Richard,

Following our coversation of yesterday, I set out for you below the following:

1.  An explanation (in draft) of the Dutch power market and the events 
leading up to the current market "squeeze" by certain players, which we have 
produced and discussed for our external lawyers.

2.  A schematic of arguments which we produced for external lawyers before 
Christmas just relating to the mis-application of capacity by TenneT.

3.  A copy of our e-mail to Clifford Chance of last Wednesday summarising the 
issues in order of priority for their advice.

Please note that, purely on the swap element of this jigsaw, we are 
attempting to arrange a conference with a Queen's Counsel for next Monday 
afternoon.  Hence, it may be better for our meeting (with Jeff patched-in) to 
take place next Tuesday - clearly the advice on all the elements involved (as 
set out in 3) in toto will not be complete until we have had the conference 
with the QC.

I am due to receive tomorrow, however, from Clifford Chance their legal 
strategy report on all the other issues raised in my e-mail (item 3) and 
shall forward you a copy on receipt.   

Kind regards 

Mark         










---------------------- Forwarded by Mark Elliott/LON/ECT on 26/01/2000 19:01 
---------------------------


Mark Elliott
19/01/2000 15:11
To: Tjepco.vanVoorstVader@cliffordchance.com
cc: ed.patton@cliffordchance.com, Joe Gold/LON/ECT@ECT, Roy 
Poyntz/LON/ECT@ECT, Ross Sankey/LON/ECT@ECT, Teun Van Biert/LON/ECT@ECT, Dirk 
Van Vuuren/LON/ECT@ECT, Stephen Asplin/LON/ECT@ECT, Andreas 
Lorenz/LON/ECT@ECT, Reuben Maltby/LON/ECT@ECT, Michael R Brown/LON/ECT@ECT, 
Jeffrey T Hodge/HOU/ECT@ECT, Mark Schroeder/LON/ECT@ECT 

Subject: URGENT: SECOND E-MAIL FOLLOWING CLIFFORD CHANCE MEETING IN AMSTERDAM 
- Dutch txn - Year 2000 - Issues to work up into a legal strategy: STRICTLY 
PRIVATE & CONFIDENTIAL - ATTORNEY - CLIENT PRIVILEDGE

Tjepco,

Following our useful meeting with yourself and your colleagues yesterday in 
Amsterdam, I now set out below the various issues, in what we consider to be 
the order of priority, relating to Dutch transmission for the Year 2000 upon 
which we need your, and your colleagues', advice with respect to framing an 
entire coordinated legal strategy (e.g., time-lines / scales, coordination 
between actions, ?Nma v Courts or both, costs liabilities of Enron to 
defendants if we lose) for Enron so as to apply the maximum, effective, legal 
pressure on the various parties and to effect a resolution to such issues as 
quickly as possible - the longer the current situation persists the more 
money Enron will lose - whilst at the same time allowing us to weigh up the 
"cost - benefit" analysis of all the various scenarios. 

Please note the following when planning our legal strategy:

- Enron Capital & Trade Resources Limited ("ECTRL") (an English incorporated 
company) is our company which has entered into physical electricty sales 
contracts to supply certain Dutch Distribution Companies. The physical supply 
contracts are governed by Dutch law and are subject either to ICC arbitration 
in either Paris, Rotterdam or the Hague or the NAI in Rotterdam or the Hague 
(dependant upon the counterparty). 

- ECTRL is also a Participant on the APX.

- Enron Capital & Trade Resources International Corp. ("ECTRIC") (a company 
incorporated  in Delaware, U.S.) is the Enron entity which, as principal, 
enters into financial swaps, arranged through Enron Europe Finance & Trading 
Limted ("EEFT") (an English incorporated company which is regulated by the 
SFA),  with, among others,  Dutch Distribution companies.   The swap 
contracts have all been documented on a "Deemed" ISDA basis (representative 
confirms have already been sent to you on this aspect).

Clearly although the first three issues are "TOP PRIORITY", the Secondary 
Priority Issues are not far behind them and so we should be obliged to 
receive your consolidated written report on all the issues on or before 
Wednesday, 26th January, as we discussed yesterday.  When providing that 
report, please also let us have at the same time estimates of your fees for 
the whole of your team (incl. London and the US) ("ball-parks" are fine at 
present) broken down into:

- fees for Clifford Chance's preliminary advice, including the written 
strategy report;

- fees for Clifford Chance prosecuting the Sep take-or-pay issues;

- fees for Clifford Chance prosecuting the APX issues;

- fees for Clifford Chance prosecuting any actions / defences / counterclaims 
on the swaps and / or physical contracts.

Fee estimates for Clifford Chance prosecuting any of the Secondary Priority 
issues can come later.
          
Please also pay particular attention to how we might obtain evidence to the 
appropriate standard of market rigging on the APX etc., conspiracy, etc, re 
defence / counterclaim to any non-payment by Enron on the Swaps (see Points 2 
+ 3 below).   

1. IMMEDIATE PRIORITY - Query: What  Court actions do we have against TenneT 
and / or SEP re allocation of capacity by TenneT   to SEP for Yr 2000 in 
November 1999?

 Issue 1 - Miss-allocation by TenneT of 1500 MW of cross-border capacity by 
TenneT to SEP (first step in allocation which defined quota of balance of  
cross-border capacity available to the market)

 Issue 2 - Unlawful speculative reservation or other unlawful reservation of 
capacity by SEP (e.g. re non take-or-pay elements).    

 Issue 3 - Unlawful retention and / or unlawful application of capacity by 
SEP once granted capacity by TenneT (blocking of essential facilities, 
i.e.,   generation, to other parties)

Resolution required: 
The quickest way possible to deny Sep right to use TenneT capacity for 
non-take or pay elements (nb relevant take or pay is energy component ie 
obligation to import at border cf take or pay on "virtual" capacity) as soon 
as possible
The quickest way possible to have that capacity released to the APX in 
accordance with existing "use it or lose it" principle or TenneT to allocate 
to term market under "weekly" contract category established by DTE as soon as 
possible.
 
Evidence:  Herkstroter report (implied), 1999 despatch regime (implied), 
general market "consensus", electricity plans?, DTE consultation paper on 
transmission (reference to virtual power plants), EZ/DTE advice which limited 
reservation to take or pay (hence only needed if some parts were non take or 
pay).  Current despatch levels on term deals (imply Sep taking 1500 MW).  
Query method of putting all of this in evidence, "discovery" etc. 
   
(PLEASE NOTE THAT THIS IS ALREADY INCLUDED AS AN ISSUE IN THE EXISTING NMA 
COMPLAINT AGAINST TENNET (NOT SEP AT PRESENT) IN RESPECT OF ITS ALLOCATION 
PROCESS ON COMPETITION GROUNDS COMMENCED THROUGH LOEFF CLAEYS IN DEC 1999).

Points to note :  (1) Initial Clifford Chance view - Summary proceedings 
against TenneT & Sep.  Time-line needed of when to commence,      length of 
time to get to Court, ? best methodology of getting Sep contracts before the 
Court, etc 

     (2) Query value of Clifford Chance initial letter to TenneT and / or Sep 
requesting confirmation that all Sep contracts are full      take-or-pay.


2. IMMEDIATE PRIORITY - Query: Preparation of  Draft proceedings against the 
APX

 Issue 1 - Drafting of summary proceedings by ECTRL as a Participant against 
APX for failing to enforce & to compel them to enforce the APX Rules on   
ensuring firm cross-border capacity pre-bid & to prevent market manipulation.
  
  Note failure of APX to enforce its Rules causes losses both to:

  (a) ECTRL on its physical sales onto APX from Germany (and Belgium) by 
virtue of other parties preventing legitimate level of sales by    ECTRL by 
breaching APX rules Art 12.1 etc.
   
  (b) ECTRL on its physical supply contracts (as prices on the APX are 
artificially higher than contracted supply price);
   plus

  (c) ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX 
Participants whom we believe are now manipulating the APX,    causing 
artificially high prices, hence securing more profit out of the swaps.  

 Issue 2 - Query availability of shareholder (10%) action by ECTRL (in 
concert with others) as shareholders of the Exchange against APX for     
mis-management in failing to enforce APX Rules leading to (a) damage to 
certain  Participants and / or (b) damage to APX's prospects as a main   
European power exchange.   

Resolution required / Tactics: (1) APX has published certain cross-border 
transmission contract "audit" requirements which are to come into 
effect       on 20.1.2000 (copy will faxed shortly) - we query effectiveness 
of this "compromise" approach plus there isnothing       specific mentioned 
re other manipulative conduct (e.g., "crossing").  Hence, Issue 1 above 
required to be done       as, if APX measures fail, then we may need to file 
suit quickly to bring matters to a head.       

     (2) IMPORTANT - Irrespective of whether or not APX audit prevents 
manipulation etc., need to consider taking       appropriate actions 
againstAPX  or others in any event asap in order to flush out evidence re 
manipulation /       conspiracy among certain Participants re any defence / 
counterclaims to any non-payment on swaps etc - see        3 below.
     
     (3) Query benefit at this stage of shareholder letter to APX "setting 
scene" for mis-management corporate action     

Points to note: Time-line needed of when to commence, length of time to get 
to Court., etc, plus, re (2) above, ? best methodology of gathering 
sufficient    evidence in due time for defence / counterclaims on swap issues 
- see 3 below.  
 
3. IMMEDIATE PRIORITY - Query:  Do we have any legitimate grounds for 
non-performing on our swap contracts / physical contracts,  and  what should 
be our strategy re this (e.g., pre-emptive actions or defensive actions / 
counterclaims)?  

 Note: certain counterparties to contracts with Enron are causing loss to 
Enron by, what we believe, is market manipulation of APX, collusion to 
lock-up  market etc.  Certain other parties to such contracts with Enron we 
do not believe are party to such conduct.  Losses to Enron are however 
occurring as  follows:        
  (a) to ECTRL on its physical sales onto APX from Germany (and Belgium) by 
virtue of other parties preventing legitimate level of sales by    ECTRL by 
breaching APX rules Art 12.1 etc.
   
  (b) to ECTRL on its physical supply contracts (as prices on the APX are 
artificially higher than contracted supply price);
   plus

  (c) ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX 
Participants whom we believe are now manipulating the APX,    causing 
artificially high prices, hence securing more profit out of the swaps. 

 Issue 1 - Can ECTRIC legitimately withhold payments on the swaps?

   - Query:  availability of pre-emptive damages or other forms of action(s) 
against swap counterparties
 
  -  Query: best jurisdiction (esp. re swaps - English, Dutch US)?

Resolution needed:  need to obtain from a strategic perspective best 
jurisdiction(s) and best course and causes of action on a pre-emptivebasis as 
far as    possible - to avoid claims of forum shopping and bring maximum 
pressure; plus advice needed on whether we should take pre-emptive    action 
or to defend and / or counterclaim if we get sued if we do not perform on 
swaps or physical contracts.
 
Initial Clifford Chance view:  None / no suitable  pre-emptive action 
available to Enron - defences / counterclaims only.  All proceedings likely 
to be in England and subject to contracts' governing law (English) (under Art 
17 Brussels' convention + Dutch conflict of laws principles).  Highly 
unlikley that any U.S. action by Enron practically possible - U.S. courts 
will consider forum shopping (unless can show that Dutch counterparty has 
"minimum contacts in the US" (?means in detail?) - even then, U.S. courts 
unlikely to give any appropriate relief - query enforcement problems in any 
event.   Clifford Chance's initial "gut reaction" is to withhold payment - 
wait for counterparty to sue which would probably be by way of summary 
judgement (approx 2 - 3 months to get court in England).  If so, to defeat 
summary proceedings thus delaying matters to full trial, ECTRIC would then 
need to establish prima facie case for either defence on breach of  implied 
term (v. difficult indeed but "gut reaction" is that London Commercial Court 
could be swayed by an argument that actual counterparty has acted in bad 
faith, e.g., manipulated mkt - fairly untested area) and / or counterclaim 
for conspiracy to defraud (for which need to establish prima facie case of 
conspiracy between counterparty and others to rig the mkt, etc).

Notes: (1) Need to thoroughly investigate all options here (approx 70 % of 
losses could be on the swaps)

 (2) Need to consider evidence re mkt rigging / conspiracy to defraud, 
practically whether this could effectively be brough to light by any 
actions   against APX - see Issue (2)  of Point 2 APX above -  the "race" 
between timescales of summary judgment in England versus any actions 
against   APX under Dutch law to flush out evidence .  Any additional ways of 
securing appropriate evidence to the relevant standard of proof (whether   
through crt actions or otherwise) - whether in the UK, US or in the 
Netherlands - and timescales?  E.g., availability of putting people on the 
"Witness   Stand" in the Netherlands  
 
 (3)  Queries re Clifford Chance initial view:

  (a) Repercussions - action by counterparty not by way of summary judgment 
but by way of filing insolvency petition under Section 123  IA    1986

  (b) Any views altered re amenability of commercial crt if (i) Enron knew 
last year that APX could be manipulated + if Enron itself had enterd into    
similar, but smaller-scale, manipulation for short period last year?  

 (4) Check: Ability of Dutch counterparties to swaps to speculate rather than 
hedge by way of OTC Derivatives and any good faith/integrity issues re'   
parties use of speculative cf hedging swaps combined with deliberate and 
systematic market manipulation by swap counterparts.

 (5) Query:  Any SFA repercussions for EEFT? 

 Issue 2 - Liability of ECTRL under physical supply contracts.

  - Does 20% liability cap on physical contracts work if ECTRL fails 
intentionally to deliver?

  - Does consequential losses exclusion on phyiscal contracts work if ECTRL 
fails to deliver?          
  
  - Strategy (i.e., should we fail to deliver, pay undisputed amount of bill 
and dispute rest of bill and let counterparty take us to arbitration?  OR, 
can    this have any adverse repercussions re any other opart of our legal 
strategy?)     


4. SECONDARY PRIORITY - Query: What actions do we have against TenneT to 
recoup our losses re allocation of capacity by   TenneT for Yr 2000 in 
November 1999?

Issue 1 - Misapplication in law of capacity (i.e. 800 MW) by TenneT to Market 
parties (e.g., Enron) after Sep allocation : allocation favoured incumbents 
based on market share - this caused a new entrant such as Enron loss.

Issue 2 - General unreasonable behaviour / lack of good faith of TenneT
Misleading market with early rules; addition of extra unfounded rules post 19 
Nov (in reasonable knowledge that market parties had already acted on earlier 
information from TenneT).
1,2 Jan 2000 : closing Dutch market to imports (query whether this was also 
for the UCTE system support activities; suspect not) in an unreasonable 
fashion ie changed procedures when it had no need so to do.  The normal 
procedures whereby TenneT curtailed in the event of a problem on the day 
would have been sufficient to maintain system stability.
Disingenous allocation of 2300 MW in off-peak capacity (night) at the same 
time as indicating to the market that no more than 1000 or 1200 MW was 
expected by TenneT to be available for use due to Sep's plant despatch 
regime.  Reasonable action would have been to allocate no more than the 1000 
MW to Sep and the market on a term basis with any additional capacity 
available on a given day treated as (uncertain) spot capacity and allocated 
to the APX.
Lack of checking and/or other disingenuity re' failure properly to check Sep 
take or pay obligations.
Lack of transparency of information eg French grid problems result in cut of 
300 MW available to APX.  No assistance from TenneT either to provide 
guidance as to the real extent or duration of the problem or to take 
reasonable steps to mitigate the problem by eg co-operating with market 
parties aiming to put in place offsetting transit arrangements to alleviate 
the congestion.

PLEASE NOTE THAT THIS IS ALREADY SUBJECT TO THE SAME EXISTING NMA COMPLAINT 
ON COMPETION GROUNDS REFERRED TO IN 1. ABOVE COMMENCED THROUGH LOEFF CLAEYS 
IN DEC 1999.

Resolution required:  Damages against TenneT

Evidence:  Herkstroter report (implied), 1999 despatch regime (implied), 
general market "consensus", electricity plans?, DTE consultation paper on 
transmission (reference to virtual power plants), EZ/DTE advice which limited 
reservation to take or pay (hence only needed if some parts were non take or 
pay).  Current despatch levels on term deals (imply Sep taking 1500 MW).  Sep 
newspaper quotes (intent to use 1500 MW day and night) - intended block on 
capacity and refusal to contemplate change to superpeak pricing.  Query 
method of putting all of this in evidence, discovery etc. 


5. SECONDARY PRIORITY -  Query:  ability of Enron to claim damages against 
APX for losses suffered owing to failure of APX to enforce its Rules and to 
allow gaming, etc.

Note failure of APX to enforce / have enforced its Rules causes losses both 
to:

(a) ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue 
of other parties preventing legitimate level of sales by ECTRL by breaching 
APX rules Art 12.1 etc.
   
(b)  ECTRL on its physical supply contracts (as prices on the APX are 
artificially higher than contracted supply price);
plus

(c)  ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX 
Participants whom we believe are now manipulating the APX, causing 
artificially high prices, hence securing more profit out of the swaps.]
      
Resolution required:  Damages against the APX


6. SECONDARY PRIORITY - Query: Actions against APX Participants for 
manipulating the APX DAM causing losses to Enron

Note manipulation of APX DAM by certain Participants causes losses both to:

(a) ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue 
of others parties preventing legitimate level of sales by ECTRL by breaching 
APX rules Art 12.1 etc. 

(b) ECTRL on its physical supply contracts (as prices on the APX are 
artificially higher than contracted supply price); plus

(c) ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX 
Participants whom we believe are now manipulating the APX, causing 
artificially high prices, hence securing more profit out of the swaps.


Resolution required:  What action can we take against APX Participants (i) to 
prevent them further manipulating APX and (ii) claiming our losses against 
them on both ECTRL's physical supply contracts and ECTRIC's swaps?       

In particular:   Query:  availability of injunction / summary proceedings 
against APX Participants to prevent them from manipulating APX DAM


7.  SECONDARY PRIORITY -  Query : Actions against SEP

(a) Plant despatch : see below re' collusive behaviour.

(b) Protocol : Sep refusing to contemplate changes to superpeak charges 
(which in no way bear reasonable relation to supply/demand or electricity   
production costs).

Query : availability to Enron of injunctive and/or other relief against Sep 
for (a) unlawful application and retention (eg query damages action against 
Sep) and /or (b) nature plant despatch and / or (c) conduct re Protocol. 

Evidence : Herkstroter report (implied), 1999 despatch regime (implied), 
general market "consensus", electricity plans?, DTE consultation paper on 
transmission (reference to virtual power plants), EZ/DTE advice which limited 
reservation to take or pay (hence only needed if some parts were non take or 
pay).  Current despatch levels on term deals (imply Sep taking 1500 MW).  Sep 
newspaper quotes (intent to use 1500 MW day and night) - intended block on 
capacity and refusal to contemplate change to superpeak pricing.  Query 
method of putting all of this in evidence, discovery etc. 
 

5. Query:  Actions available to Enron against Parties for collusive behaviour

Supply market actions

Deliberate and systematic attempts by certain parties (predominantly large 
Dutch distcos) to deny new entrants ability to access capacity/energy at 
reaonable prices by virtue of a) withholding capacity within NL ie Protocol 
and b) breaching APX rules (gaming) in such a fashion as to block legitimate 
access for those parties with foreign txn to sell legitimate volumes on APX 
consistent with APX rules.   Effect of withholding capacity from market 
compounded by (collusive) actions to manipulate APX prices by strategic 
bidding.

 - Protocol: Collusive behaviour suspected by Dutch Distcos re locking 
parties out of re-contracting and use of Protocol to disadvantage of new  
market entrants (e.g., see EnergieNed letter: ?? now in public domain + note 
transcript of Wed 12.1.00 Arnhem Court case on Protocol re intent of parties 
to  keep market short) 

 - APX
  - Art 25.3 APX DAM Regs - collusion by certain APX Participants suspected 
re rigging APX prices

  - Art 12.1 APX DAM Regs - collusion suspected by certain APX Participants 
re failing to ensure that parties have firm cross-border capacity prior to   
making bids on to APX   

Sep/TenneT

- Import allocation : collusion to fudge take or pay issue?
- Plant despatch by Sep : collusion to ensure that Sep can despatch plants in 
such a fashion as to minimise possible imports?

Note : burden and standard of proof of collusive behaviour and ability and 
means to obtain discovery of such behaviour.  Some evidence exists from ENECO 
court case (transcript of Arnhem case public?) plus EnergieNed letter pls 
taped APX participants meeting of 10 Jan 2000 (public or accessible to Enron 
as participant?).


Kind regards

Mark