Additional Government Affairs Staff in Calgary

Rick,

Aleck and I have recently discussed the prospect of adding another individu=
al to our Canadian team based in Calgary and Aleck invited me to prepare a =
description of the need and our circumstances for your review. =20

I understand Derek Davies and Rob Milnthorp spoke to John Lavorato about th=
e need for additional support for our PPA exposure last week. They tell me =
that John agreed with them that we need additional transmission rate design=
experience in-house in Calgary given we are exposed through our PPA positi=
on to considerable transmission rate risk. From Derek's and Rob's perspect=
ive, the dedication of an additional individual to assist in managing outst=
anding transmission rate related matters that have not yet been addressed (=
and other issues that impact the value of our PPA) could be conservatively =
quantified as in excess of $Cdn 80 million over the 20 year life of the PPA=
. While this person does not necessarily have to be in the Government Affa=
irs Group, my sense is that our group would be a much better fit than havin=
g the person join our commercial group.=20

Background

The Alberta Conservatives were re-elected with a significant majority in Ma=
rch 2001 and is now in the early years of a new four year mandate. The new=
Minister of Energy has reaffirmed the vision and commitment of the Alberta=
Government to electricity restructuring which started to a limited degree =
in 1996 with the deregulation of generation and the creation of a power poo=
l and transmission administrator. Effective Jan 1, 2001 the formerly regul=
ated generation was sold in the form of Power Purchase Arrangements and ret=
ail customer choice for all classes of electricity customers was introduced=
. =20

In late August 2000 Enron Canada purchased the 705 MW Sundance B PPA in the=
PPA Auction for an up front price of $Cdn 300 million and assumption of th=
e fixed and variable costs over the 20 year (starting Jan 1, 2001) remainin=
g base life of units 3 and 4 of the Sundance B Power Plant of approximately=
$Cdn 2 billion. The Sundance Power Plant is owned by TransAlta Corporatio=
n and located west of Edmonton in central Alberta. =20

In Q2 2001 Enron Canada launched Enron Direct in Alberta which is a retail =
supplier of natural gas and electricity whose initial target market is comm=
ercial customers of all sizes. Enron Direct recently began operating in On=
tario and will initially serve the same market segment as the Alberta opera=
tion. Enron Direct's initial business plan does not involve serving reside=
ntial customers but it is expected that Enron Direct will expand its target=
market to include these customers within 1-2 years.=20

Current Government Affairs Coverage

Fino Tiberi joined the Government Affairs team on May 15, 2001 and his focu=
s has been on dealing with market design and implementation issues that imp=
act the risk profile and profitability of Enron Direct's retail electricity=
and gas business in Alberta. In particular, the Alberta electricity retai=
l market is in the very early stages of development and the first 9 months =
of operation have revealed some significant design flaws in the initial set=
tlement process that have implications for Enron Direct. In addition, othe=
r issues need to be addressed such as: exit fees, unreasonable distribution=
tariffs, lack of oversight of municipal utilities. The government has ind=
icated that one of its top priorities is address the problems with the pres=
ent retail market design. Fino has also had some limited involvement in su=
pporting Enron Direct's retail initiative in Ontario and has recently began=
investigating the current status of the retail gas market in BC with a vie=
w to advising Enron Direct on the requirements for entry and the market des=
ign issues that must be addressed. =20

It is reasonable to assess the task of influencing retail market design and=
providing information/support to Enron Direct's commercial staff in Albert=
a and Ontario as requiring Fino's full time attention for the next 2 years.

Since Fino's arrival, my focus has primarily been on providing input and co=
mments to the Alberta Government, Power Pool of Alberta, Transmission Admin=
istrator and AEUB on wholesale electricity matters and to a lesser extent s=
ome retail gas matters (unbundling, code of conduct). In addition, I have =
been working closely with the Enron Canada commercial and legal groups on n=
umerous issues that impact the value of, or relate to commercial opportunit=
ies arising out of, the Sundance B PPA position. This includes issues such=
as: Alberta Government approval to split the Sundance B PPA into two small=
er PPAs for resale by Enron Canada, treatment of the unsold PPAs, transmiss=
ion congestion issues, transmission tariff issues, energy import/export rul=
es, power pool rule changes. Transmission issues are of particular interes=
t to Enron given Alberta's unique transmission rate design regime under whi=
ch suppliers in Alberta pay 50% of the transmission revenue requirement. M=
any of these issues are complex and in many cases the implications of their=
outcome impact Enron Canada's Sundance PPA position by millions of dollars=
. For example, Enron Canada is leading a coalition of PPA Buyers (Derek Da=
vies and I will be on the PPA Buyer Coalition witness panel) that is presen=
tly involved in an AEUB hearing to contest the STS rate schedule proposed b=
y the Transmission Administrator that, if approved, will have the effect of=
requiring the PPA Buyers to pay for transmission capacity that is used sol=
ely by the PPA Owners for their own financial benefit. Enron Canada estima=
tes the value of it prevailing in this application over the 20 year life of=
the PPA is approximately $Cdn 60 million. =20

Staffing Requirements and External Resources Going Forward

A number of key wholesale market issues are yet to be debated and resolved =
such as: transmission congestion, the consolidation of the TA and Power Poo=
l, the role of the Balancing Pool in managing the unsold PPAs, the future d=
esign of the transmission tariff (i.e. whether generator's should continue =
to pay one half of the costs of the deep/bulk transmission system), export/=
import transmission access, power pool price caps and other distortionary p=
ool rules such as those that exclude importers from setting pool price, aut=
hority of the market surveillance administrator, and amendments to the Elec=
tric Utilities Act in spring 2002. =20

My initial plan was to manage these issues myself and rely on the approval =
of RCR's to obtain ongoing support from the team of external consultants I=
have worked with (TCA, Frontier, Altitude Energy) to assist me in circumst=
ances where the issues are technically complex and/or where I am unable to =
commit the time necessary to develop Enron's position/input on an issue. T=
his has worked, but it is clear that given the scope, complexity, and numbe=
r of the issues in Alberta that we must be involved in given the value at r=
isk of our Sundance PPA position, it can reasonably be concluded that the c=
ost of these resources over the next two years will far exceed the cost of =
a full time Director level Government Affairs staff member familiar with th=
e Alberta electricity market design and more specifically the Power Pool an=
d Transmission Administrator designs (including the TA's rates and tariff).=
In addition, these consultants are much less accessible to our commercial=
staff than a full-time employee. =20

I anticipate the most substantial changes in the Alberta electricity market=
design will occur over the next 2 years as this is the period during which=
the Government itself, and via pressure on the institutions it oversees (A=
EUB, Power Pool, TA), will implement changes with a view to then leaving a =
period of two full years prior to the next provincial election for the mark=
et to respond. There is a clear need for at least this period of time for =
full-time coverage of Alberta electricity issues alone. =20

Proposed Individual

Randy Stubbings is currently Director, Regulatory Affairs, at ESBI Alberta =
Limited (the Transmission Administrator) and is responsible for the TA's fi=
lings before the AEUB. I have known Randy for approximately 4 years and ha=
ve found him to be an intelligent and reasonable individual who is well res=
pected by the Government, AEUB, and other industry participants. Randy is c=
apable of providing immediate and valuable advice and input in the developm=
ent of Enron Canada's participation in the transmission related matters tha=
t could impact Enron Canada, including the STS Rate Schedule issue (the hea=
ring will resume on Nov 19). His technical background and experience along=
with his long term involvement in various Alberta electricity market issue=
s would be of significant and immediate benefit to Enron Canada's commercia=
l group. Derek Davies has had some limited dealings with Randy (and has wa=
tched Randy as one of EAL's witnesses at the STS hearing) and has been impr=
essed with his knowledge and expertise. =20

Randy called me recently to advise that he was interested in leaving ESBI a=
nd thought Enron would be a challenging and interesting place to work. He =
advised that the current salary (including bonus) for a person of his level=
at ESBI is between $Cdn 120,000 - 140,000. If the position is approved, I=
would propose we not proceed through the normal recruiting process but rat=
her immediately have Randy meet firstly with Aleck and I, then with Derek D=
avies, Rob Milnthorp and myself, and then with Rick Shapiro, Harry Kingersk=
i, Jim Steffes (in person or by video conference) Aleck and I. I invited R=
andy to forward a copy of his CV to me.

Regards,

Rob