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strategy: STRICTLY PRIVATE & CONFIDENTIAL - ATTORNEY - CLIENT PRIVILEDGE
Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Jeffrey T Hodge X-To: Richard B Sanders X-cc: X-bcc: X-Folder: \Richard_Sanders_Dec2000\Notes Folders\All documents X-Origin: Sanders-R X-FileName: rsander.nsf Here is a further update on the Amsterdam power issue. ---------------------- Forwarded by Jeffrey T Hodge/HOU/ECT on 01/19/2000 09:26 AM --------------------------- Mark Elliott 01/19/2000 09:11 AM To: Tjepco.vanVoorstVader@cliffordchance.com cc: ed.patton@cliffordchance.com, Joe Gold/LON/ECT@ECT, Roy Poyntz/LON/ECT@ECT, Ross Sankey/LON/ECT@ECT, Teun Van Biert/LON/ECT@ECT, Dirk Van Vuuren/LON/ECT@ECT, Stephen Asplin/LON/ECT@ECT, Andreas Lorenz/LON/ECT@ECT, Reuben Maltby/LON/ECT@ECT, Michael R Brown/LON/ECT@ECT, Jeffrey T Hodge/HOU/ECT@ECT, Mark Schroeder/LON/ECT@ECT Subject: URGENT: SECOND E-MAIL FOLLOWING CLIFFORD CHANCE MEETING IN AMSTERDAM - Dutch txn - Year 2000 - Issues to work up into a legal strategy: STRICTLY PRIVATE & CONFIDENTIAL - ATTORNEY - CLIENT PRIVILEDGE Tjepco, Following our useful meeting with yourself and your colleagues yesterday in Amsterdam, I now set out below the various issues, in what we consider to be the order of priority, relating to Dutch transmission for the Year 2000 upon which we need your, and your colleagues', advice with respect to framing an entire coordinated legal strategy (e.g., time-lines / scales, coordination between actions, ?Nma v Courts or both, costs liabilities of Enron to defendants if we lose) for Enron so as to apply the maximum, effective, legal pressure on the various parties and to effect a resolution to such issues as quickly as possible - the longer the current situation persists the more money Enron will lose - whilst at the same time allowing us to weigh up the "cost - benefit" analysis of all the various scenarios. Please note the following when planning our legal strategy: - Enron Capital & Trade Resources Limited ("ECTRL") (an English incorporated company) is our company which has entered into physical electricty sales contracts to supply certain Dutch Distribution Companies. The physical supply contracts are governed by Dutch law and are subject either to ICC arbitration in either Paris, Rotterdam or the Hague or the NAI in Rotterdam or the Hague (dependant upon the counterparty). - ECTRL is also a Participant on the APX. - Enron Capital & Trade Resources International Corp. ("ECTRIC") (a company incorporated in Delaware, U.S.) is the Enron entity which, as principal, enters into financial swaps, arranged through Enron Europe Finance & Trading Limted ("EEFT") (an English incorporated company which is regulated by the SFA), with, among others, Dutch Distribution companies. The swap contracts have all been documented on a "Deemed" ISDA basis (representative confirms have already been sent to you on this aspect). Clearly although the first three issues are "TOP PRIORITY", the Secondary Priority Issues are not far behind them and so we should be obliged to receive your consolidated written report on all the issues on or before Wednesday, 26th January, as we discussed yesterday. When providing that report, please also let us have at the same time estimates of your fees for the whole of your team (incl. London and the US) ("ball-parks" are fine at present) broken down into: - fees for Clifford Chance's preliminary advice, including the written strategy report; - fees for Clifford Chance prosecuting the Sep take-or-pay issues; - fees for Clifford Chance prosecuting the APX issues; - fees for Clifford Chance prosecuting any actions / defences / counterclaims on the swaps and / or physical contracts. Fee estimates for Clifford Chance prosecuting any of the Secondary Priority issues can come later. Please also pay particular attention to how we might obtain evidence to the appropriate standard of market rigging on the APX etc., conspiracy, etc, re defence / counterclaim to any non-payment by Enron on the Swaps (see Points 2 + 3 below). 1. IMMEDIATE PRIORITY - Query: What Court actions do we have against TenneT and / or SEP re allocation of capacity by TenneT to SEP for Yr 2000 in November 1999? Issue 1 - Miss-allocation by TenneT of 1500 MW of cross-border capacity by TenneT to SEP (first step in allocation which defined quota of balance of cross-border capacity available to the market) Issue 2 - Unlawful speculative reservation or other unlawful reservation of capacity by SEP (e.g. re non take-or-pay elements). Issue 3 - Unlawful retention and / or unlawful application of capacity by SEP once granted capacity by TenneT (blocking of essential facilities, i.e., generation, to other parties) Resolution required: The quickest way possible to deny Sep right to use TenneT capacity for non-take or pay elements (nb relevant take or pay is energy component ie obligation to import at border cf take or pay on "virtual" capacity) as soon as possible The quickest way possible to have that capacity released to the APX in accordance with existing "use it or lose it" principle or TenneT to allocate to term market under "weekly" contract category established by DTE as soon as possible. Evidence: Herkstroter report (implied), 1999 despatch regime (implied), general market "consensus", electricity plans?, DTE consultation paper on transmission (reference to virtual power plants), EZ/DTE advice which limited reservation to take or pay (hence only needed if some parts were non take or pay). Current despatch levels on term deals (imply Sep taking 1500 MW). Query method of putting all of this in evidence, "discovery" etc. (PLEASE NOTE THAT THIS IS ALREADY INCLUDED AS AN ISSUE IN THE EXISTING NMA COMPLAINT AGAINST TENNET (NOT SEP AT PRESENT) IN RESPECT OF ITS ALLOCATION PROCESS ON COMPETITION GROUNDS COMMENCED THROUGH LOEFF CLAEYS IN DEC 1999). Points to note : (1) Initial Clifford Chance view - Summary proceedings against TenneT & Sep. Time-line needed of when to commence, length of time to get to Court, ? best methodology of getting Sep contracts before the Court, etc (2) Query value of Clifford Chance initial letter to TenneT and / or Sep requesting confirmation that all Sep contracts are full take-or-pay. 2. IMMEDIATE PRIORITY - Query: Preparation of Draft proceedings against the APX Issue 1 - Drafting of summary proceedings by ECTRL as a Participant against APX for failing to enforce & to compel them to enforce the APX Rules on ensuring firm cross-border capacity pre-bid & to prevent market manipulation. Note failure of APX to enforce its Rules causes losses both to: (a) ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue of other parties preventing legitimate level of sales by ECTRL by breaching APX rules Art 12.1 etc. (b) ECTRL on its physical supply contracts (as prices on the APX are artificially higher than contracted supply price); plus © ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX Participants whom we believe are now manipulating the APX, causing artificially high prices, hence securing more profit out of the swaps. Issue 2 - Query availability of shareholder (10%) action by ECTRL (in concert with others) as shareholders of the Exchange against APX for mis-management in failing to enforce APX Rules leading to (a) damage to certain Participants and / or (b) damage to APX's prospects as a main European power exchange. Resolution required / Tactics: (1) APX has published certain cross-border transmission contract "audit" requirements which are to come into effect on 20.1.2000 (copy will faxed shortly) - we query effectiveness of this "compromise" approach plus there isnothing specific mentioned re other manipulative conduct (e.g., "crossing"). Hence, Issue 1 above required to be done as, if APX measures fail, then we may need to file suit quickly to bring matters to a head. (2) IMPORTANT - Irrespective of whether or not APX audit prevents manipulation etc., need to consider taking appropriate actions againstAPX or others in any event asap in order to flush out evidence re manipulation / conspiracy among certain Participants re any defence / counterclaims to any non-payment on swaps etc - see 3 below. (3) Query benefit at this stage of shareholder letter to APX "setting scene" for mis-management corporate action Points to note: Time-line needed of when to commence, length of time to get to Court., etc, plus, re (2) above, ? best methodology of gathering sufficient evidence in due time for defence / counterclaims on swap issues - see 3 below. 3. IMMEDIATE PRIORITY - Query: Do we have any legitimate grounds for non-performing on our swap contracts / physical contracts, and what should be our strategy re this (e.g., pre-emptive actions or defensive actions / counterclaims)? Note: certain counterparties to contracts with Enron are causing loss to Enron by, what we believe, is market manipulation of APX, collusion to lock-up market etc. Certain other parties to such contracts with Enron we do not believe are party to such conduct. Losses to Enron are however occurring as follows: (a) to ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue of other parties preventing legitimate level of sales by ECTRL by breaching APX rules Art 12.1 etc. (b) to ECTRL on its physical supply contracts (as prices on the APX are artificially higher than contracted supply price); plus © ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX Participants whom we believe are now manipulating the APX, causing artificially high prices, hence securing more profit out of the swaps. Issue 1 - Can ECTRIC legitimately withhold payments on the swaps? - Query: availability of pre-emptive damages or other forms of action(s) against swap counterparties - Query: best jurisdiction (esp. re swaps - English, Dutch US)? Resolution needed: need to obtain from a strategic perspective best jurisdiction(s) and best course and causes of action on a pre-emptivebasis as far as possible - to avoid claims of forum shopping and bring maximum pressure; plus advice needed on whether we should take pre-emptive action or to defend and / or counterclaim if we get sued if we do not perform on swaps or physical contracts. Initial Clifford Chance view: None / no suitable pre-emptive action available to Enron - defences / counterclaims only. All proceedings likely to be in England and subject to contracts' governing law (English) (under Art 17 Brussels' convention + Dutch conflict of laws principles). Highly unlikley that any U.S. action by Enron practically possible - U.S. courts will consider forum shopping (unless can show that Dutch counterparty has "minimum contacts in the US" (?means in detail?) - even then, U.S. courts unlikely to give any appropriate relief - query enforcement problems in any event. Clifford Chance's initial "gut reaction" is to withhold payment - wait for counterparty to sue which would probably be by way of summary judgement (approx 2 - 3 months to get court in England). If so, to defeat summary proceedings thus delaying matters to full trial, ECTRIC would then need to establish prima facie case for either defence on breach of implied term (v. difficult indeed but "gut reaction" is that London Commercial Court could be swayed by an argument that actual counterparty has acted in bad faith, e.g., manipulated mkt - fairly untested area) and / or counterclaim for conspiracy to defraud (for which need to establish prima facie case of conspiracy between counterparty and others to rig the mkt, etc). Notes: (1) Need to thoroughly investigate all options here (approx 70 % of losses could be on the swaps) (2) Need to consider evidence re mkt rigging / conspiracy to defraud, practically whether this could effectively be brough to light by any actions against APX - see Issue (2) of Point 2 APX above - the "race" between timescales of summary judgment in England versus any actions against APX under Dutch law to flush out evidence . Any additional ways of securing appropriate evidence to the relevant standard of proof (whether through crt actions or otherwise) - whether in the UK, US or in the Netherlands - and timescales? E.g., availability of putting people on the "Witness Stand" in the Netherlands (3) Queries re Clifford Chance initial view: (a) Repercussions - action by counterparty not by way of summary judgment but by way of filing insolvency petition under Section 123 IA 1986 (b) Any views altered re amenability of commercial crt if (i) Enron knew last year that APX could be manipulated + if Enron itself had enterd into similar, but smaller-scale, manipulation for short period last year? (4) Check: Ability of Dutch counterparties to swaps to speculate rather than hedge by way of OTC Derivatives and any good faith/integrity issues re' parties use of speculative cf hedging swaps combined with deliberate and systematic market manipulation by swap counterparts. (5) Query: Any SFA repercussions for EEFT? Issue 2 - Liability of ECTRL under physical supply contracts. - Does 20% liability cap on physical contracts work if ECTRL fails intentionally to deliver? - Does consequential losses exclusion on phyiscal contracts work if ECTRL fails to deliver? - Strategy (i.e., should we fail to deliver, pay undisputed amount of bill and dispute rest of bill and let counterparty take us to arbitration? OR, can this have any adverse repercussions re any other opart of our legal strategy?) 4. SECONDARY PRIORITY - Query: What actions do we have against TenneT to recoup our losses re allocation of capacity by TenneT for Yr 2000 in November 1999? Issue 1 - Misapplication in law of capacity (i.e. 800 MW) by TenneT to Market parties (e.g., Enron) after Sep allocation : allocation favoured incumbents based on market share - this caused a new entrant such as Enron loss. Issue 2 - General unreasonable behaviour / lack of good faith of TenneT Misleading market with early rules; addition of extra unfounded rules post 19 Nov (in reasonable knowledge that market parties had already acted on earlier information from TenneT). 1,2 Jan 2000 : closing Dutch market to imports (query whether this was also for the UCTE system support activities; suspect not) in an unreasonable fashion ie changed procedures when it had no need so to do. The normal procedures whereby TenneT curtailed in the event of a problem on the day would have been sufficient to maintain system stability. Disingenous allocation of 2300 MW in off-peak capacity (night) at the same time as indicating to the market that no more than 1000 or 1200 MW was expected by TenneT to be available for use due to Sep's plant despatch regime. Reasonable action would have been to allocate no more than the 1000 MW to Sep and the market on a term basis with any additional capacity available on a given day treated as (uncertain) spot capacity and allocated to the APX. Lack of checking and/or other disingenuity re' failure properly to check Sep take or pay obligations. Lack of transparency of information eg French grid problems result in cut of 300 MW available to APX. No assistance from TenneT either to provide guidance as to the real extent or duration of the problem or to take reasonable steps to mitigate the problem by eg co-operating with market parties aiming to put in place offsetting transit arrangements to alleviate the congestion. PLEASE NOTE THAT THIS IS ALREADY SUBJECT TO THE SAME EXISTING NMA COMPLAINT ON COMPETION GROUNDS REFERRED TO IN 1. ABOVE COMMENCED THROUGH LOEFF CLAEYS IN DEC 1999. Resolution required: Damages against TenneT Evidence: Herkstroter report (implied), 1999 despatch regime (implied), general market "consensus", electricity plans?, DTE consultation paper on transmission (reference to virtual power plants), EZ/DTE advice which limited reservation to take or pay (hence only needed if some parts were non take or pay). Current despatch levels on term deals (imply Sep taking 1500 MW). Sep newspaper quotes (intent to use 1500 MW day and night) - intended block on capacity and refusal to contemplate change to superpeak pricing. Query method of putting all of this in evidence, discovery etc. 5. SECONDARY PRIORITY - Query: ability of Enron to claim damages against APX for losses suffered owing to failure of APX to enforce its Rules and to allow gaming, etc. Note failure of APX to enforce / have enforced its Rules causes losses both to: (a) ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue of other parties preventing legitimate level of sales by ECTRL by breaching APX rules Art 12.1 etc. (b) ECTRL on its physical supply contracts (as prices on the APX are artificially higher than contracted supply price); plus © ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX Participants whom we believe are now manipulating the APX, causing artificially high prices, hence securing more profit out of the swaps.] Resolution required: Damages against the APX 6. SECONDARY PRIORITY - Query: Actions against APX Participants for manipulating the APX DAM causing losses to Enron Note manipulation of APX DAM by certain Participants causes losses both to: (a) ECTRL on its physical sales onto APX from Germany (and Belgium) by virtue of others parties preventing legitimate level of sales by ECTRL by breaching APX rules Art 12.1 etc. (b) ECTRL on its physical supply contracts (as prices on the APX are artificially higher than contracted supply price); plus © ECTRIC on swaps - ECTRIC shorted APX floating price to certain APX Participants whom we believe are now manipulating the APX, causing artificially high prices, hence securing more profit out of the swaps. Resolution required: What action can we take against APX Participants (i) to prevent them further manipulating APX and (ii) claiming our losses against them on both ECTRL's physical supply contracts and ECTRIC's swaps? In particular: Query: availability of injunction / summary proceedings against APX Participants to prevent them from manipulating APX DAM 7. SECONDARY PRIORITY - Query : Actions against SEP (a) Plant despatch : see below re' collusive behaviour. (b) Protocol : Sep refusing to contemplate changes to superpeak charges (which in no way bear reasonable relation to supply/demand or electricity production costs). Query : availability to Enron of injunctive and/or other relief against Sep for (a) unlawful application and retention (eg query damages action against Sep) and /or (b) nature plant despatch and / or © conduct re Protocol. Evidence : Herkstroter report (implied), 1999 despatch regime (implied), general market "consensus", electricity plans?, DTE consultation paper on transmission (reference to virtual power plants), EZ/DTE advice which limited reservation to take or pay (hence only needed if some parts were non take or pay). Current despatch levels on term deals (imply Sep taking 1500 MW). Sep newspaper quotes (intent to use 1500 MW day and night) - intended block on capacity and refusal to contemplate change to superpeak pricing. Query method of putting all of this in evidence, discovery etc. 5. Query: Actions available to Enron against Parties for collusive behaviour Supply market actions Deliberate and systematic attempts by certain parties (predominantly large Dutch distcos) to deny new entrants ability to access capacity/energy at reaonable prices by virtue of a) withholding capacity within NL ie Protocol and b) breaching APX rules (gaming) in such a fashion as to block legitimate access for those parties with foreign txn to sell legitimate volumes on APX consistent with APX rules. Effect of withholding capacity from market compounded by (collusive) actions to manipulate APX prices by strategic bidding. - Protocol: Collusive behaviour suspected by Dutch Distcos re locking parties out of re-contracting and use of Protocol to disadvantage of new market entrants (e.g., see EnergieNed letter: ?? now in public domain + note transcript of Wed 12.1.00 Arnhem Court case on Protocol re intent of parties to keep market short) - APX - Art 25.3 APX DAM Regs - collusion by certain APX Participants suspected re rigging APX prices - Art 12.1 APX DAM Regs - collusion suspected by certain APX Participants re failing to ensure that parties have firm cross-border capacity prior to making bids on to APX Sep/TenneT - Import allocation : collusion to fudge take or pay issue? - Plant despatch by Sep : collusion to ensure that Sep can despatch plants in such a fashion as to minimise possible imports? Note : burden and standard of proof of collusive behaviour and ability and means to obtain discovery of such behaviour. Some evidence exists from ENECO court case (transcript of Arnhem case public?) plus EnergieNed letter pls taped APX participants meeting of 10 Jan 2000 (public or accessible to Enron as participant?). Kind regards Mark
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