RE: ERCOT Delay Risks

Thanks. Any assignment would have to be confidential. I don't view an assignment any different than the unwinds that we are currently doing directly with the customer. If there is a positive NPV trade, we should do it. "Assignment" maybe the wrong word. Maybe we can transfer the ERCOT switching risk to another supplier or back to the customer.

-----Original Message-----
From: Herndon, Rogers
Sent: Monday, September 10, 2001 12:58 PM
To: Presto, Kevin M.
Subject: RE: ERCOT Delay Risks

I do not think that assignment is anything that EES will consider at this stage - PR, comittment to market, perception, etc. This is a tough one. If we do what I feel to be prudent we will slow down their sales effort, at a time when they need sales. The issue is that a delay is not certain and I will be viewed as not a team player and overly cautious. The incumbents are loving this. They realize the more confusion, the less competition - witness Shell already. I think the legislators are beginning to realize this. I am having Joe review our contracts and he will let me know what our options are in the existing contract and how we should amend it.

-----Original Message-----
From: Presto, Kevin M.
Sent: Friday, September 07, 2001 3:57 PM
To: Herndon, Rogers
Subject: RE: ERCOT Delay Risks

I generally agree with your approach. We may be able to assign our contracts to a competitor and actually get paid (because of margin in contract vs. current market), particularly if competition is not pricing this risk or choosing to ignore it. Potential candidates are Green Mountain, New Power Co, TXU, etc.

Any thoughts?

-----Original Message-----
From: Herndon, Rogers
Sent: Friday, September 07, 2001 10:00 AM
To: Presto, Kevin M.; Lavorato, John
Cc: Wagner, Joseph; Gilbert-smith, Doug
Subject: ERCOT Delay Risks

Kevin/John -

I am becoming concerned that ERCOT will not achieve full open access by 1/1/02. Our sales are virtually all commencing 1/1/02. A delay will result in foregone margin and possible incremental losses until such time we can physically serve. For example, we will possibly be forced to serve our customers with regulated utility gen service until such time as ERCOT can fully implement direct access. The cost are greater than our retail gen product and greater than our sales price = loss of margin + incremental losses due to costs above sales price. (make sense?)

I have expressed this concern to EES Origination. Margins are extremely tight in ERCOT, approximately $2.00 Mwh above offer and if we build in a fee/reserve to account for this risk we will probably shut down the TX effort. Our competitors (absent Shell) are apparently not considering/pricing this risk. In fact, the incumbent utilities have a natural hedge. If open access is delayed then their customers just continue to pay higher tariff rates, thus they are incented not to assist in a speedy transition.

I suggested that at a minimum we reserve margin until we have a better feel for transition status but obviously received no nods of approval. I will get with Steffes on Monday to get a feel from him, and Doug if you could provide your thoughts as well. I am afraid we may have no choice other than imposing some price component to reflect this risk which could lead to our being viewed uncompetitive in the marketplace.

One possible mitigation is to amend our contract to begin upon full transition date (or such earlier date if allowed). This would at least limit our exposure to loss of margin vs. additional incremental losses associated with our obligation to serve with reg gen. Joe can you review contracts and determine what our obligation to serve is under existing contract and whether you think this idea would help mitigate.

I would like al of your thoughts as any move like this will receive significant resistance.

Rogers