PRIVILEGED AND CONFIDENTIAL ATTORNEY CLIENT COMMUNICATION

Jeff & Sue --

We need to discuss at 9am your time (as well as other things).

Jim

-----Original Message-----
From: =09Williams, Robert C. =20
Sent:=09Wednesday, August 08, 2001 7:11 PM
To:=09Dietrich, Janet; Frazier, Lamar; Wu, Andrew; Steffes, James D.; Keene=
y, Kevin; Adzgery, Ronald
Cc:=09Sharp, Vicki; Sanders, Richard B.; Haedicke, Mark E.; Mellencamp, Lis=
a; Tribolet, Michael; Curry, Wanda; Huddleson, Diann
Subject:=09EES Billing Issues

Privileged and Confidential Attorney-Client Communication

This is to recap our discussion today about two billing issues--recoupment =
of the PX Credit and the $10 surcharge. I would appreciate it if those of =
you with more first-hand information, particularly Wanda and Diann, correct=
or clarify anything I've misstated. Also, please forward this to anyone e=
lse with an interest in this matter.

A. Recoupment of the PX Credit (also known as the "Negative CTC")

1. Background: The issue here relates to the fact that PG&E and SCE =
are no longer reflecting credit balances on the bills for our customers. P=
rior to our returning the customers to bundled service in March, the bills =
would reflect the PX Credit as an offset to T&D charges. SCE and PG&E have=
now removed the PX Credit from the bill and are attempting to charge us fo=
r T&D, despite the fact that they owe us hundreds of millions of dollars in=
PX Credits. This is potentially harmful particularly in view of the opini=
on of perhaps three of the Commissioners that the PX Credit can only be col=
lected as a bill credit, and not in cash. Mike Day, our regulatory lawyer,=
expressed his strong opinion that removing the Credit from the bills was i=
mproper, and that we should challenge the action by making a filing with th=
e CPUC. Note: the PX Credit to which I am referring here is that which ac=
crued to prior to December 31, 2000; the utilities do not dispute that a PX=
Credit accrued during that time frame, and there is no dispute as to the p=
roper methodology for computing the PX Credit for that time frame. Further=
more, PG&E and SCE are in virtual agreement with us as to the amount of the=
Credit that had accrued as of December 31, 2000.

2. Action Items/Issues: (a) With respect to SCE, Legal is evaluatin=
g filing a suit in federal court versus filing at the CPUC. The CPUC has a=
process whereby we could prevent the utilities from disconnecting our cust=
omers while the issue is being determined (by depositing the payments in an=
interest-bearing account controlled by the CPUC); while there is no equiva=
lent procedure in federal court, one can request that the court enter an in=
junction against the utilities disconnecting customers. While the analysi=
s is worth doing, I suspect that we will conclude that we have to go to the=
CPUC for relief. (b) With respect to PG&E, the banruptcy team is evaluat=
ing whether to file at the CPUC or in bankruptcy court.

3. Timing: Late fees will begin accruing August 20. The first discon=
nect notices would not be received until September 19.

4. Effect on other CTC issues: Pursuing action at the CPUC or in cour=
t to force the utilities to restore the PX Credit to our bills has no effec=
t on the issues of how the CTC should be calculated post-January 17, and pr=
ospectively.

B. $10 Surcharge

1. Backgound: Although when provisionally imposed in January the $10=
surcharge went to the utilities to keep them financially solvent, when ma=
de permanent in March it became dedicated to defray the DWR's purchases of =
power on behalf of the utilities. This evolution gives rise to two bases f=
or EES to argue that it should not bear the financial burden of the $10 sur=
charge. First, since the $10 surcharge is now dedicated to purchasing gene=
ration for bundled customers only, and not direct access customers, direct =
access should not have to pay it. This is the same logic that caused the C=
PUC to exempt direct access customers from the $30 surcharge.
Secondly, if legitimately applied to direct access, because it is of no dir=
ect benefit to direct access customers it (arguably) can only be viewed as =
a tax. Under EES's contracts with its customers, taxes assessed at the del=
ivery point are borne by the customer. Note: SCE, unlike PG&E, may not im=
pose the $10 surcharge on direct access customers, according to a filing ma=
de at the staff level at the CPUC, so this action may relate to PG&E only.

2. Action Items/Issues: (a) Regulatory (Jim Steffes) has the lead i=
n advising us about a challenge to the application of the $10 surcharge to =
direct access customers at the CPUC. It may be advisable for an industry g=
roup rather than Enron to make the filing. (b) I would expect that we wou=
ld follow the same procedure outlined above--depositing the payment with th=
e CPUC--to prevent any customer from being disconnected. In the interim we=
would likely bill the customer for the surcharge and promise a credit if o=
ur challenge to the application of the surcharge to DA customers is success=
ful. © A decision will need to be made on how far we go back--to July 1 w=
hen the customers became DA again or to January 4 when the surcharge was fi=
rst imposed.

3. Timing. Same timeframe as with the Recoupment issue since we will=
need to have CPUC challenge on file to prevent late fees and disconnect no=
tices.

4. Effect on other CTC issues: Regulatory (Jim Steffes) will analyze=
with the appropriate people the effect, if any, of taking this position on=
other CTC issues (principally how CTC should be calculated post-January 17=
, and prospectively).=20

End. =20