Jim:
It was a pleasure speaking with you yesterday.  Based on our conversation, 
this email includes the following:

An Enron contact to discuss developing small-scale, distributed generation on 
Tribal lands.

Our views on the impediments to small scale, distributed generation and 
suggestions on how to remove those impediments.

A description of the credit issues that continue to impede DWR,s ability to 
sign contracts with power suppliers, and options to resolve them. Two 
possible options for addressing the credit issue are 1) a California PUC 
order clarifying that DWR will recover its power purchase costs through 
rates, and 2) an amendment to AB1X designed to accomplish the same goal.  I 
have attached talking points regarding the California PUC order and proposed 
amendments to AB1X.  We believe that an amendment to AB1X is the preferable 
option.

Our assessment of the supply/demand picture in California and the West.

Our suggestions for a legislative package designed to solve both the near- 
and long-term electricity crisis in California.  We will deliver to your 
office tomorrow detailed legislative language.  In those materials we will 
also identify existing bills that we believe can easily accommodate our 
proposed language.

I hope that the information is useful.  Please do not hesitate to contact me 
if you would like to discuss these materials further, or if there is anything 
else that I can do to assist you.

Regards,
Ken



1. Contact Information to Discuss Interest Expressed by Native American 
Tribes in Installing Small-scale Generation on  Tribal Lands

David Parquet, Vice-President
Enron North America
101 California Street, Suite 1950
San Francisco, CA 94111
Phone: 415.782.7822


2. Key Barriers to Distributed Generation

Excessive and Unnecessary Utility Stand-by Charges
Solution: The executive orders issued by the Governor on February 14th took a 
step in the right direction.  Utility stand-by charges have always been 
designed by the utilities to protect their monopoly position, extract 
monopoly prices from customers, or both.  But there is no reason to limit the 
elimination of these charges to generation facilities that are less than 
1MW.  These limits will only lengthen unnecessarily the time it takes for 
California to close the significant gap between supply and demand and reduce 
the risk of black outs.  We would propose lifting the cap through amendments 
to SB27X, which is designed to facilitate development of distributed 
generation.
 
Excessive delays and costs related to interconnecting facilities with 
investor-owned and municipal utilities
Solution:   The Governor,s executive order regarding interconnection is a 
step in the right direction*D-D-26-01 requires utilities to complete 
interconnection studies within 7 days.  California should ensure that this 
requirement applies to all generation facilities, including distributed 
generation.  In addition, the financial conflicts the utilities face when 
interconnecting generation facilities are simply too powerful to overcome 
through executive orders or other regulations.  To the greatest extent 
possible, California should shift control over interconnection away from the 
utility and place that control with the California ISO.  This could be 
accomplished through amendments to SB 27X.

Permitting and Air Quality Issues
Developers of distributed (i.e., &on-site8) generation that is 50 MWs or 
greater must receive certification from the California Energy Commission and 
therefore faces all of the impediments to development that large-scale 
generation faces.  

Solution: California should ensure that the executive orders (D-22-01 thru 
D-26-01) issued by the Governor to expedite plant siting and maximize plant 
output apply equally to smaller scale, &distributed generation8 facilities. 
In addition, distributed generation that is less than 50 MWs continues to 
face local opposition.  The State should ensure that local, parochial 
interests cannot block otherwise beneficial distributed generation projects.  
These objectives could be accomplished through amendments to SB27X.

3. Credit Concerns Regarding Authority Granted to DWR in AB1X to Purchase 
Electricity on Behalf of the Utilities 

Enron responded to the RFP issued by DWR to enter into power contracts with 
suppliers.
Enron is in active discussions with DWR to establish contract terms with the 
goal of entering into a power purchase agreement as soon as possible.
However, ambiguities contained in AB1X have created significant credit risk 
concerns that need to be resolved in order to finalize contract terms.
We understand that the lion,s share of counterparties share Enron,s credit 
risk concerns.
Enron has proposed several options for resolving the credit risk issues and 
is working with DWR to arrive at a solution that is mutually agreeable to 
both sides and that might serve as a template for power purchase agreements 
going forward.

Summary of the Source of the Credit Risk Issue

Ambiguous Ratemaking Authority
The language in AB1X leaves ambiguous whether DWR has any authority to charge 
California ratepayers for the costs of purchasing power.  From our analysis 
of the bill, the language in AB1X appears to leave intact the California PUC,
s exclusive jurisdiction over ratemaking in California.  As such, suppliers 
have no assurance that the PUC will agree to include in rates adequate 
charges to cover DWR,s costs of power purchases.

Ambiguous Regulatory Authority Regarding Contract &Prudence8
The language in AB1X leaves open the possibility that the California Public 
Utilities Commission could determine that power purchases made by DWR are 
&imprudent.8  On the basis of such a finding, the CPUC could then refuse to 
allow DWR to collect from ratepayers the costs associated with its power 
purchases.  Consequently, suppliers have no assurance that the PUC will agree 
to include in rates the charges to cover the costs of power contracts that 
DWR has entered into with suppliers.
 
Ambiguous Language Regarding the Ratemaking Mechanism that Will Be Used to 
Recover DWR,s Costs of Power Purchases
In addition to the ambiguity regarding ratemaking and regulatory authority 
noted above, the language in the bill is equally ambiguous with respect to 
the specific ratemaking &mechanics8 that AB1X directs the PUC to employ to 
permit DWR to recover its power purchase costs. Based on our analysis, it is 
extremely difficult to determine how the PUC would design the rates to ensure 
DWR recovers its power purchase costs.  Moreover, as currently drafted, it is 
difficult to determine whether AB1X would even permit the PUC to include in 
rates all of the charges necessary to fully recover DWR,s power purchase 
costs.  Again, this ambiguity raises significant credit risk concerns since 
suppliers have little assurance that DWR will have the ability to recover 
from ratepayers the costs of purchasing power.

Options to Resolve Concerns Regarding Credit Risk 

We have been working diligently with DWR officials to resolve the credit risk 
issues.  We have identified three options:

Amend AB1X
The amendments, which are attached to this email, would clarify that a) the 
PUC would accept as &prudent and reasonable8 all purchase costs incurred by 
DWR, and b) the PUC is obligated to include in rates the charges necessary to 
ensure that DWR fully recovers its costs of power purchases.  This is the 
preferred option, though we understand that the there may be some political 
challenges standing in the way of amending AB1X.  (See attached file 
entitled, &XXXX8.)

Clarify the Ambiguities in AB1X through an Order Issued by the PUC, and 
through Contract Language
This is the option that we are currently working with DWR officials to 
implement.  However, it is more complicated and could take significantly more 
time to implement than the "legislative" fix.  We have attached electronic 
copies of the talking points related to the order that the California PUC 
would need to issue under this option.  (See attached file entitled, &XXXX.8)

Make Use of Other Instruments Designed to Address Credit Risk
As indicated in our letter responding to DWR,s RFP, we are willing to accept 
other forms of credit from DWR.  Those options include a letter of credit, 
cash prepayment, or an acceptable form of collateral.  DWR officials have 
indicated to us that it prefers to pursue the second options, that is, 
clarifying the ambiguities in AB1X through a PUC order and through contract 
amendments.

4. California,s Supply-demand Picture Heading into Summer 2001

Both the California Energy Commission and Cambridge Energy Research 
Associates, a private sector energy think tank, have issued reports showing 
that California faces a severe supply-demand imbalance.  They differ only on 
how much and how soon additional supply will be made available.  All credible 
sources agree supply supply will be very tight throughout the Summer of 
2001.  

CEC and CERA both forecast that California will be this summer short by 
approximately 5,000 MW.   These numbers are in line with our estimates.  
California,s supply base currently has a 6% capacity margin, well below the 
average 15-20% which is recommended for reliable system operation in the 
West.  Since the West relies more heavily upon hydroelectric power than other 
regions, reserves are particularly important, owing to the unpredictability 
of the weather and the dry year the West has had thus far.

In the event of a low rain and snow period, the system must possess the 
flexibility to respond to the reduced availability of power supply.  
California,s very low reserve margin makes it especially susceptible to 
this.  Other reasons for reduced supply for the Summer of 2001 include the 
early draw down of reservoirs close the supply-demand gas this summer, 
emissions restrictions on existing plants, and a reduced number of customers 
who can be curtailed.  Cambridge Energy Research Associates asserts that at 
the current pace of siting, permitting and construction, adequate supplies 
will not be added to correct the market imbalance until 2003 at the earliest.

CERA predicts that California is likely to face approximately 20 hours of 
rolling black outs this summer.  The CEC paints a considerably more 
optomistic scenario, banking that California will bring an additional 5,000 
MWs on line to meet peaking summer demand.  It is our view that the 
California should view the CEC's predictions regarding increased supply with 
considerably skepticism.

5. Suggested Package of Legislative Proposals Designed to Solve California,s 
Electricity Crisis

This email offers an overview of our proposed legislative solution.  We will 
deliver to your office tomorrow specific legislative language and existing 
bills that we believe can accommodate our proposals.

As we have suggested throughout the crisis, any solution to California crisis 
must focus on four issues:

Increase supply
Decrease demand
Establish a truly competitive retail electricity market
Return California,s Investor-owned utilities to solvency

Increase supply--Legislative vehicle: SB28X (Sher)
To site and construct a power plant in Texas takes approximately 2 years.  
Enron and others have completed the entire process in other states in less 
than a year.  In California, complex and costly air quality regulations 
exacerbate California,s inability to site power plants.  

The Governor,s executive orders and Senator Sher,s siting reform legislation 
are steps in the right direction.  Our suggested amendments can improve those 
efforts by:

Decrease demand*Legislative Vehicle:   AB31X
Because of the delay in implementing a solution to California,s electricity 
crisis, closing the supply-demand gap through energy conservation and 
efficiency offers the best chance of avoiding blackouts this summer.  This 
can be accomplished most effectively and quickly in two ways:

Buy-down demand
California is tapping into an enormous amount of money from the General Fund 
to finance DWR,s power purchases.  California could likely reduce demand more 
cheaply by running an auction to determine the payments businesses would be 
willing to receive to reduce demand for a sustained period (e.g., through the 
summer months).  DWR could very easily run an on-line auction to determine 
the best price it could pay for these demand reductions.  To participate, 
businesses would be required to have the metering equipment necessary to 
monitor and verify that they are actually achieving the reductions.  Enron 
has developed an on-line auction software package, &Dealbench,8 that it would 
be willing to contribute to the effort.

Use Price Signals to Incent Voluntary Curtailment

To work, customers need access to the following key elements:

An internet based hour-ahead price posting system to track the market price 
for hour-ahead power in real time. 
Real-time metering systems for baseline demand and voluntarily curtailment 
verification.
Settlement process that allows for market clearing prices of energy to be 
paid for load reduction (&Negawatts8).

The potential benefits of an effective demand response program would include:

&creation8 of additional summer peaking capacity in California, particularly 
in the short term, without requiring construction of additional generation 
resources.
reduction of  peak or super-peak load on the over-stressed California 
electric system, thus potentially reducing the overall cost of electricity in 
the state.
fostering of demand elasticity without subjecting customers to the full risk 
of hourly market price volatility by passing market price signals to 
customers and allowing them to voluntarily shed load and be compensated for 
responding. 

We estimate that we could generate a summer 2001 on-peak demand response in 
excess of 400 MW during certain high cost hours, and a demand response for 
summer 2002 on-peak hours that could exceed 1000 MW.  We further estimate 
that the market response to this program from all ESPs who would also pay 
Access Fees could be 2 to 3 times that amount.  We recommend that the State 
of California provide rebates directly to customers to fund the installation 
of advanced metering and control systems that would support load curtailment 
implementation.

Establish a truly competitive retail electricity market*Legislative vehicle: 
SB27X
The only customers who were protected from price volatility in San Diego were 
customers who chose Direct Access and signed fixed price deals with energy 
service providers.  Ironically, AB1X takes that important option away from 
customers and businesses.  It is critical that AB1X be amended to remove the 
prohibition against Direct Access.

In addition, California will only achieve a competitive retail market when 
the utility is removed completely from the procurement function.  Procurement 
is not a utility core competency, as evidenced by the dire financial 
condition in which the utilities now find themselves.  California should 
therefore begin now to gradually phase the utility out of the procurement 
function entirely, with the goal having all customers served by a non-utility 
provider within 36 months.  To execute the transition, California should hold 
a competitive solicitation in which competing service providers would bid for 
the right to serve segments, or &tranches,8 of utility load.

Return California,s Investor-owned utilities to solvency*Legislative vehicle: 
AB18X
Utility bankruptcy will not increase supply and it will not decrease demand.  
In short, bankruptcy does nothing to solve California,s supply-demand 
imbalance.  In addition, bankruptcy increases the likelihood that consumers 
and businesses will bear the significant financial risks of having California 
State government assume the role of &electricity buyer8 for an extended 
period of time.

California can return the utilities to financial solvency by implementing a 
series of staged rate increases.  California should design those rate 
increases with the dual goal of returning the utilities to solvency without 
&shocking8 the economy or consumers, wallets (e.g., amortize the recovery of 
the utilities, debt over a 5-10 year period). The magnitude of the rate 
increase can be reduced in two ways: First, the utilities could absorb some 
portion of their existing debt in recognition of the risk they accepted when 
they agreed to the structure of AB 1890.  Second, California can &net8 the 
revenues the utilities have received from selling electricity into the Power 
Exchange against the debts they have accrued due to the retail price cap.