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Enron Mail |
Many thanks, Christian - we will be in touch shortly.
<<< <Christian.Yoder@enron.com< 02/02/01 12:07PM <<< Harry and Kristin (sp??) I am fedexing down documents related to the indemnity agreement issue. Here is a narrative background account . When the CalPX opened its doors sometime in 1998, it offered what is referred to as the "Day Ahead" and "Day Of" markets. As the names imply, these markets were basically daily spot markets. The transactions were done on very short terms of one day or less. This market is what is referred to in the indemnity discussion as the "Core Market." Originally, the PX did not ask any of the Market Participants to sign any indemnity agreements with respect to the Core Market. In the summer of 1999, the PX began offering another market called the Block Forward Market. This market was for terms of one month or longer and deals could be done for forward, or future dates, for example, the market participant could, in the summer of 1999, agree to buy power for the month of October in 2001. When they began this market, the PX opened up a new software system and related internal bureaucracy and called all of this the California Trading Systems or "CTS." That is why the BFM is called the CTS. Because a forward market for terms of one month or longer involved more financial risk, the non-profit PX decided to protect the interests of all participants by going out to the market and getting a big company to post a Surety Bond to it. See CTS Surety Bond. The CTS Surety Bond basically said that if the PX experienced default liability in its BFM, that the Surety would pay the PX money to cover it. Before the Surety would sign the Bond, however, it required each of the BFM market participants (which it was theoreticaly protecting since the PX is itself a neutral non-profit organization) to sign an Indemnity Agreement. The Indemnity Agreement basically says that if the Surety has to pay anything to the PX related to the market participant indemnifior's default, that the indemnifior will pay the Surety to cover his part of the default. When the PX came to us and asked us to sign the Indemnification Agreement with respect to the CTS Bond, we (at Enron Power Marketing (EPMI), got them to go to Enron Corp. our parent company, and work something out under and already existing Indemnity Agreement between Enron Corp. and AIG, the Surety. We never did sign the CTS Indemnity Agreement. You will see documentation showing that we were advised that we had otherwise satisfied the PX on this point and did not need to sign the Indemnity Agreement. NOTE: In the bizarre world of PX misinformation, incompetency and rank confusion, they seem to feel that we still need to sign the CTS Indemnity Agreement! See Richard Sanders on this point. We should be very careful about simply telling them that we have already apparently signed something which they once told us put us on the hook for this indemnification obligation. With all of this CTS block forward market in place and going, the CalPX, in the summer of 2000, became anxious about the Core Market, and came out with another bond, this one called the Core Market Bond, and asked all Core Market Participants to sign a Core Market related Indemnity Agreement. We argued and procrastinated and delayed and never did sign the Core Market Bond. When we get into arguing with the arbitrator about putting the cash from our drawn down letters of credit into an escrow account, it will be easy to get him confused about the two different markets and the two different bonds and the two different indemnity agreements and what we did with both. The essential point about this that merits careful handling is: the PX drew down letters of credit related to the CTS-BFM, and in doing so, said they had no choice because we would not sign an indemnity agreement (presumably related to the CTS market), when, in fact, they had already told us we were on the hook for the CTS indemnity pursuant to a letter which you will see in the package I am sending you. Why would they do this? There are two possible reasons. The first is that they do not know what they did in the past. The second one is that they know very well that we are on the hook for the CTS indemnity and they are intending to talk about the Core Market Indemnity Agreement. How can they hold us hostage for the Core Market indemnity agreement when we are talking about a CTS collateral issue? They probably do this because they see the two markets as being related, insofar as collateral is concerned. The tariff says a default in one market is a cross default in the other market for the purposes of collateral. NOTE: The facts and the previous discussions that Richard Sanders had with them need to be studied very carefully before we put our final argument together before the arbitrator. Please give me a call if I can be of any further assistance. ----cgy
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