Hi Rosalee:
Steve Kean asked that I send you this note for transmittal to Ken Lay.  Mr. 
Lay may receive a call from David Freeman regarding on-going power 
negotiations between the California Department of Water and Enron, but it is 
not certain that he will call.  In the event that he does phone, we would 
like to make sure that Mr. Lay gets this information prior returning the 
call.  Thanks very much for your help.

All the best,
Jeff

Mr. Lay:

As you know we've been working very hard with David Freeman trying to hammer 
out a power deal with CDWR.  The big issue getting in the way of the deal 
continues to be credit. I've attached the summary of the credit issues and 
possible solutions to the problem that was included in the email to Senator 
Brulte last week.  As part of the ongoing efforts to resolve the credit 
issues, Chris Calger of the Portland office sent a letter to David Freeman 
yesterday.  That letter is also attached.  In sum, the letter:

expresses our commitment to continue working together to resolve the credit 
issues,and,
requests payment for power previously delivered to CDWR and pre-payment for 
any new deliveries.

In response, David Freeman phoned Chris Calger expressing dissappointment 
that 1) we had yet to sign a power deal with DWR, despite your meeting with 
Dave Freeman and Mike Peevey a couple of weeks ago, and 2) we would make a 
power deal contingent upon a) payment for power previously delivered to DWR 
and b) pre-payment for any future deliveries.  Freeman suggested that we 
could sign the deal for 200 MWs of power now, but then back out of the deal 
if CDWR fails to get adequate credit provisions in place within the next few 
weeks.  Given the political climate in California, we are of course not 
anxious to sign a deal today that carries significant credit risk and 
announce later that we are backing out of the deal, since doing so would 
place the Company in a very uncomfortable political position.  Instead, we 
continue to suggest that it's best for all parties to have the credit issues 
resolved up front.

You may receive a call from David Freeman seeking to discuss these issues 
further.  As you know, the credit issues are significant and we are working 
hard to overcome those issues.  But in the current climate, where the 
Governor and the Legislature are actively discussing a complete takeover of 
the electric industry in California, getting the contract issues right is 
critical.

Regards,
Jeff Dasovich


SUMMARY OF CREDIT ISSUES FROM BRULTE EMAIL

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 is ambiguous as to 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, &AmendAB1X.doc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, 
&cpuctalkingpoints.doc.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 DWR prefers to pursue the second options. That is, DWR 
prefers to clarify the ambiguities in AB1X through a PUC order and through 
contract amendments.

LETTER FROM CHRIS CALGER TO DAVID FREEMAN

February 19, 2001


S. David Freeman, Advisor to the Governor
California Department of Water Resources
1416 ) 9th Street
Sacramento, California 95814

FAX# (213) 897-9560

 Re: Proposed Short-Term CAISO Firm Energy Sale

Dear Mr. Freeman,

As we described in our Response to Notice and Invitation to Bid dated 
February 6, 2001, Enron Power Marketing Inc. (&EPMI8) and its affiliates are 
prepared to provide California Department of Water Resources (&CDWR8) various 
power and power-related products.  At this time, however, EPMI and CDWR are 
not in agreement with respect to the form of contract and the credit support 
required to enter into long-term transactions.  In response to your request 
of February 14, 2001, EPMI proposes that CDWR consider a short-term firm 
energy transaction.  

EPMI is prepared to offer to CDWR CAISO Firm Energy under the attached EEI 
Agreement and Confirmation Letter subject to (i) the payment in full by CDWR 
to EPMI on or before February 21, 2001 for deliveries of power already made 
by EPMI to CDWR; (ii) confirmation that CDWR will pay EPMI in full for the 
new power deliveries according to the schedule described in the attached 
Confirmation Letter; and (iii) CDWR will in good faith consider the following 
proposals described in our Response To Notice and Invitation to Bid dated 
February 6, 2001:

a) Unit Contingent Power supply from Pastoria Energy Facility
b) Firm Power Supply from Market Sources
c) Hourly Demand Response Program

The amounts due from CDWR to EPMI are described below:

DATE  DESCRIPTION   NET SALES
JAN  CDWR    $578,870.00
JAN  CDWR    $4,913,100.00
FEB  CERS    $6,014,000.00
FEB1-17 Block Forward    $2,502,000.00
    Total:  $14,007,970.00

The above amount can be wire transferred to:

BNK:  Bank of America
  For: Enron Power Marketing, Inc.
ABA:  Routing # 111000012
ACCT:  #375 046 9312
Confirmation: Enron Power Marketing, Inc.
  Credit and Collections
  (713) 853-5667

If we find that payment has been made, we will be able to offer a firm price, 
and if we are in agreement at that time, we will sign and forward the 
attached documents.  On Friday, February 16, 2001, the price for the power 
described in the attached Confirmation Letter was $270 per MWh.  The price is 
subject to change based on market conditions and will need to be revised and 
confirmed prior to execution of the attached Confirmation Letter.  

EPMI is available to discuss this proposal at your convenience and we will be 
available on Tuesday, February 20, 2001 to discuss the amounts payable 
described above.   We are prepared to continue working with you and your team 
to establish a Master Agreement with sufficient credit support to enable us 
to enter into other agreements that best meet your power purchase needs.   I 
can be reached at (503) 464-3735.

Yours Truly,

ENRON POWER MARKETING, INC.


Christopher F. Calger
Managing Director