: Assignment of Regulatory Risk Responsibility for Current Assets  

Jim - overnight I realised you need to add our project in Turkey (Fiona 
Grant) and Poland (Philip Davies).  I have not given you any one person, as 
the regulatory issues seem to be country/environment specific, and instead I 
have given you the names of each person with country responsibility.  Indeed, 
at year-end we completed a financial transaction (Project Margaux), in which 
regulatory risk was reviewed.  A definition of Rugulatory Risk would be 
helpful, e.g., in most of these markets, trading arrangements are being 
re-written, or developed for the first time, this put existing PPAs under 
pressure.  Would energy taxes, carbon taxes/trading, transmission pricing 
(both for evacuation of power, and delivery of gas), changes in property 
tax/fuel tax regimes, risk of price regulation, all be included?  Do you have 
checklist?  We can identify these risks, what is meant by "manage"?  We work 
on these types of issues on a daily basis, so I am unclear as to what else is 
intended or implied.  thanks  mcs     



James D Steffes@EES
08/02/2000 17:24
To: Richard Shapiro/HOU/EES@EES, Mark Schroeder/LON/ECT@ECT
cc: Steven J Kean/HOU/EES@EES 

Subject: Assignment of Regulatory Risk Responsibility for Current Assets

Rick & Mark --

One of the first steps in building our Regulatory Risk process is to 
establish responsibility for the current assets owned/managed by Enron.  
Having a point person that I can contact will help me immensely.

Attached is a listing of the assets that I have been able to pull together -- 
there may be more that you know about.

Is it possible for us to agree upon the person(s) who will manage the 
Regulatory Risk with each of these assets?  Please feel free to call me to 
discuss.

I would like to have this assignment process complete within the month.

The same type of effort will be necessary as we review pending transactions.

Thanks.