Subject: Preparation for Administrative Hearing on CA prices, etc.
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked]
Date: Fri, 13 Jul 2001 05:58:00 -0700 (PDT)

As most of you are aware, the FERC mediator yesterday submitted his 
recommendation to the agency, culminating a 15-day mediation process. Among 
the mediator's recommendations is that FERC convene an evidentiary hearing, 
to close within 60 days, to determine the offset or refund liability of 
suppliers of energy, including Enron, into the California's spot markets.  I 
expect FERC to act on the recommendation early next week and issue an order 
directing that a hearing be convened within possibly a week or less.  
Accordingly, getting organized is an imperative.

Several of us participated in a conference call yesterday to discuss whether 
Enron should retain Seabron Adamson of Frontier Economics to serve as Enron's 
expert in the hearing.  The decision was made to retain Seabron for this 
purpose.  Seabron has informed me that he can come to Washington to start 
preparing discovery and developing a theory for Enron's case.  The discovery 
that Enron pursues will obviously need to be coordinated with litigation 
counsel representing Enron in the various California civil litigations and 
investigations.

The mediator's recommendation largely ignores two of the issues that were set 
for mediation (moving CA power supply to the forward markets and restoring 
creditworthiness of CA purchasers) and instead deals exclusively with the 
third issue:  Did any supplier overcharge for post-October 1, 2000, 
short-term (24 hrs or less) sales into the PX and ISO and, if so, should the 
supplier refund the overcharge or have it offset against amounts owed the 
supplier?

The mediator did not find a specific overcharge amount. Instead, he opined 
that, while not the $8.9 billion claimed by the CA delegation, overcharges 
"do amount to hundreds of millions of dollars, probably more than a billion 
dollars in an aggregate sum."

Per the mediator's recommendation, the evidentiary hearing should address the 
details of a methodology for determining how much each supplier overcharged.  
The "single" methodology recommended by the mediator is a modified, 
retroactive application of the price ceiling that FERC ordered imposed 
prospectively on the entire west in a June 19 order.  That methodology 
classes as an overcharge any amount charged between October 2, 2000, and May 
28, 2001, that exceeded the operating cost of the least efficient gas-fired 
turbine dispatched in CA in an hour plus an adder for O&M, a credit premium 
and NOx.  The recommended methodology deviates from the prospective price 
ceiling in several respects, including that it would be applied in all hours, 
without discount, and would reflect actual heat rates and separate actual 
hourly natural gas prices for southern CA and northern CA, resulting in two 
separate proxy prices.

The mediator recommends that this methodology be applied to all suppliers, 
even those that did not supply power wholly from gas-fired turbines.   
Nevertheless, in a contradictory passage, the mediator goes on to recognize 
that his recommended methodology "may not be appropriate for all sellers," 
but that any sellers advocating a different methodology "should bear the 
burden of demonstrating that their costs exceeded the results of the 
methodology recommended herein over the entire refund period.."  (emphasis 
added).

Assuming that the agency largely follows the recommendation of the mediator, 
then it appears Enron, working through Seabron, can pursue one or two basic 
theories.  First and most simply, Enron can accede to the mediator's 
methodology and work with the large generators (Duke, Reliant, Dynegy, 
Mirant) to force up the proxy price (and lower the overcharge amount) that 
the mediator's methodology produces.  Alternatively, in addition to trying to 
force up the proxy price, Enron can try to develop a theory that the 
mediator's methodology either should not apply to power marketers or should 
apply differently to them.  This second approach will likely be joined by 
other non-thermal generator suppliers, such as PowerEx.  The obvious risk in 
pursing this second approach is that Enron might become exposed to discovery 
into the cost basis of its book over the entire refund period..

Those of you who will need or want to discuss the issues with Seabron, please 
respond by letting me know as between Wednesday, Thursday or Friday of next 
week, which works better for you for a meeting in Washington or a 
teleconference.