jeff,

Is the problem that the energy DWR purchased is above market and not needed 
by CORE  or  just above market.  If the energy is needed by CORE wouldn't the 
deals just be blended in as costs like utility gen and QF supply?  If the 
energy is not needed now could the state sell back the excess then compute 
the exact loss and put a surcharge on rates for all or some customers that 
recoup that amount over time.  Once again there would be a CTC type recovery 
period but there would not be the risk that the market price must stay below 
a fixed price for the stranded costs to be recovered.  

Phillip
 -----Original Message-----
From:  Dasovich, Jeff  
Sent: Tuesday, June 19, 2001 5:11 PM
To: Belden, Tim; Calger, Christopher F.; Steffes, James; Shapiro, Richard; 
skean@enron.com; Kaufman, Paul; Mara, Susan; Allen, Phillip K.; Yoder, 
Christian; Hall, Steve C.
Subject: Call to Discuss Possible Options to Mitigate Effect of DWR 
Contracts--Privileged and Confidential
Sensitivity: Confidential

PLEASE KEEP THIS NOTE, AND THE INFORMATION CONTAINED IN THE NOTE CONFIDENTIAL.

As folks are aware, we have been engaged in closed-door negotiations for the 
past two weeks regarding a possible market-based solution to California's 
electricity crisis.
In the room are the major large customer groups, environmentalists, small 
customers (TURN), Independent Energy Producers, labor, the Western States 
Petroleum Association, and Enron.
The negotiations were convened by the Speaker of the Assembly (Bob Hertzberg).
When Hertzberg convened the meeting, he told the parties that he wanted to 
achieve a core/noncore structure, similar to the structure in place in 
California's gas market (i.e., large customers are required to buy gas from 
the market, with Direct Access available to all other customers).
In effect, "core" customers (rez and small business) would be served by the 
utilities' retained generating assets and QF contracts; and large customers 
would go to market.  
The core/noncore structure would begin 1.1.03.
The negotiating group has struggled over the past two weeks, but is close 
devising a framework for core/noncore in Californis (but who pays for the 
utilities' past debts and the costs of DWR power purchased between January 
and today remain very contentious).
Unfortunately, with the release of the information regarding the DWR 
contracts last Friday, it is now clear that achieving a core/noncore 
structure will be very difficult unless something is done to mitigate the 
contracts.
The problem is that, if core is served by utility gen and QFs, and large 
customers are in the market, there is no (or very little) need for the DWR 
contracts.  Instead, they look like a signficant stranded cost.
Hertzberg and the negotiating group are looking to Enron for creative ways to 
address "the DWR contract problem" in order to prevent the contracts from 1) 
killing the core/noncore deal and 2) forcing California to accept a structure 
focused on a state power authority headed-up by David Freeman that does not 
include Direct Access.
Christian Yoder and Steve Hall are reviewing the contracts to analyze any 
"out clauses" that the buyer and/or the seller might have under the contract 
provisions.  (My cursory review of the contracts suggests that "outs" for the 
state are minimal or nonexistent.)
In addition, we've started batting around ideas about how the State might 
reform the contracts.
All this said, want to let everyone know that we have made it extremely clear 
that Enron fundamentally opposes any and all attempts to unilaterally 
abrogate anyone's contract rights.

We'd like to have a quick call tomorrow (30-60 minutes) to brainstorm some 
options that we can offer Hertzberg to handle the contracts and keep the 
core/noncore solution alive.  We'd like to try to have the the call at 1 PM 
PDT.  Please let me know if this works for you, and if it doesn't, please let 
me know if there's a time after 1 PM PDT that works for you.

Thanks,
Jeff