EES Pre-holiday Update

---------------------- Forwarded by John J Lavorato/Corp/Enron on 12/29/2000
12:29 PM ---------------------------

From: Vladimir Gorny @ ECT 12/28/2000 05:46 PM

To: Ted Murphy/HOU/ECT@ECT, Yahoo Mail, Cassandra Schultz/NA/Enron@Enron,
David Port/Market Risk/Corp/Enron@ENRON, Minal Dalia/HOU/EES@EES, Andy
Knight/Corp/Enron@ENRON, Darin Schmidt/NA/Enron@ENRON
cc: (bcc: John J Lavorato/Corp/Enron)

Subject: EES Pre-holiday Update

Regulatory:

Based on the on-going CA PUC hearings and opinions of Enron legal and
regulatory groups, it seems that the Commission is likely to increase tariff
rates by anywhere from 10 to 20% (PG&E and SCE are arguing for a 30% increase
- not realistic). The critical decision is to leave EES direct-access
customers on that tariff. Alternatively, if the PUC rules to end the rate
freeze, eliminates the existing CTC credits and does not allow EES customers
to switch to this tariff, we stand to lose somewhere between $600-650
million, as EES would have to serve their customer loads by buying expensive
CA power during 2001.

A 10% increase in tariff rates results in ~$50 million loss for EES. However,
if the tariff is extended beyond 2001, it will create additional value for
EES (the tariff is lower than Cal-02 power prices).

CA Gov. Davis met with Clinton yesterday where they have decided to extend
the emergency status in the state.

Ken Lay is scheduled to meet with Davis today to address the following topics:
- clarify any inaccurate information about Enron's role in CA markets
- urge the Governor to not go overboard with this situation and give the
"world" to the CA utilities
- remind about the upside PG&E and SCE will realize from high valuations of
hydro plants (increased almost three-fold from a year ago)

Hearings and oral arguments will continue this week. CA PUC decision is
expected to come on Jan-4th, followed by multiple appeals.

Credit issues:

- Enron is attempting to reduce credit exposure with PG&E, whereby PG&E will
assign its out-of-the-money trades with Avista and MS to EPMI and EES will
assign its in-the-money positions with PG&E to EPMI, creating an off-set.
These assignments will reduce PG&E exposure by ~$265 MM, in exchange for
Avista and MS exposures.
- PUC is not likely to rule removal of retail tariff retroactively (to May
99) - this will enforce EES position in collecting its accounts receivable
from PG&E of ~$150 MM (so far, they have not paid Enron on the premise of
retroactive ruling).

Market Risk:

12/27 VaR is $7.8 MM - limit violation. An increase of $0.5 MM because of:
- addition of long Feb-01 positions at MidC
- overall increase in prices
- incorrectly booked trades at PJM (50 MWs Cal-03 Long instead of a Short)

My suggestion, at a high level, to Don Black and Dennis Benevides to sell MWs
in both East and West in order to reduce VaR. However, because of the
holidays the liquidity in the market is very scarce.

Vlady.