MPLP Capacity Charges

Here is the email I told you about...I'll forward you a voice mail he left me
on this subject and have him get in touch with you directly to get you a copy
of the PPA and discuss the issue
----- Forwarded by Dan Lyons/HOU/ECT on 12/07/2000 01:39 PM -----

Garrick Hill
12/07/2000 10:29 AM

To: Dan Lyons/HOU/ECT@ECT
cc: Douglas Clifford/Corp/Enron@ENRON, Charles Ward/Corp/Enron@ENRON, Dan
Lyons/HOU/ECT@ECT, Mike Mazowita/Corp/Enron@Enron, John King/HOU/ECT@ECT
Subject: MPLP Capacity Charges

THE FOLLOWING INFORMATION HAS BEEN PREPARED AT THE REQUEST OF COUNSEL:

Per the voicemail I left you yesterday concerning the billing of capacity
charges by Consumers for electric service provided by MPLP:

Background

MPLP went into service on October 1, 1995 and provides service under a PPA
for a term that ends September 30, 2030. Capacity charges are billed under
Section 10(a) of the PPA, which references a schedule of capacity rates
provided as Exhibit D. Exhibit D: (1) shows Consumers' avoided cost rates
for 35 years and (2) converts these rates into the specific rates applied
under Section 10(a). Presumably, any QF that signed a contract with
Consumers for a facility due to go on line in 1995 would be subject to
payment under the same avoided cost rate schedule, although the way these
rates were manipulated to achieve any particular agreement might vary from
project to project (i.e., in the case of MPLP, the rates are "backloaded"
over ten years before levelizing for the remaining term of the PPA).

Consumers', which "self-bills" under the PPA, began applying "Year 2"
capacity rates under Exhibit D on January 1, 1996 and implemented subsequent
increases on January 1 of 1997, 1998 and 1999. January 1 rate increases were
not anticipated by the partnership. However, there is no definition for
"contract year" under the PPA and Exhibit D shows rates by "Year" without
specific reference to what constitutes a "Year" (i.e., "contract year" vs.
"calendar year"). Based on Consumers' past actions, it would appear that
their interpretation of the PPA has been that Schedule D sets rates that are
effective in a particular calendar year. (NOTE FROM A RATE GEEK: This would
generally jive with the manner in which the avoided cost rates are determined
and scheduled. That is, it's unlikely that Consumers ran a new avoided cost
study each time it entered into a contract with a QF. Rather, one could
interpret Column (b) of Exhibit D to lay out the avoided cost rates in effect
in calendar year 1995, 1996, etc.) Further to this interpretation, Section
10(a) also lays out the manner in which total capacity charges are adjusted
"if for any calendar year, beginning with the second calendar year after the
calendar year during which the Commercial Operation Date occurs..." the
project fails to achieve a 60% "Contract Capacity Factor" (which is
determined based on results for any calendar year). Based on Consumers'
action and this language, the partnership remained silent on the
interpretation leading to the rate increase.

As a result of restructuring legislation passed in June 2000, Consumers now
operates under a "fuel cap"; that is, its Power Service Cost Recovery (PSCR)
rate is frozen. Accordingly, whereas costs incurred under the PPA were
previously a pass-through (i.e., via Consumers' PSCR and/or base rates),
Consumers now has a strong incentive to minimize purchased power costs as any
savings will, in theory, flow directly to shareholders.

Issue

It should come as no surprise that Consumers' recently concluded that it has
implemented capacity rate increases erroneously. While no action has been
taken to date, Consumers has indicated in the course of discussing the
reverse tolling transaction for MPLP that it does not intend to implement a
rate increase on January 1, 2001 but will defer the increase until October 1,
2001. There was no suggestion that Consumers would attempt to reconcile past
capacity rate billing differences (i.e., "backbilling"), but we need to
assume that they will go after this value as well.

Three side notes on this issue:

To the extent rates were erroneously applied in the past, it would appear
that these costs to Consumers would have been recovered from ratepayers; Mike
Mazowita has indicated that he's seen regulatory filings that would support
this point. Accordingly, it would appear that Consumers would face some
regulatory issues to the extent it considered "backbilling"; it's not clear
yet how these would play out in light of the currently effective fuel cap.

We identified this issue during due diligence on MPLP and modeled capacity
charges on a going forward basis in a manner that reflects a contract year
interpretation that has capacity rates running from October 1 to September
30. Accordingly, we have minimal exposure on value but for the issue of
backbilling, however...

We need to know what rates should be in effect January 1, 2001 in order to
structure a reverse tolling transaction. It goes without saying, but this is
an untimely issue in the context of reverse tolling discussions with
Consumers.

Legal Questions

Do we have a valid claim that Consumers is required to implement a capacity
rate increase on January 1, 2001?

Does Consumers have a claim to value lost (i.e., backbilling) as a result of
the manner in which rate increases have been previously applied?

To the extent that Consumers does have a claim on backbilling, do we have a
right to recovery from MCN as we were not the owner of the facility during
most of the period of time during which rates may have been applied
erroneously?

Do we have any claims against Dynegy as the MGP of the asset? That is, did
they have a fiduciary responsibility to (1) pursue/resolve the issue when it
first came up or (2) reserve for future claims by Consumers based on a
different (an potentially correct) interpretation of the contract?

Let me know when you'll be prepared to discuss this and I'll pull together
the right group.

RH