Attached is an e-mail that I sent to my management earlier this week.

A also have a couple of questions and observations.  First, do we have 
anything in writing from PG&E when they refused to comply with our request to 
revise their Roll-off Matrix?  

Also, I spoke with Jeff who informed me of the various variables that the 
market has to work with to negotiate with PG&E.  I agree with the following 
variables:
extend the rate freeze beyond 2001, but no later than the end of 2004.
a $3.5 to $4.0 billion hydro valuation on January 1, 2002 to cover TRA and 
TCBA undercollections at that point in time, with future payments based on a 
revenue requirement calculation and a fixed rate of return.  These fixed 
payments will be offset by the wholesale market revenues for the hydro 
output.  Ratepayers will have to make up the difference in the future through 
a balancing account and fixed surcharge or surcredit; in financial derivative 
terms this is is the equivalent of a negative index (fixed revenue 
requirement - market revenues presumed to be the PX).  This essentially NPVs 
the cashflows to payoff shortfalls today at the risk of creating shortfalls 
in the future to the extent that the value is too high.
increase the level of the frozen rate at some modest amount.  Keep in mind, a 
$10 per mWh increase in PG&E's rates beginning January 1, 2001, translates to 
a $155 million hit to the book for 2001 through 2010, so we would need an 
offsetting benefit.  We could probably offset this hit if the rate freeze was 
extended through March 31, 2002.
allow PG&E to hedge procurement costs for the extended frozen time period.
it is critical that the rate freeze does not end before July 1, 2001 for all 
customers, including large and small and DA and SO.  Preferably the rate 
freeze would end no earlier than December 31, 2001 or 2002.  They can also 
extend the rate freeze for a longer period of time for small customers or 
change the freeze to an SDG&E type of mechanism beyond December 31, 2001.
The following is PG&E's situtation.

As you can see that they will be trying to cut their losses, even though they 
have still not fully collected all outstanding undercollections.  
Undercollections are projected to grow through next year.  What PG&E will be 
looking for is a way out or a swaption to switch customers from the fixed to 
index asap.  I don't think they will be so quick to do give up $500 million 
at this point and will be interested in some type of settlement that would 
protect this amount.  There is still the political hot potato about rolling 
off early and selling out customers and the only way they could do this is 
with a quick valuation of hydro.  Maybe they would be willing to take some 
loss even in a settlement to avoid upsetting politicians and customers.  If 
the process is delayed, PG&E's exposure will probably be over $1 billion by 
the end of the year and possible $2 billion by the end of 2001.  So you see, 
there would be a need for some combination of a slight increase in rates, 
extension of the freeze to capture the backwardation in commodity price, and 
a higher hydro valuation with ratepayers incurring the risk for the higher 
valuation in the future, in exchange for a deal that insulates ratepayers 
from volatility and rate shock today.
It is key that the extended Rate Freeze equitably treats DA customers in the 
form of today's rate freeze with a PX credit that is not capped.

Roger 
---------------------- Forwarded by Roger Yang/SFO/EES on 09/21/2000 01:52 PM 
---------------------------


Roger Yang
09/19/2000 10:28 PM
To: Dennis Benevides/HOU/EES@EES, Scott Stoness/HOU/EES@EES
cc: Marty Sunde/HOU/EES@EES 
Subject: PG&E Strategy to End the Rate Freeze Early and Potential Book Impact

PG&E filed Advice Letter 2010-E-A on September 15 requesting to revise its 
hydro value estimate of a $1.0 billion previously filed in June to $2.8 
billion, retroactively effective on June 23, 2000.  Although PG&E does not 
state the intent to end the rate freeze, effective July 1, 2000, it is clear 
that PG&E will claim that the $2.8 billion interim valuation will render the 
rate freeze as having ended retroactively on July 1, 2000 if the CPUC 
approves this advice letter.  Our estimates show that this is viable; 
however, PG&E will be undercollected by $682 million in its Transition 
Revenue Account.  It is unclear whether PG&E is willing to forego this 
undercollection in order to avoid incurring higher undercollections from the 
run-up in electric commodity prices under a rate freeze, or if PG&E has some 
other plan to recover this undercollection as a post-freeze rate adder.  Even 
though Decision Nos. 00-02-048 and 00-06-004 adopt ratemaking methodologies 
to establish an interim valuation that triggered PG&E's Advice Letter 
filings, this decision states that "[the CPUC] will address the impact of 
this accounting on the end of the rate freeze at the appropriate time and in 
the appropriate proceeding." (p. 10)  Hence, there is no conclusive decision 
that states that this interim valuation should be used to end the rate 
freeze.  In fact, the utilities had argued the contrary, it could not be used 
in this manner.  

Since PG&E has already sent out bills for August and should alreay wdy have 
sent out bills for September by the final resolution of this Advice Letter, I 
believe the earliest implementation date for ending the rate freeze would be 
October 1, 2000.  In addition, I would have to believe that allowing PG&E to 
implement an end to the rate freeze effective July 1 would violate codes on 
retroactive ratemaking since it would result in an immediate increase to 
PG&E's customers.  The book impact to EESI for a termination date of October 
1 would be a $127 million loss.  A delay to an October 1 end date would 
result in an undercollection for PG&E greater than $1.2 billion.  PG&E will 
try to recover this undercollection in future rates if the end date is 
October 1.  To the extent that such recover is delayed and recovered over an 
extended period of time, the impact on the book could be minor due to the 
expiration of many of our contracts in 2002.   

AB1890 Section 368.a states, "These [frozen] rate levels for each customer 
class, rate schedule, contract, or tariff option shall remain in effect until 
the earlier of March 31, 2002, or the date on which the commission-authorized 
costs for utility generation-related assets and obligations have been fully 
recovered.  The electrical corporation shall be at risk for those costs not 
recovered during that time period."  I interpret this to mean that the 
utility does not have the option to artificially end the rate freeze 
earlier.  However, PG&E may be trying to end the rate freeze early through an 
interim valuation of hydro assets.  AB1890 Section 367.a.5 states, "For those 
assets subject to valuation, the valuations used for the calculation of the 
uneconomic portion of the net book value shall be determined not later than 
December 31, 2001, and shall be based on appraisal, sale, or other 
divestiture.  The commision's determination of the costs eligible for 
recovery and of the valuation of those assets at the time the assets are 
exposed to market risk or retired, in a proceeding under Section 455.5, 851, 
or otherwise, shall be final, and notwithstanding Section 1708 or any other 
provision of law, may not be rescindeded, altered or amended.  PG&E's 
original position was an interim valuation could not end the rate freeze when 
PG&E had thought it could overcollect CTCs before the run-up in market 
prices.  Now PG&E is trying to rewrite history after the fact by using an 
interim valuation that is higher than their original estimate.

Per Decision No. 99-10-057, PG&E and SCE were ordered to "file an advice 
letter three months prior to the earliest forecasted date that the rate feeze 
will end or Sepetmeber 2001 if the rate freeze does not end early....The 
Advice Letter implementing rate changes shall become effective within 30 days 
of the end of the rate freeze subject to Energy Division determining the 
Advice Letter is in compliance." (Ordering Paragraph 1)  To the best of my 
knowledge, PG&E has yet to file an advice letter providing 3 months notice of 
an end to the rate freeze.  This demonstrates that PG&E is taking desperate 
actions.  In that same decision, the CPUC ordered that "PG&E and SCE shall 
provide to interested parties estimates of the date the rate freeze will end 
and file advice letters to effectuate the end of the rate freeze as set forth 
herein." (Ordering Paragraph 2)  To date, every estimate filed with the CPUC 
showed that the rate freeze would end no earlier than January 1, 2001.  In 
fact, Enron has notified PG&E on prior occasions of the possibility of a 
potential earlier end date and PG&E dismissed our concerns about the 
misinformation perpetrated by PG&E's filings.  This demonstrates a willful 
act on PG&E's part to commit fraud if they were to end the rate freeze before 
2001.  This would not be the first time that PG&E has manipulated the 
regulatory process.  In its General Rate Case, PG&E was communicating an 
expectation of 35 to 40% rate drops at the end of the freeze, which were 
later revised to 20% drops.  The effect was to paralyze customers from 
choosing an alternate supplier, which turns out was not in the customers best 
interest.  Finally, the decision states, "the end of the rate freeze shall 
not occur before the generation assets of each utility have been 
market-valued except as the law or the Commission determine otherwise." 
(Ordering Paragraph 2)  This provision clearly demonstrates that despite all 
of PG&E's acts, it will be the final decision of either the Legislature or 
Commission as to whether they will allow PG&E to end the rate freeze 
retroactively without any advance notice and causing an immediate increase in 
utility bills to half of the customers of investor-owned utilities in 
California.  If the Legislature or Commission is willing to commit this type 
of political suicide, then PG&E's grip on these bodies is tighter than we 
could ever imagine.

As opposed to PG&E's desperate plans that would negatively impact California 
customers, we willl pursue a win-win strategy.  Amongst various strategies 
would be to extend the rate freeze up to December 31, 2004.  A freeze ending 
any period between July 1, 2001 and December 31, 2004, will have a positive 
impact on our book.  Estimates from a month ago showed a positive impact in 
the ballpark of $156 million if the rate freeze were to end on December 31, 
2004.  Of course our preference would be to end earlier than 2004 so as to 
avoid a potential negative impact on future sales; however, we believe this 
PG&E would require at least this time frame in order to mitigate its 
undercollections that it would incur for the next few years.  PG&E will 
benefit by the opportunity to maximize recovery, especially given an 
opportunity to now hedge this risk and with the hedge funded by ratepayers.  
ENA will have the opportunity to sell to PG&E.  Customers get a reprieve and 
will have an additional four years to prepare for the new market structure, 
knowing what they may expect from the scare from this summers.  With a better 
informed customer, we may even be able to still sell in California.  The 
Governor, Legislature, and Regulators, can defer the concerns to someone 
else's term in office.  At a minimum, we should try to negotiate some joint 
proposal with PG&E that would extend the rate freeze to December 31, 2001 or 
March 31, 2002, with guaranteed recovery of undercollections for PG&E for 
some time period beyond those dates.  If adopted by CPUC, PG&E would get the 
P&L protection they need and customers can benefit from the reprieve from 
higher rates.  I think the key is to preserve the current AB1890 rate freeze 
mechanism versus a mechanism similar to that enacted by the Legislature for 
SDG&E, because that legislation does not adequately protect all customers and 
competitors equally.  The only solution will be a win-win solution.  The Wall 
Stree Journal speculates that PG&E will be reluctant to be too aggressive in 
selling out customers and may be positioning itself to negotiate a win-win 
solution.  We need to make sure we are part of that winning solution, if not 
influence that solution.  Moody's Investor Services Inc. issued a negative 
outlook on PG&E and PG&E's stock price has dropped $4 from $30 to $26 in the 
last week.  Government Affairs is on top of this issue.

Roger