Richard,

Tim Belden asked me to relay these concerns about the July 25, 2001 FERC Order to you.  

The biggest concern is that FERC is proposing to order refunds for sales in the Pacific Northwest.  Our refund exposure in the Pacific Northwest may be as much as six times as great as the California refund exposure, because of the greater number and volume of transactions.   

Here is a quick overview of FERC's Order as it affects Enron:

California

Yesterday, the Commission ordered refunds for October 2, 2000 through June 20, 2001 in the California spot markets for all hours.  The following transactions will be subject to recalculation of market-clearing prices and subject to potential refund:

1.	Sales into ISO and PX spot markets (real time and day-ahead)
2.	Out of Market ("OOM") sales to the ISO

The Commission ruled that the following transactions are not subject to refunds:

1.	California transactions outside the ISO and PX markets
2.	Bilateral sales to DWR
3.	Sales made pursuant to Dept. of Energy orders

The Commission has given the ISO fifteen days to calculate the proxy price for each hour during the nine-month period.

A significant aspect of this ruling for us is that marketers cannot use purchased power costs to offset potential refunds.  Order at 34.  Generators can justify above-cap costs but marketers cannot.  Therefore, no matter how much we paid for our energy, we will have to refund 100% of the difference between our sales price and the ISO's recalculated price.

Pacific Northwest

The Commission has established a separate proceeding to determine if the prices were unjust and unreasonable for spot market bilateral sales in the Pacific Northwest for the period December 25, 2000 through June 20, 2001.  The Commission has directed parties to submit factual information to the Administrative Law Judge over a fifteen-day period beginning August 2, 2001.  The judge shall complete discussion and make a recommendation within 37 days.  

If the FERC orders refunds in the Pacific Northwest here are some concerns:

1.	There is no centralized auction, so a larger group of transactions will be swept into the refund net.
2.	In California, "spot market" is defined as a 24-hour period.  The Order says that "spot markets" may be defined differently for the Pacific Northwest.  In Commissioner Massey's dissent and concurrence, he states that spot sales in the Pacific Northwest "could include sales up to a month's duration or even longer."  Massey Dissent, at 4.  If Pacific Northwest spot markets are defined to include term markets, this could significantly increase the amount of money at stake.  A comparison of 2001 YTD transactions for Long Term Pacific Northwest and Short Term Pacific Northwest transactions compared to Short Term California transactions shows a ratio of approximately 6 to 1.
3.	Marketers cannot pass through purchased power costs in the same way that generators can use actual costs to justify prices.  The result is that we may have bought at $500, sold at $550, but if the proxy price is determined to be $200, we will have to pay a refund of $350.
4.	Public power entities are subject to refunds in California, but the FERC's basis for asserting jurisdiction over these "non-jurisdictional" facilities in California---that the entities sold into FERC-authorized markets, e.g., ISO and PX---will not work in the Pacific Northwest.  Result:  Powerex, BPA, and the Pacific Northwest munis, e.g., most of our customers, will be exempt from refunds but we will not be.
5.	The effect of the FERC Order would theoretically be mitigated if Enron were to receive refunds, however:

		a.	we may not get refunds from munis, Powerex, or BPA
			b.	we will not get refunds from generators that can justify above-cap costs.
			c.	Accordingly, we will be paying refunds much more often and in greater amounts than we will receive.

Bottom line:

1.	We need to coordinate our litigation efforts with our Regulatory/Gov't Affairs efforts so that this issue does not fall through the cracks, that we do not lose any appeal rights, and that we present the most effective rebuttal to this attack on our business that we can.
2.	We need to petition FERC to allow marketers to use their costs of purchased power to offset potential refunds.
3.	We need to vigorously oppose refunds in the Pacific Northwest for reasons that are well known to all.  Our fallback position might be that such refunds are arbitrary and capricious unless we can use our purchased power costs and munis are also subject to refunds.  And, in any event, the definition of "spot markets" should not be expanded for the Pacific Northwest.

Steve