Jim,

Lets get together to discuss - if we need to pull someone else into the discussion, then lets do it.  

The current structure for allocating insurance costs does not provide the correct price signals to the business units as to the real cost of holding assets.  This year we have been asked to increase our velocity of capital, cash flow, and our return on equity.  Corporate charges need to provide the correct incentives to accomplish this.  

I suggest that you use the "cost of capital charge" as a model to allocate cost that can be re-assessed and re-allocated at least at mid-year.  Given that this year is waning, I suggest that you absorb "freed up" insurance capacity at the corp level.  I imagine that if a business unit purchased an asset mid-year it would bear an allocation of insurance cost, so why not provide a savings when an asset is sold?

I will call to set up a time we can meet.

Regards,
Brian

P.S.  I'm not sure I understand what you mean by "once you complete your study of replacement cost values" - as nothing is being replaced?

 -----Original Message-----
From: 	Bouillion, James L.  
Sent:	Tuesday, October 09, 2001 11:41 AM
To:	Redmond, Brian; Clayton, Paul; Coffey Jr., Jim; Azore, Jacquelyn
Cc:	Whiting, Greg; Gruesen, Karen; Helton, Susan; Koehler, Anne C.; Kitchen, Louise
Subject:	RE: Replacement Cost Values

The 2001 annual allocated premium for these assets for property insurance is $670,000 based upon ENA's 2001 reported value of approximately $470,000,000.  The pro-rata credit for 7 months, assuming a 5-31-01 sale date, would be $390,833.  

Underwriters require an update of values and exposures annually at renewal. Gathering these values within Enron normally requires 30 to 45 days.  We use these same values in the allocation system. Unless the value change is significant, the actual cost of insurance to the outside insurers will not change  Once you complete your entire study of replacement cost values, we can discuss whether approaching underwriters is warranted.

 If we internally adjust your allocation mid-year, we must move the premium that we take away from you to the other participants in the program.  As you know, the remainder of Enron did not stand still while you sold Bammel.  We have not tried this before, however, I suspect if approached with the additional premium as a result reducing ENA's allocation, all the other operating entities would want to re-submit their revised  values as well and we would find ourselves in a constant state of adjustment.  In view of the time required, this is neither practical nor cost effective for Enron.  In view of the relatively small numbers, I doubt that Corp. would entertain this proposition either, however, we can approach them if you wish.  

 -----Original Message-----
From: 	Redmond, Brian  
Sent:	Tuesday, October 09, 2001 9:26 AM
To:	Clayton, Paul; Coffey Jr., Jim; Azore, Jacquelyn
Cc:	Whiting, Greg; Gruesen, Karen; Helton, Susan; Koehler, Anne C.; Kitchen, Louise; Bouillion, James L.
Subject:	RE: Replacement Cost Values

Paul:

Please let me know how much of the 2000 insurance premium is being allocated to the approx. $700MM of HPL assets.  This charge is effectively "a cost of capital" and should be re-allocated to other groups with insured assets or should remain at Corp.

Regards,
Brian 

 -----Original Message-----
From: 	Clayton, Paul  
Sent:	Tuesday, October 09, 2001 8:43 AM
To:	Redmond, Brian; Coffey Jr., Jim; Azore, Jacquelyn
Cc:	Whiting, Greg; Gruesen, Karen; Helton, Susan; Koehler, Anne C.; Kitchen, Louise; Bouillion, James L.
Subject:	RE: Replacement Cost Values

Brian:

This insurance is purchased on a portfolio basis with payment to underwriters at inception of the coverage. Values are adjusted annually at renewal. The premiums are allocated to the participating entities as part of the budget process and insignificant additions and deletions of assets do not normally result in premiums additions or refunds.  In the event that we discontinue premiums to North America for HLP, we have no mechanism to allocate that premium to the other assets that continue to be insured. In the event of a significant divestiture, underwriters may consider a refund, however, the values discussed below would not likely be significant when compared to Enron's values as a whole. Additionally, Enron's adverse loss experience affects the underwriters ability to return premium for small divestitures. 

At renewal, 4/01/02, North America's revised property values will be declared to underwriters as part of Enron's overall values and your premium allocation will adjust depending upon your values and loss experience as compared to the rest of Enron. 

Regards,

Paul


 -----Original Message-----
From: 	Redmond, Brian  
Sent:	Monday, October 08, 2001 5:31 PM
To:	Coffey Jr., Jim; Clayton, Paul; Azore, Jacquelyn
Cc:	Whiting, Greg; Gruesen, Karen; Helton, Susan; Koehler, Anne C.; Kitchen, Louise
Subject:	RE: Replacement Cost Values

Paul:

Please confirm that ENA will not bear any insurance costs for the HPL assets for the second half of 2001 and the balance of years going forward?  If this is not the case, then we need to meet and discuss why this is not the case.

Thanks,
Brian

 -----Original Message-----
From: 	Coffey Jr., Jim  
Sent:	Monday, October 08, 2001 5:25 PM
To:	Clayton, Paul; Azore, Jacquelyn
Cc:	Redmond, Brian; Whiting, Greg; Gruesen, Karen; Helton, Susan; Koehler, Anne C.
Subject:	RE: Replacement Cost Values

Paul
In addition to the 188,371,296 property value for Bammel Lease that you mentioned below there was also a value on your spreadsheet for Bammel Gas Storage of 267,000,000.  Requirements to insure both of these amounts should be with AEP not Enron and thus the 2002 Plan Premium Allocations of $754,096 on the Bammel Gas Storage 267,000,000 value and $924,433 on the Bammel Lease value of 188,371,296 should not be needed.  

Jackie
Please remove these amounts from the ENA-HPL 2002 Plan.

 -----Original Message-----
From: 	Clayton, Paul  
Sent:	Monday, October 08, 2001 5:10 PM
To:	Coffey Jr., Jim
Subject:	RE: Replacement Cost Values

Jim:
As discussed for the purposes of the 2002 Insurance Budget, we will delete the Bammel Lease (1409) property values of $188,371,296. We will advise the insurers effective this past June to delete these assets and will attempt to receive a refund. However, as respects asset divestitures, insurers have not been inclined in the past to refund premiums for comparatively small divestitures in view of our adverse loss experience. However, if we are successful in receiving a credit, we will refund the premium.

I will discuss with Karen and Brian the other remaining assets. 

Regards,


 -----Original Message-----
From: 	Clayton, Paul  
Sent:	Monday, October 08, 2001 2:13 PM
To:	Coffey Jr., Jim
Subject:	Replacement Cost Values

Jim:
Please update accordingly.
Thanks,


 << File: ENAREPLACEMENT COSTS 2001.xls >>