Privileged and Confidential Attorney-Client Communication

This is to recap our discussion today about two billing issues--recoupment of the PX Credit and the $10 surcharge.  I would appreciate it if those of you with more first-hand information, particularly Wanda and Diann, correct or clarify anything I've misstated.  Also, please forward this to anyone else with an interest in this matter.

A.  Recoupment of the PX Credit (also known as the "Negative CTC")

     1.  Background:  The issue here relates to the fact that PG&E and SCE are no longer reflecting credit balances on the bills for our customers.  Prior to our returning the customers to bundled service in March, the bills would reflect the PX Credit as an offset to T&D charges.  SCE and PG&E have now removed the PX Credit from the bill and are attempting to charge us for T&D, despite the fact that they owe us hundreds of millions of dollars in PX Credits.  This is potentially harmful particularly in view of the opinion of perhaps three of the Commissioners that the PX Credit can only be collected as a bill credit, and not in cash.  Mike Day, our regulatory lawyer, expressed his strong opinion that removing the Credit from the bills was improper, and that we should challenge the action by making a filing with the CPUC.  Note:  the PX Credit to which I am referring here is that which accrued to prior to December 31, 2000; the utilities do not dispute that a PX Credit accrued during that time frame, and there is no dispute as to the proper methodology for computing the PX Credit for that time frame.  Furthermore, PG&E and SCE are in virtual agreement with us as to the amount of the Credit that had accrued as of December 31, 2000.

    2.   Action Items/Issues:  (a)  With respect to SCE, Legal is evaluating filing a suit in federal court versus filing at the CPUC.  The CPUC has a process whereby we could prevent the utilities from disconnecting our customers while the issue is being determined (by depositing the payments in an interest-bearing account controlled by the CPUC); while there is no equivalent procedure in federal court, one can request that the court enter an injunction against the utilities disconnecting customers.   While the analysis is worth doing, I suspect that we will conclude that we have to go to the CPUC for relief.  (b)  With respect to PG&E, the banruptcy team is evaluating whether to file at the CPUC or in bankruptcy court.

    3.  Timing:  Late fees will begin accruing August 20.  The first disconnect notices would not be received until September 19.

    4.  Effect on other CTC issues:  Pursuing action at the CPUC or in court to force the utilities to restore the PX Credit to our bills has no effect on the issues of how the CTC should be calculated post-January 17, and prospectively.

B.  $10 Surcharge

     1.  Backgound:  Although when provisionally imposed in January the $10 surcharge went to the utilities to keep them financially solvent,  when made permanent in March it became dedicated to defray the DWR's purchases of power on behalf of the utilities.  This evolution gives rise to two bases for EES to argue that it should not bear the financial burden of the $10 surcharge.  First, since the $10 surcharge is now dedicated to purchasing generation for bundled customers only, and not direct access customers, direct access should not have to pay it.  This is the same logic that caused the CPUC to exempt direct access customers from the $30 surcharge.
Secondly, if legitimately applied to direct access, because it is of no direct benefit to direct access customers it (arguably) can only be viewed as a tax.  Under EES's contracts with its customers, taxes assessed at the delivery point are borne by the customer.  Note:  SCE, unlike PG&E, may not impose the $10 surcharge on direct access customers, according to a filing made at the staff level at the CPUC, so this action may relate to PG&E only.

     2.  Action Items/Issues:  (a)  Regulatory (Jim Steffes) has the lead in advising us about a challenge to the application of the $10 surcharge to direct access customers at the CPUC.  It may be advisable for an industry group rather than Enron to make the filing.  (b)  I would expect that we would follow the same procedure outlined above--depositing the payment with the CPUC--to prevent any customer from being disconnected.  In the interim we would likely bill the customer for the surcharge and promise a credit if our challenge to the application of the surcharge to DA customers is successful. (c) A decision will need to be made on how far we go back--to July 1 when the customers became DA again or to January 4 when the surcharge was first imposed.

     3.  Timing.  Same timeframe as with the Recoupment issue since we will need to have CPUC challenge on file to prevent late fees and disconnect notices.

     4.  Effect on other CTC issues:  Regulatory (Jim Steffes) will analyze with the appropriate people the effect, if any, of taking this position on other CTC issues (principally how CTC should be calculated post-January 17, and prospectively). 

End.