----- Forwarded by Richard B Sanders/HOU/ECT on 03/01/2001 02:37 PM -----

	"Meringolo, Peter" <PMeringolo@brobeck.com>
	02/28/2001 08:57 PM
		 
		 To: "'Sanders, Richard'" <richard.b.sanders@enron.com>
		 cc: "Fergus, Gary S." <GFergus@brobeck.com>
		 Subject: Status of Duke Energy v. State and ISO v. Reliant et al.


Richard,

 Per Gary's request, here is the status of Duke Energy v. Governor
Davis and ISO v. Reliant.

Duke v. State of California.

 According to a news article, on February 27, 2001, Duke Energy Corp.
suspended its lawsuit against Gray Davis and the State "after the California
Department of Water Resources agreed to buy power from Duke that was
formerly being provided under contracts with two financially trouble
utilities."

 Originally, Duke argued that Governor Davis exceeded his authority
under the Emergency Services Act when he commandeered Duke's long-term
contracts.

 The case is suspended until an April 30 hearing.  I am trying to
obtain a copy of any order and/or stipulation filed with the Court.

ISO v. Reliant, et al.

 I.  Brief Summary of Complaint

 In ISO v. Reliant, et al., ISO seeks a preliminary injunction to
require six Reliant entities, Williams Energy Marketing & Trading, four AES
entities, and Dynegy Power Corporation (collectively, "Defendants") to
provide generation in response to ISO's emergency dispatch instructions.

 ISO's sole allegation is that because Defendants submitted to the
ISO Tariff by participating in the ISO markets and by entering into
Scheduling Coordinator Agreements and Participating Generator Agreements,
Defendants cannot refuse to generate in response to an emergency dispatch
order.  This allegation is based upon section 5.6.1 of the Tariff.

 II.  Current Status of the Case -- February 23, 2001 Stipulation

On February 23, 2001, the parties entered a stipulation, which states, in
relevant part:

   The Reliant Defendants, Williams, and Dynegy
(collectively "Generator Defendants") will comply with emergency dispatch
orders of the California ISO under the terms of the ISO tariff without
regard to whether ISO allocates the cost of power produced in response to
such a dispatch order to a creditworthy Scheduling Coorindator until the
earlier of the following:

   (a) 5:00 p.m. Pacific Standard Time on March 19,
2001, or

   (b) two business days (but in no event less than 48
hours) after written notice to this Court and the parties by a Generator
Defendant that this stipulated obligation is terminated as to it.

   3. Notice of termination by a Generator Defendant of
its obligation under paragraph 2(b) shall not affect the stipulated
obligations or remaining Generator Defendants except that, on receipt of
such notice, each remaining Generator Defendant shall have the right to file
with the Court an election terminating its obligation. In the event of such
an election, the obligation of a terminating Generator Defendant to comply
with ISO dispatch orders imposed by paragraph 2 shall end 48 hours after
written notice to ISO of the election to terminate. Each terminating
Generator Defendant shall have the same right and status to participate in
any legal proceedings that follow the initial notice of termination,
including any appeal.

   4. The motions heard by this Court on February 16,
2001, including ISO's motion for preliminary injunction, Reliant's motion to
dismiss or stay pursuant to the FERC order, and DWR's motion to dismiss
Reliant's third party complaint, will be deemed submitted at 5:00 p.m. on
March 16, 2001, or at 5:00 p.m. on the day written notice of termination of
the obligation stipulated in paragraph 2 is filed with the Court, whichever
is earlier.

 III.  February 16th Hearing

 Below is a summary of the hearing held on February 16th in the
Reliant case, which I initially prepared on Saturday, February 17th.  I
apologize if you did not receive this earlier.

>  The hearing involved three motions:
>
>  (A) ISO's Motion for Preliminary Injunction
>  (B) Reliant's Motion to Dismiss or Stay
>  (C) DWR's Motion to Dismiss Third Party Complaint
>
>  Judge Damrell took each motion under submission and stated that he
> will issue an order on or before February 21, 2001 at 5:00 p.m.  He
> ordered the February 8, 2001 TRO to remain in effect until then.  Judge
> Damrell clarified that the TRO requires Defendants to respond to all ISO
> Emergency Dispatch Orders ("EDOs") regardless of the creditworthiness of
> the purchasers.  The Judge encouraged Defendants to stipulate that they
> would respond to ISO EDOs, and gave Defendants until February 20, 2001 to
> do so.  (It appears that only AES is willing to do so at this time).
>
Summary

>  ISO's Motion for Preliminary Injunction and Reliant's Motion to
> Dismiss/ Stay are linked in that they essentially relate to the same
> issue:  Are generators obligated to respond to EDOs despite having no
> assurances that they will be paid, i.e., assurances that a creditworthy
> purchaser will be buying the generation in response to the EDO?
>
>  A.  Reliant's Motion to Dismiss or to Stay
>
>  Reliant's motion to dismiss or alternatively to stay was based
> solely upon a February 14, 2001 FERC order conditionally adopting ISO's
> proposed Amendment 36.  This FERC Order (as I understand it from the
> arguments) allows ISO to waive the creditworthy requirement only with
> respect to PG&E and SCE scheduling of energy to meet their own load.
>
>  Parsing the Order, Reliant argued that the Order implicitly means
> that the creditworthy requirement is not waived with respect to all other
> purchases, including EDOs.  Because of the FERC Order, Reliant argued that
> ISO's complaint, which seeks injunctive relief requiring Defendants to
> respond to EDOs without assurances of creditworthiness, should be
> dismissed.  Alternatively, Reliant argued that because the proceeding
> before FERC continues, the Court should stay this case pending the outcome
> by FERC.
>
>  ISO argued that according to the language of the FERC Order, FERC
> explicitly did not rule on the issue related to the application of the
> creditworthiness requirement to EDOs.  And, a stay is improper because due
> to energy crisis, ISO cannot wait for FERC to decide this issue.
>
>  Analysis:  Judge Damrell appeared very skeptical of Reliant's
> interpretation of the Order.  He asked, "If FERC intended that the
> creditworthy requirements apply to EDO, why didn't it address it head-on,
> especially because the importance of this issue was raised by Dynegy
> before FERC?"  He questioned Reliant about several sentences in the Order
> which suggest that FERC explicitly did not decide the issue.
>
>  Judge Damrell is unlikely to stay the proceedings.  He stated that
> the exigencies of the situation are such that he perhaps he should not
> wait for FERC to rule.  He made several comments about how long it takes
> FERC to act, and that the Federal Courts should step in times of crisis
> such as this.
>
>  B.  ISO's Motion for Preliminary Injunction
>
>  In support of its motion for a preliminary injunction to require
> Defendants to provide generation in response to EDOs, ISO argued as
> follows: (1) Defendants submitted to the ISO Tariff by participating in
> the ISO markets and by entering into Scheduling Coordinator Agreements and
> Participating Generator Agreements; (2) Section 5.6.1 of the Tariff
> obligates Defendants to respond to EDOs; (3) EDOs are essential to "keep
> the lights on;" and (4) because the decision to issue EDOs are made only
> in times of emergencies, the ISO does not look at who the purchaser is, is
> not required to by the Tariff, and should not be required to because of
> the current energy crisis.
>
>  Defendants argued that they need not respond to an EDO without
> assurances that they would be selling to a creditworthy purchaser because
> (1) the creditworthy requirement is an essential element of the Tariff;
> and (2) a 2/14/01 FERC Order held that the creditworthy requirement
> applies even EDOs.
>
>  Dynegy raised an additional argument -- ISO and DWR are using the
> EDO procedures to get a price below market and that there is no real
> threat that the lights will go out.  According to Dynegy, DWR can back
> real time purchases including EDOs, but instead DWR backs only purchases
> at a certain price below market.  If generators refuse, ISO issues an EDO,
> with no assurances that the generators will get paid, as a strong arm
> tactic to get this below market price.  Dynegy argued that the reality is
> that the lights will not go out because if generators do not abide by the
> EDOs, DWR has enough money to buy at market rate.  There would be no issue
> here if DWR would pay the just and reasonable rate for the electricity,
> rather than using EDO procedures to lower the rate.  And, DWR can go to
> FERC if it believes that the rate is unjust and unreasonable.
>
>  Analysis:  Judge Damrell certainly appeared to be leaning towards
> the ISO.  He expressed his views that this case involves a narrow issue --
> do the Defendants have an obligation to respond to EDO's without
> assurances that it will get paid in this time of crisis.  His questions
> and comments suggest that he believes that the amount of energy subject to
> the EDO's is small and necessary to avert rolling black-outs.  He
> questioned Mr. Detmer, manager of operation of ISO, who suggested that
> about 5% of purchases at peak are made through EDOs.
>
>  Judge Damrell was not very sympathetic towards Dynegy's argument,
> asking "Are you was saying that DWR, ISO and the State are the cause of
> the crisis?"  Several times, Judge Damrell stated that he thought the high
> wholesale prices caused the crisis.  According to Judge Damrell, "the
> simple fact is, you got rich, and the utilities went broke."  Also, as
> noted above, Judge Damrell does not believe that waiting for FERC to make
> decisions is the proper course in the current energy crisis because FERC
> does not act quickly enough.
>
>  C.  DWR's Motion to Dismiss 3rd Party Complaint

 Reliant brought a third party complaint against DWR, and DWR moved
to dismiss.  As framed by the Court, the key issue is:  does 11th Amendment
prohibit Reliant from joining DWR in the case?  Judge Damrell asked about
the 11th Amendment immunity argument, stating that the issue was not
thoroughly briefed.  The Judge asked the parties to file supplemental briefs
on the issue.

 I am obtaining a copy of these supplemental briefs and I will
summarize DWR's argument in a subsequent email.

> Peter P. Meringolo
> Brobeck, Phleger & Harrison LLP
> Spear Tower
> One Market
> San Francisco, CA 94105
> Main:  (415) 442-0900
> Direct:  (415) 442-1285
> Fax:  (415) 442-1010
>

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