Summary or PX Credit Proposals

I wanted to summarize the conclusions from our meeting on Wednesday, August 8th. Please let me know if I have misrepresented anything.

Below is a description of four proposals which may help resolve issues associated with PX credits or mitigate Enron's exposure to PX credits. Steve Swain has the responsibility for evaluating each proposal, and his goal is to have recommendations for EWS/EES management on August 14th.

Current Issues:
1) The methodology for calculating PX credits after January 18 is undetermined (SCE and PG&E have implemented different methodologies)
2) Applicability of the 1 cent surcharge to direct access customers (PG&E is passing thru to DA customers, SCE is not)
3) Impact to Enron if FERC implements retroactive changes to the CAL PX clearing prices from Oct 2, 2000 thru January 18th which result in revised PX credits
4) Recoupment of outstanding PX credits against future payments for T&D
5) Uncertainty surrounding future tariffs (CTC or other pass through charges), making it difficult to hedge price risk in forward positions
6) Large uncollected receivables from both PG&E and SCE

The four proposals are as follows:

SCE Recommended Approach
This approach assumes no PX (or PE) credit effective from January 18, 2001 forward. Mary Lynne and Diann will work with Steve to quantify the gross PX receivable (as billed by each utility) which would be reversed. This approach will ensure that only charges for T&D (no generation/commodity costs, CTC charges, or surcharges for CDWR, including the 1 cent) will be applicable to Direct Access customers.

Enron would request the following:
1) Assurances that no surcharges for CDWR will be passed through to EES or EEMC
2) SCE will support our historical PX credit receivable as an "allowable claim" at a minimum and would provide additional credit support if possible.
3) PG&E will support Enron's recoupment argument
4) Both utilities will immediately reinstate the Cumulative Credit Balances on utility bills and agree to a netting arrangement at the utility parent level.
5) Both utilities agree to not adjust the historical PX credits, if/when an adjustment of historical PX clearing prices is mandated by FERC

Other consideration:
Ability to hedge price risk in the retail portfolio, without concern re CTC or other surcharge amounts.

PG&E Recommended Approach
This approach assumes the PX calculation methodology effective January 18, 2001 would include an "avoided cost" component. This avoided cost
component would include, owned generation, QF purchases, actual CDWR purchases for the utility, bilateral purchase contracts, and ISO purchases. This resulting "avoided cost" would be used in lieu of the PX clearing price in the old PX formula through March, 2002. If the actual CDWR purchase costs are not included, then the surcharge (along with the embedded gen costs) should be included in the calculation.

Enron would request the following:
Same as above

Other Consideration:
Enron would continue to be exposed to "price" risk attributable to the actions of the utility at a minimum through March, 2002. This would hamper Enron's ability to hedge the positions in the retail portfolio.

Hybrid Approach
This approach assumes that the PG&E approach is applicable from January 18, 2001 through September 1, 2001 and that the SCE approach is applicable from September 1st forward. This approach might be necessary as a compromise for both utilities to provide their support of the proposal.

Enron would request the following:
Same as SCE and PG&E approach

Other considerations:
Ability to hedge price risk in the retail portfolio, without concern re CTC or other surcharge amounts.

Enron Model
This approach assumes we continue to support a market based (NP15 and SP15) calculation methodology for the PX credit.

Enron would request the following:
It is unlikely we would receive any level of cooperation from either PG&E and SCE. The consensus from legal, regulatory, and EWS commercial is the probability of getting this approach approved is low. However, understanding this amount, at a minimum, can be used to help defend the "value" Enron is foregoing in order to reach agreement with the utilities and CPUC.

Other considerations:
This approach would give Enron the ability to hedge "price" risk, but this is somewhat offset with incremental credit exposure associated with the actual collection of the PX credit.

Again, please let me know if this does not clearly represent what we concluded in Wednesday's meeting.

Thanks,
Wanda Curry