Subject: Re: Indemnity Agreement Story
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 2 Feb 2001 04:28:00 -0800 (PST)

Many thanks, Christian - we will be in touch shortly.

>>> <[email-masked]> 02/02/01 12:07PM >>>
Harry and Kristin (sp??) I am fedexing down documents related to the
indemnity agreement issue.  Here is a narrative background account .

When the CalPX opened its doors sometime in 1998, it offered what is
referred to as the "Day Ahead" and "Day Of" markets.  As the names imply,
these markets were basically daily spot markets.  The transactions were
done on very short terms of one day or less.  This market is what is
referred to in the indemnity discussion as the "Core Market."   Originally,
the PX did not ask any of the Market Participants to sign any indemnity
agreements with respect to the Core Market.

In the summer of 1999, the PX began offering another market called the
Block Forward Market.  This market was for terms of one month or longer and
deals could be done for forward, or future dates, for example, the market
participant could,  in the summer of 1999, agree to buy power for the month
of October in 2001.  When they began this market, the PX opened up a new
software system and related internal bureaucracy and called all of this the
California Trading Systems or "CTS."  That is why the BFM is called the
CTS.

 Because a forward market for terms of one month or longer involved more
financial risk, the non-profit  PX decided to protect the interests of all
participants by going out to the market and getting a big company to post a
Surety Bond to it.  See CTS Surety Bond.  The CTS Surety Bond basically
said that if the PX experienced default liability in its BFM, that the
Surety would pay the PX money to cover it.  Before the Surety would sign
the Bond, however, it required each of the BFM market participants (which
it was theoreticaly protecting since the PX is itself a neutral non-profit
organization) to sign an Indemnity Agreement.  The Indemnity Agreement
basically says that if the Surety has to pay anything to the PX related to
the market participant indemnifior's default, that the indemnifior will pay
the Surety to cover his part of the default.

When the PX came to us and asked us to sign the Indemnification Agreement
with respect to the CTS  Bond, we (at Enron Power Marketing (EPMI), got
them to go to Enron Corp. our parent company, and work something out under
and already existing Indemnity Agreement between Enron Corp. and AIG, the
Surety.  We never did sign the CTS Indemnity Agreement.  You will see
documentation showing that we were advised that we had otherwise satisfied
the PX on this point and did not need to sign the Indemnity Agreement.
NOTE:  In the bizarre world of PX misinformation, incompetency and rank
confusion, they seem to feel that we still need to sign the CTS Indemnity
Agreement!  See Richard Sanders on this point.  We should be very careful
about simply telling them that we have already apparently signed something
which they once told us put us on the hook for this indemnification
obligation.

With all of this CTS block forward market in place and going, the CalPX, in
the summer of 2000, became anxious about the Core Market, and came out with
another bond, this one called the Core Market Bond, and asked all Core
Market Participants to sign a Core Market related Indemnity Agreement.  We
argued and procrastinated and delayed and never did sign the Core Market
Bond.

When we get into arguing with the arbitrator about putting the cash from
our drawn down letters of credit into an escrow account, it will be easy to
get him confused about the two different markets and the two different
bonds and the two different indemnity agreements and what we did with both.
The essential point about this that merits careful handling is:  the PX
drew down letters of credit related to the CTS-BFM, and in doing so, said
they had no choice because we would not sign an indemnity agreement
(presumably related to the CTS market), when, in fact, they had already
told us we were on the hook for the CTS indemnity pursuant to a letter
which you will see in the package I am sending you.  Why would they do
this?

There are two possible reasons.  The first is that they do not know what
they did in the past.  The second one is that they know very well that we
are on the hook for the CTS indemnity and they are intending to talk about
the Core Market Indemnity Agreement.  How can they hold us hostage for the
Core Market indemnity agreement when we are talking about a CTS collateral
issue?  They probably do this because they see the two markets as being
related, insofar as collateral is concerned.  The tariff says a default in
one market is a cross default in the other market for the purposes of
collateral.   NOTE:  The facts and the previous discussions that Richard
Sanders had with them need to be studied very carefully before we put our
final argument together before the arbitrator.

Please give me a call if I can be of any further assistance.  ----cgy