From: richard.sanders@enron.com
To: andrew.edison@enron.com
Date: 2001-02-21 17:46:00+00:00
Subject: MPLP PPA Dispute

----- Forwarded by Richard B Sanders/HOU/ECT on 02/21/2001 05:45 PM -----

	Elizabeth Sager
	02/20/2001 02:21 PM
		 
		 To: Marcus Nettelton/NA/Enron@ENRON, Richard B Sanders/HOU/ECT@ECT
		 cc: 
		 Subject: MPLP PPA Dispute

fyi
----- Forwarded by Elizabeth Sager/HOU/ECT on 02/20/2001 02:20 PM -----

	"JOHN G KLAUBERG" <JKLAUBER@LLGM.COM>
	02/18/2001 05:46 PM
		 
		 To: Elizabeth.Sager@enron.com
		 cc: 
		 Subject: MPLP PPA Dispute



PRIVILEGED AND CONFIDENTIAL: ATTORNEY WORK PRODUCT
DO NOT DISTRIBUTE

Elizabeth:

I looked through the CMS PPA on my return flight to NY.  While I think we 
should walk through the various contractual provisions over the phone, I 
nonetheless thought it might be of some help to set forth a few preliminary 
focal points for those discussions, particularly if you don't get to this for 
a few days.  I thought it made sense to contemporaneously record some 
comments as I was thinking through some of the issues/positions.  Also, I'll 
have to run down the conflict issue when I get back into the office, but I 
thought I could generally review the PPA in any event.

In addition, I did not know whether it was ENA's or Dynegy's obligation to 
work on a response to CMS, but I thought it made some sense to see what one 
might look like on paper.  (See  attached).  At this point, however, I'm not 
sure whether MPLP should furnish any specific contract-based rationale in 
writing to CMS as to MPLP's position that the capacity charges should be 
adjusted on a calendar year basis.  You will note that the draft letter 
focuses on the language dealing with the adjustment formula to the Contract 
Capacity Factor (which clearly is done on a calendar year basis), rather than 
the scheduled changes to the stated capacity charges set forth on Exhibit D.  
As noted below, there are some issues underlying this position.

Preliminary Overall Assessment

The PPA essentially is inconsistent on the capacity charge adjustment issue.  
While many of the relevant computations are done on a calendar year 
basis--which generally supports MPLP's position--the effect of adjusting the 
stated capacity charges on a calendar year basis results in two anomalies: 
namely, the stated capacity charge (on Exhibit D) for "Year 1" only would 
apply for 3 months, but even more importantly, the capacity charge (on 
Exhibit D) for "Year 35" would apply for the last 21 months of the Contract 
Term.  The anomaly "running in the other direction" is that, under CMS's 
interpretation, various computations would be made on a calendar year basis 
(e.g., Contract Capacity Factor), and adjustments resulting therefrom would 
be applied "mid-stream" (i.e., after 3 months of the alleged "contract year" 
).  My overall concern is that an arbitrator may focus on the anomaly 
(described above) that results by applying Exhibit D using a calendar year 
concept (i.e., the 21 month "Year 35" issue) since that is a fairly easy 
concept to get your arms around..

More Information/Diligence/Research

Before a definitive conclusion on the issue can be made, we likely would want 
to review or undertake, as the case may be, some additional 
information/diligence/research, such as (which I assume we could generally 
obtain from the Michigan regulatory counsel referenced in the e-mail you 
forwarded):

--The Michigan PUC presumably approved the PPA (prior to the first amendment) 
in a published Order.  Was there anything in that Order or the submissions 
(or exhibits thereto, including financial projections) that might provide 
some guidance?

--My guess is that there must be other CMS QF PPAs with the same type of 
pricing structure since this issue essentially would arise in every instance 
where the COD was not a Jan.1.  Do we (or local counsel) know whether this 
may be a "global" attack by CMS on these types of PPAs?

--While not directly relevant to the contract interpretation question, 
confirm with local counsel that CMS would have recovered the "excess" 
capacity payments from its customers--so that it presumably would have to 
issue a customer refund if it were to prevail on its claims.

--CMS "self bills" itself under the PPA.  Has the statute of limitations run 
on any of its claims for refunds for prior years?  Can CMS's prior course of 
dealing be used to support MPLP's contractual interpretation, or is there 
otherwise an equitable argument that CMS should not be able to recover prior 
"overpayments" (as opposed to prospectively adjusting the capacity 
payments)?  (This could be particularly helpful to try to settle out the 
dispute on the basis that MPLP would concede the issue on a prospective basis 
only).

--The cover letter from CMS suggests that the alleged payment error resulted 
in payments in excess of the avoided cost rate authorized by the PUC.  Isn't 
this determination to be made over the life of the PPA, rather than for any 
particular period?  Assuming CMS's statement is correct, I assume it does not 
affect the validity of the PPA, but only whether CMS can recover the "excess" 
amount in rates?

--Do we have any leverage in the event we were to raise this dispute with the 
PUC?  If so, can this be used in the context of trying to work out an overall 
restructuring of the PPA?


Certain Points in Support of MPLP's Position

--The definition of "Contract Capacity Factor" provides for a calendar year 
determination and, most importantly, provides for a partial year calculation 
for the year in which the COD occurs that ends at the end of that calendar 
year.  If the capacity charge should be adjusted as of the anniversary of the 
COD date, it arguably would not make sense to have a partial year calculation.

--Sec. 10(a) provides that if in any calendar year the Contract Capacity 
Factor is less than 60%, then the capacity charges set forth on Exhibit D 
"shall be adjusted for the next calendar year as follows.... The capacity 
charges for the following calendar year shall then be determined....  
(Emphasis added).  This section makes specific reference to Exhibit D and 
makes the adjustment effective for the next calendar year, not on the next 
anniversary of the COD.  It arguably would not appear to make any sense to 
apply the Contract Capacity Factor adjustment on a calendar basis, but 
determine the capacity charges on a COD anniversary basis if no adjustments 
thereto are required because the Contract Capacity Factor levels do not 
require an adjustment.

 --NOTE:  The counter-argument, however, is that the foregoing language only 
pertains to the computation of a percentage "haircut" or adjustment that is 
applied to the stated capacity charges on Exhibit D, whatever those may be, 
rather than to when the annual stated capacity charges are effective.  That 
is, making this adjustment on a calendar year basis, even though the 
scheduled capacity rates change each October 1, is not necessarily in 
conflict with the rest of the PPA.

--Sec. 2(b) (Effective Date and Term) provides that the Agreement runs for 35 
years "and thereafter from year to year," unless a party gives at least one 
year's notice to terminate which termination shall be effective "at the end 
of the 35 years or any calendar year thereafter." (Emphasis added).  Thus, 
for example, if one month after the end of the 35 year term--i.e., October 
31, 2030--a party gave notice to terminate, such termination would be 
effective December 31, 2031, not September 30, 2031 or September 30, 2032 
(i.e., not on the anniversary dates of the COD).  Thus, the PPA contemplates 
in certain respects certain "stub" years and certain "long" years, a 
contractual scheme that is at least analogous to MPLP's position on the stub 
and long years for the timing of the scheduled changes in the stated capacity 
charges on Exhibit D.

--There are other calendar year based obligations--for e.g., Sec. 13 (and 
Exhibit B) reflect termination payments that, again, are calculated on a 
calendar year basis.  (We should discuss with the commercial people the 
economic rationale underlying the termination payments to see if there may be 
additional support in that respect).  (Note that some other calendar year 
based calculations were eliminated by the First Amendment to the PPA, but can 
still be used to reflect the underlying "calendar year" flavor of the PPA 
since the issue at hand existed even prior to the First Amendment).

A Few Additional Points to Note

--The PPA is devoid of default language, LDs, etc.; however, MPLP could bring 
a claim against CMS to arbitration (Sec. 18) for what it believes it is owed 
when CMS does not pay the full capacity charges in 2001 (plus interest as 
provided at Sec. 20) and keep performing under the PPA.

--Although I do not see a significant issue here, let's briefly discuss the 
potential for CMS to try to affirmatively use an "indication" of a regulatory 
disallowance pursuant to Sec. 10(c) as a way to attempt to force its 
"contract year" interpretation of Exhibit D.  While Sec. 10(c) is one of 
those "old school" one way regulatory outs, MPLP would undoubtedly use Sec. 
10(e) [requiring CMS to defend the PPA) to prevent CMS's affirmatively use of 
the PUC to support its contract claim.  (In Pennsylvania, PECO, in an 
analogous circumstance, attempted to use a PUC determination as justification 
to attempt to break a PPA with a QF).

Let me know when you wish to follow up.

John



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John Klauberg
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
212 424-8125
jklauber@llgm.com
 - sager-2.doc