Subject: Calpine damages ATTORNEY CLIENT PRIVILEGED COMMUNICATION
From: [email-masked]
To: [email-masked]
Cc: [email-masked]
Date: Thu, 19 Apr 2001 05:21:00 -0700 (PDT)

Doug, 

This is a recap of my understanding of our damages calculation in the Calpine 
matter:

For the year 2000, EPMI relied primarily on the contract with Oxychem to 
fulfill its obligations to LCRA.  EPMI paid $1 per kilowatt month for a total 
of $1.2 million for capacity under the Oxychem deal.

In addition, we had costs and expenses to supply energy to LCRA when it 
exercised its option. [Doug, I need to revisit our calculation here to make 
sure I understand it. Ed, this is information that I will need to supplement 
for you.]  We also paid liquidated damages on, as you recall, two occasions, 
when we could not physically supply power.  I received documentation from 
Mike Curry that shows LDs of $55,821.50 for 5/12/2000. We are attempting to 
locate documentation of the other day for which we had to pay LDs, but you 
believe it would have been a similar amount.  We also discussed the issue of 
additional damages caused by LCRA's ability to select an 8 hour peaking 
option rather than a full 16 hour on peak day.  EPMI would generally need to 
purchase a full 16 hour piece in order to fulfill LCRA's 8 hour peaking 
option.  EPMI could then attempt to sell the extra 8 hours, but could only do 
so on the spot market and typically at a substantial discount over what EPMI 
could have sold the full 16 hour piece.  The process of pulling documentation 
to show what we used to fulfill the days when LCRA selected the peaking 
option, and what part of the remainder of that piece we were able to resell 
(and at what price) is a very labor intensive process, which we currently 
have underway. You estimate that this "scaler" issue resulted in 
approximately $250,000.00 additional damages, which we will confirm as we are 
able to locate the documentation.  Your estimate of total damages related to 
the year 2000 is $1 to 1.5 million.  [I need to clarify whether this is in 
addition to the $1.2 million capacity charge.]

For the year 2001, we are primarily relying on the Frontera contract.  We 
paid Frontera $6.2 million for the year.  We do not know how much of the $6.2 
million we will be able to recoup from sales to LCRA and others, because we 
do not know with certainty what the price of natural gas will be and how many 
days LCRA will exercise either the daily 16 hour option or the 8 hour peaking 
option.  Thus, we can, at best, estimate what our total costs will be for 
2001.  Thus far into the year, LCRA has only exercised its option a handful 
of times.  Your approximation was 5 times.  This results in minimal recovery 
based on sales to LCRA.  When LCRA has chosen not to exercise its option we 
have gone into the spot market to sell the power.  Our records indicate that 
we have sold the Frontera piece, when we could, and have recovered a total of 
$515,084 from 1/1/2001 through 4/18/2001.  ( This is from a schedule provided 
by Eric Saibi.) For the remainder of April 2001, we can estimate perhaps  an 
additional $129,408.  (I arrived at this figure by taking the average profit 
per mwh for the 1st half of April and applying it to the last 8 week days of 
the month).

Assuming that LCRA will exercise its option for most of the months of May, 
June, July and August 2001, we can arrive at an estimated recovery as 
follows:  Taking an average natural gas price of $5.00, our variable costs 
for purchase of energy from Frontera will be $41.29 per mwh, and our variable 
costs for sales to LCRA will be $56.70; thus, we will recover approximately 
$15.41 per mwh sold to LCRA.

There are 89 weekdays from May 1 through August 31.  LCRA is expected to 
purchase full 16 hour days at times and choose only the peaking option at 
times (8 hours).  We can blend this amount to average 12 hour days.  $15.41 x 
100 mw x 12 hours x 89 days = $1, 645,788.  We may be able to sell the 
remaining half days when LCRA selects the peaking option on the spot market 
at a reduced price.  If we are able to sell these 8 hour blocks at an average 
profit of $5.00 per mwh, we will recover an additional $178,000.  We may 
occasionally  be able to sell weekend hours during the summer months. Again 
assuming an average of $5.00 profit per mwh, we might recover an additional 
$272,000 ($5.00 x 100 mw x 16 hours x 34 days).  

We expect that LCRA will not exercise its option as often during the months 
of September through December.  Using similar modelling, we can expect to 
recover perhaps an additional $750,000 to $1 million for the remainder of the 
year.  

Using these estimates we anticipate that we will recover approximately $3.75 
million of our expenditure of $6.2 million, for a total loss of approximately 
$2.45 million for the year 2001.  Because of the imprecision of our ability 
to estimate future variables, we should call this estimated damages of $2 to 
2.5 million.

I understand that we do not have our cover for 2002 finalized, but that we 
can expect losses similar to 2001, although perhaps a little lower.  For 
purposes of estimation at this point, we would forecast a loss of $ 1.5 to 2 
million for 2002.

Doug, Please review this damages discussion at soon as you can, and then call 
me with any clarifications.  Thanks.

Bonnie J. White
Enron Litigation Unit
1400 Smith Street, Suite 4824
Houston, TX  77002
Ph:  713-853-7244
Fax: 713-853-6576
[email-masked]