Good Morning:

Attached, please find our FC note discussing the report issued by the FERC
ALJ following the refund settlement conference, which concluded on Monday.

 <<IPPupdate071301.pdf>>

Summary:
1. On July 12, Curtis Wagner, the Administrative Law Judge who presided over
the recent FERC settlement conference, issued a report presenting his
findings and recommendations on next steps.  Overall, the report was very
much consistent with our expectations.

2. Wagner notes that large refunds are due from the generators.  However, he
argues that the $8.9 billion amount demanded by the State of California
"cannot be substantiated."  Rather, ultimate refunds will likely approach
and perhaps exceed a mere $1 billion.   Further, Wagner indicates that
amounts owed to the generators likely exceed any refunds that may be due.
As such, cash refunds, which have been demanded by California Governor Gray
Davis, cannot be justified.

3. Wagner's recommendations focus less on quantifying refunds due and more
on the appropriate methodology and procedures FERC should adopt in arriving
at a final decision.  In terms of methodology, Wagner argues that with some
modification FERC should apply its June 19 market mitigation order, which
called for 24 hour floating price caps, on a retroactive basis to October 2,
2000.  From a procedural perspective, Wagner recommends that FERC order a 60
day evidentiary hearing to resolve the significant factual disputes between
the State of California and the generators and other power sellers.

4. Litmus Test: Impact on Forward Earnings   Our view is that the market's
litmus test for evaluating recent political and regulatory events must focus
on their impact on forward earnings, returns and growth rates.  It is
important to remember that while the prospect of refunds creates some
uncertainty, this issue has absolutely no bearing on the forward earnings
prospects for any of the California IPPs-AES, CPN, MIR, NRG, and RRI.

5. CPN and MIR are Best Positioned   In our view, Strong Buy rated Calpine
and Buy rated Mirant face the least exposure with respect to the refund
issue.  In the case of Calpine, recent press reports indicate that the
company is close to a bilateral settlement with the State of California,
which would resolve all outstanding issues with regard to retroactive
refunds.  We believe this settlement could be forthcoming over the next 2
weeks.  Such an announcement would be an important catalyst for the stock.
In the case of Mirant, while the company had been involved in the spot
market over the past 12 months, the company has reserved about $295 million
(75%) against its past receivables.  We regard this action as highly
conservative, providing MIR considerable downside protection.

Regards,

Neil Stein   212/325-4217
Bryan Sifert   212/325-3906


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 - IPPupdate071301.pdf