Based on Ed's e-mail, given that Darren Delage will be in the Tokyo office 
entering into trades, we should pursue a back-to-back trading arrangement.  
That is, Darren would be working for Enron Japan ("EJ")  and would enter into 
the trades for EJ as principal.  Then, EJ would enter into mirror trades with 
ENA.  The tax issue then is a transfer pricing issue.  Ed previously advised 
that the margin should be based on a profit-split method.  In his June 23rd 
memo, he advised:

"Such a profit split would likely be along the lines of the various profit 
split methods that have been used to allocate profits among branches or local 
entities of banks and financial institutions that engage in global trading 
operations.  As we expect you are aware from experience in other 
jurisdictions, there is no clearly agreed upon set of factors to use in 
profit splits for global trading operations, but typical profit split factors 
employed have been trader compensation, back office compensation, a location 
or value factor, and perhaps a risk or capital factor.  If our sense is 
correct that a profit split would ultimately be determined to be the 
appropriate price method, this could entail a substantial effort to make the 
necessary functional analysis to develop the profit split.  These are initial 
impressions only and, on your request, we can evaluate the appropriate 
pricing method for the Japan financial trader operation in detail."

Basically, under a profit split approach, Enron Japan should earn a margin 
depending on what risks it retains and the costs it occurs with respect to 
these back-to-back trades.  The amount of the margin is something that we'll 
have to develop, based on how comparable unrelated trades would be priced.

Please let me know if you have any questions or need any additional 
information.

Best regards,
Susan

---------------------- Forwarded by Susan Musch/ENRON_DEVELOPMENT on 
09/25/2000 08:04 PM ---------------------------


Edwin.T.Whatley@BAKERNET.com on 09/24/2000 10:54:02 PM
To: Susan.Musch@enron.com
cc: jane.mcbride@enron.com, john.viverito@enron.com, 
Jeremy.Pitts@BAKERNET.com, Alan.Aronowitz@enron.com, 
Paul.TYO.Davis@BakerNet.com, Yukinori.Watanabe@BAKERNET.com 

Subject: Enron: Japan-Based Trader/PE and TP Issues



Dear Susan:

We confirm that we continue to recommend the basic approaches put forward in 
the
June 23, 2000 memo:  either (1) use back-to-back transactions if it is 
essential
to have Japan-based personnel trading for ENA or other offshore affiliates or
(2)(preferable purely from the tax standpoint if acceptable in light of
operational considerations) have personnel at Enron Australia (or other
affiliate in an appropriate time zone) handle the Japan trading.

Your description of the back-to-back trades as "mirror" transactions is 
correct
in the sense that the trades would be symmetrical in order to transfer to ENA 
or
other offshore affiliate the position it wants to take in the covered trade.
The terms might differ depending what decision is made about what mechanism to
compensate Enron Japan for transfer pricing purposes, i.e., if some margin 
were
built into the back-to-back trades to compensate Enron Japan.  As discussed in
our June 23 memo, the transfer pricing issues are potentially difficult in 
view
of the limited authority in this area, but in our view, such pricing issues
would present less exposure than structuring the operation so that it would
constitute a PE.

If you have any questions, or if we can provide further  assistance with this
matter, please let us know.

Best regards, Y. Watanabe/E. Whatley



Edwin.T.Whatley@bakernet.com
Phone: 81-3-3796-5857 Fax:81-3-3479-4224
Registered in Japan as an Attorney at Foreign Law;  Jurisdiction of  Primary
Qualification--California; Designated Law--Washington, D.C. and All U.S. 
States
Except Louisiana

-----Original Message-----
From: Susan.Musch@enron.com [mailto:Susan.Musch@enron.com]
Sent: Monday, September 25, 2000 10:41 AM
To: Paul.TYO.Davis@BakerNet.com; Edwin.T.Whatley@BAKERNET.com
Cc: jane.mcbride@enron.com; john.viverito@enron.com;
Jeremy.Pitts@bakernet.com; Alan.Aronowitz@enron.com
Subject: Re: Trader



Paul and Ed,

I want to confirm my understanding of your advice from last week (attached
below).  I think you're advising consistent with what Ed had advised back
in June, but I'm not totally sure.  That is, it would be best to have
back-to-back trades between Enron Japan ("EJ") and Enron North America
("ENA").  Under this scenario, DD would be an EJ employee who would enter
into the trades for EJ as principal.  Then, EJ would enter into mirror
trades with ENA.  The issue, as I understand it, under this scenario is
that the NTA could assert transfer pricing issues if the trades between EJ
and ENA weren't at arms' length.  Would you please confirm that this is
your conclusion on how the trades should be structured?

 I am trying to get this structure resolved by Monday night (Houston time)
so I would appreciate your thoughts in an e-mail during your Monday.

Best regards,
Susan