1.  Review attached note to confirm that we are restricted to one option (the 
"Regulatory Structure") from a regulatory standpoint with respect to the 
trading of Japanese bandwidth.

2.  Determine whether there are similar restrictions in SIngapore or Hong 
Kong requiring us to adopt a similar Regulatory Structure.

3.  Review the tax costs and risks arising from the Regulatory Structure and 
describe the steps that must be taken to manage the tax risks.

4.  Given the foregoing, determine what specific steps are necessary to 
implement the Regulatory Structure and manage the concomitant tax, legal, 
accounting, and credit risks.

5.  Review what steps, if any, are necessary to permit bandwidth trading by 
the US (and UK?) trading desks of bandwidth terminating in Australia.

6.  Time permitting, determine whether regulatory considerations require that 
we adopt a structure similar to the Regulatory Structure in Mexico, Brazil, 
or Argentina.

7.  Time permitting, review what steps, if any, are necessary to permit 
bandwidth trading by the US (and the UK?) trading desks of bandwidth 
terminating in Canada.

Questions and comments are invited.  Thanks.

W. Wayne Gardner
Enron Broadband Services
1400 Smith Street
Houston, TX  77002-7361
Phone:  713 853 3547
Fax:  713 646 2532
----- Forwarded by Wayne Gardner/Enron Communications on 05/12/2000 08:28 
-----

	Wayne Gardner
	17/11/2000 18:12
		 
		 To: Sue Nord/NA/Enron
		 cc: James Ginty/Enron Communications@Enron Communications, Donald 
Lassere/Enron Communications@Enron Communications, David 
Merrill/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT
		 Subject: Japan Trading

Dear Sue,
Because of the important role of Japan in the trading business of EBS, I want 
to make sure I understand very clearly our regulatory options.  For the sake 
of simplicity, I limit the discussion below to trading of segments between 
Japan and the US on the grounds that the Japanese principles that apply to 
any other trading of international segments would be identical.  The 
discussion is further limited to the purchase of IPLCs because that is the 
standard form of telecom capacity available for purchase out of Japan.  
Finally, based on input from Regulatory, the discussion assumes that the 
purchased IPLCs are divided into half-circuits.  The Japan half-circuit 
terminates in Japan and in the middle of the Pacific.  The US half-circuit 
terminates in the middle of the Pacific (picking up where the Japan 
half-circuit terminates) and in the US.

I.  Our only option from a regulatory standpoint:
We understand that the only option from a regulatory prespective is as 
follows:  EBS Networks YK ("YK") purchases the Japan half-circuits because it 
has an ST2 license and switch in Japan through which it will route ALL 
trades.  EBS Trading L.P. ("Trading") purchases the US half-circuits only.  
Each of Trading and YK can resell their respective half-circuits in the form 
of capacity under the EBS Master Services Agreement (the "Master") to others, 
who may be resellers or end-users.

II.  Tax consequences of structuring trades in accordance with this option:
At best, the tax consequences of the foregoing are that half of the earnings 
on Japan to US trading will be subject to 42% immediate Japan income tax 
(with no ability to defer the cash payment of tax with Enron's US tax loss 
carryforward).  In addition there may be significant exposure to US income 
tax (we are in the midst of quantifying this risk and evaluating potential 
ways around it) which would incrementally increase the effective income tax 
rate  to 62%.  If instead Trading undertook all the Trading activity, 
virtually all of the earnings of Japan to US trading would be subject to a 
single rate of US income tax (35%) and the payment of such tax could be 
deferred for a significant period of time due to Enron's large US tax loss 
carryforward.

III.  The following options have been ruled out by Regulatory for the 
following reasons:

Unworkable Option 1:
Trading does not acquire an ST2 license.  Trading buys US and Japan 
half-circuits directly and resells them in the form of capacity under the 
Master to others, who may be resellers or end-users.

This option is illegal from a regulatory standpoint even though YK has an ST2 
license.  Japanese telecom regs provide that a reseller of Japanese IPLC 
capacity must hold an ST2 license directly.  In other words, the regulations 
provide that no affiliate of the YK licensee may resell IPLCs unless that 
affiliate itself acquires a license.  Moreover, Trading cannot claim that it 
is not engaged in resale activities that require an ST2 license.  Japanese 
telecom regulations treat the resale of capacity under the Master as a resale 
of the underlying IPLC.

Unworkable Option 2:
Trading does not acquire an ST2 license.  YK purchases the Japan 
half-circuits.  Trading purchases the US half-circuits.  YK then resells the 
Japan half-circuits to Trading.  Trading then resells the entire circuits 
under the Master to others, who may be resellers or end-users.

For the reasons set forth under Option 1, this option is illegal from a 
regulatory standpoint, even if the sale from the YK to Trading and the 
subsequent resale by Trading occur in tandem one immediately after the other.

Unworkable Option 3:
EBS Trading L.P. forms a wholly-owned US special purpose vehicle ("SPV") 
which obtains an ST2 license.  SPV executes a cost-plus contract with EBS 
Networks YK.  The cost-plus contract provides that SPV has the right to use 
and control the telecom equipment owned by EBS Networks YK in exchange for 
periodic payments based on the cost of the equipment.  SPV buys entire 
circuits and resells them in the form of capacity under the Master to others, 
who may be resellers or end-users.

This option is illegal from a regulatory standpoint because SPV does not own 
or lease the equipment through which it trades capacity.  Even if it were 
legal from a regulatory standpoint, this option is NOT workable because the 
companies that control the Japanese capacity market would sell only to a 
licensed Japanese company.

Unworkable Option 4:
EBS Trading L.P. forms a wholly-owned US special purpose vehicle ("SPV") 
which obtains an ST2 license.  SPV establishes a local branch in Japan and 
controls a nominal amount of the telecom equipment in Japan through which the 
SPV's Japanese trading is switched or routed.   SPV buys Japan to US full 
circuit IPLCs and resells them in the form of capacity under the Master Sales 
Agreement.

This option is illegal from a regulatory standpoint because SPV does not own 
or lease ALL the equipment through which it trades capacity.  Even if it were 
legal from a regulatory standpoint, this option is NOT workable because the 
companies that control the Japanese capacity market would sell only to a 
licensed Japanese company.

Unworkable Option 5:
EBS Trading L.P. forms a wholly-owned US special purpose vehicle ("SPV") 
which obtains an ST2 license.  SPV establishes a local branch in Japan and 
controls ALL of the telecom equipment in Japan through which the SPV's 
Japanese trading is switched or routed.   SPV buys Japan to US full circuit 
IPLCs and resells them in the form of capacity under the Master Sales 
Agreement.

Although perfectly legal from a regulatory standpoint, this option is NOT 
workable because the companies that control the Japanese capacity market 
would sell only to a licensed Japanese company.  This also creates a tax 
problem in that Japan would treat the SPV as having a Japanese permanent 
establishment subject to Japanese income tax on the earnings attributed to it.

Please confirm, clarify where ambiguous, or correct where inaccurate.  Due to 
the extremely tax inefficient results of what appears to be our only option, 
we need to be absolutely certain that our understanding is correct.  Is it 
clear that there are no other options here?

Thanks.


W. Wayne Gardner
Enron Broadband Services
1400 Smith Street
Houston, TX  77002-7361
Phone:  713 853 3547
Fax:  713 646 2532