Elizabeth:  here is the PECO e-mail I referred to.  After skimming it, I 
realize that if you find it at all worthwhile, you may ask to see a copy of 
the PECO/Great Bay lawsuit and the agreement involved.  I'll see if Nellie 
can locate that as well.  John

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John Klauberg
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
212 424-8125
jklauber@llgm.com
Content-Transfer-Encoding: quoted-printable
Date: Tue, 27 Oct 1998 12:35:23 -0500
From: "JOHN G KLAUBERG" <JKLAUBER@LLGM.COM>
To: esager2@ect.enron.com
cc: stweed@ect.enron.com
Subject: Marketing Arrangements
MIME-Version: 1.0
Content-Type: text/plain;  charset=us-ascii
Content-Disposition: inline

Elizabeth:

Following up on our conversation last week, I have an associate pulling some 
of the relevant authority on the fiduciary duty/principal--agent issues we 
discussed in the context of some of the deals ECT is considering with respect 
to marketing the output of generation units of third party owners.  We should 
be able to get back to you this week with our thoughts in that respect and we 
will forward to you the major authorities, articles, etc.  that we come up 
with.

My sense of the market is that it is likely that ECT may be approached by 
many owners of power plants as the markets further deregulate and some of the 
owners of "hard assets" realize that they do not have the resources necessary 
to participate in the wholesale power markets.  And, with the further market 
participant fall-out to come (witness PacifiCorp's retrenchment announcement 
on Friday), ECT could end up with a larger share of this market perhaps 
resulting in multiple deals with third parties, even parties whose facilities 
may be viewed in competition with one another (based on load pockets, grid 
interconnection, etc.).  I agree with you that these deals carry a lot of 
legal risk because of ECT's commanding presence in these markets.

In addition, I found the PECO marketing contract with Great Bay Power ("GBP") 
that, as you know, resulted in litigation earlier this year.  I faxed it to 
you this morning along with a copy of the complaint that GBP filed against 
PECO earlier this year.  Set forth below are a few of the key aspects of the 
PECO/GBP Contract that I thought you might find of interest, including some 
of the contract language that bears on the fiduciary duty/ principal-agent 
considerations.  I thought it made sense to focus on some of these, not 
because it is a great contract, but I think it illustrates many of the 
concepts that your commercial people may wish to employ in the proposed 
marketing deals they are currently examining.  Further, you will see how many 
of the key provisions dealing with the key legal concepts are either unclear 
or confusing or never really addressed.

1.  Term; Exclusive Agent Relationship.  The Contract was for an initial term 
of 2 years.  PECO is designated to act as GBP's exclusive agent in marketing 
the power from GBP's only asset; namely, its interest in the Seabrook nuclear 
plant.  Except as noted in Paragraph 2 below, GBP could not sell to customers 
without PECO's consent.  GBP apparently sought the PECO deal since it needed 
a party to "firm up" its sales; that is, it needed a party to back up its 
Seabrook power in the event Seabrook went down.  GBP retained title to all 
power until title passed to third parties.  Of further note is that in 
connection with the contract PECO also received a warrant to purchase up to 
4.9% of the stock of GBP.  (This is similar to what ECT proposed with El Paso 
a year or so ago, but ECT proposed a warrant to purchase a greater percentage 
of the stock of El Paso.)  Note that the 4.9% limit is '35 Act driven.  More 
than 4.9% would be a "second bite" under the '35 Act that would require prior 
SEC approval and, in addition, could be problematic for PECO under the 
limitations of such Act.

2.  PECO's Authority to Effect Deals for GBP.  PECO could effect transactions 
for GBP, although it could not execute deals of  more than a year in duration 
without GBP's consent.  PECO also had the right to negotiate "on behalf of" 
GBP enabling agreements (such as those necessary to effect NEPOOL 
transactions), although those agreements would only become effective upon 
GBP's consent (which could not be unreasonably withheld).  Notwithstanding 
the foregoing, GBP could cause PECO to offer a sale of power on terms 
directed by GBP if the sale was for longer than six months, provided GBP 
could not require PECO to firm up such sale.  If PECO felt this was not the 
best course of action, it could terminate the Contract.

3.  PECO Standard of Care.  Sec. 4(a) of the Contract provides that "PECO 
shall use 'reasonable best efforts' to arrange for the sale of the [GBP 
Power]" and that it "shall use the same care and diligence in arranging 
Transactions [involving the GBP power] as it uses in the sale of capacity 
and/or energy owned by PECO."  PECO was authorized and required to use 
"reasonable judgment" during the negotiation and scheduling of transactions 
under the Contract.

4.  Conflicting Sales Opportunities.  Sec. 4(c) denominated "Bundling of 
Initial Power Amount" is of particular interest.  Effectively, this provision 
requires that if some of the GBP power is available but not committed and 
PECO has other NEPOOL power available to it that can be used to effect a 
sale, then PECO shall be obligated to serve each such sale with both the GBP 
power and its own NEPOOL resources "until the [GBP power] is fully 
utilized."  It is not exactly clear how this provision is intended to work, 
but I would assume that if PECO located a candidate for a sale transaction 
and PECO could use its own NEPOOL power  (defined as "Other NEPOOL Supply") 
to serve it or, alternatively, it could use the GBP power, then PECO would 
have to make the sale using both sources of power.  It is not clear whether 
PECO would have to apply the GBP first or whether a pro rata concept (perhaps 
based on the ratio of the GBP power to the total power available) would be 
permissible.  Obviously, this type of a provision would have major 
implications for the considerations we have been discussing since ECT would 
not want to be required either to use its counterparty's power first to make 
a sale or to apply some form of pro rata concept (which would be incredibly 
difficult to apply and a ticket to litigation).

5.  Notice of Conflicting Opportunities.  Sec. 4(d) of the Contract, 
denominated "Economic Disincentive," similarly is interesting (and 
confusing).  It provides, in effect, that if a portion of the GBP power is 
uncommitted but PECO owns Other NEPOOL Supply and PECO would make more of a 
margin by selling the Other NEPOOL Supply for its own account than effecting 
a deal for the GBP power, then "PECO shall notify GBP of such 
circumstances."  What is interesting is that it just requires PECO to notify 
GBP; it does not appear that there is any restriction on PECO's right to sell 
such power, except perhaps the restriction set forth in Sec. 4(c) above.  
Perhaps the negotiators of the Contract know how these provisions tie 
together, but it is not clear from the Contract itself.  This is very 
surprising since one would think that it would have been in both parties' 
interests to make it absolutely clear how the fiduciary duty/corporate 
opportunity responsibilities were to be handled.

6.  Compensation.  With respect to compensation, PECO paid GBP a "reservation 
fee" in consideration of GBP retaining PECO as its exclusive agent, which was 
based on a $ per MWh basis.  GBP paid a "service fee" to PECO based on a % of 
net sales revenues.  (It really wasn't on a net basis, however, since it 
effectively was based on gross revenues less transmission and ancillary 
services costs).

7.  Commitments for Future Opportunities.  Another interesting feature of the 
Contract was the parties' commitments to engage in "future joint 
opportunities."  For example, Sec. 13(a) states that "PECO shall be obligated 
to provide Great Bay with the opportunity to participate in all purchases of 
[additional favorably priced power from facilities in New England having a 
term in excess of 1 year]." (Emphasis added).  As with many other provisions 
of the Contract, it is not clear what happens if PECO and GBP do not agree on 
the sharing of costs, revenues, etc. with respect to such additional 
opportunities.

8.  Early Termination Rights.  In addition to termination for a breach of the 
Contract, GBP could terminate upon 30 days notice prior to certain dates 
(tied to the warrant expiration date).  PECO, as noted at paragraph 2 above, 
could terminate on 90 days notice if GBP elected to effect a sale on its won 
(that essentially PECO felt would not maximize the parties' profits).

9.  Choice of Law.  PECO was able to get Pennsylvania law to be the governing 
law.  Presumably, this was a function of the fact that GBP had less 
negotiating leverage and "needed" PECO to help it with firming up its sales.

10.  The Litigation.  In its complaint, GBP alleged, among other things, that 
since inception of the Contract PECO only effected two firm energy 
transactions for GBP.  In addition, it asserted that PECO entered into a 
number of wholesale transactions for its own benefit, rather than in the name 
of GBP.

I apologize for the length of this E-mail, but in light of the importance of 
these issues to the deals ECT is considering, I thought it made sense to give 
a flavor of the PECO/GBP contract.  We will be back to you later this week 
with the outcome of our research.  Please call me if you have any questions 
or need anything else.

John