From: ray.alvarez@enron.com
To: james.steffes@enron.com, t..hodge@enron.com, c..williams@enron.com, steven.kean@enron.com, richard.shapiro@enron.com, linda.robertson@enron.com, jeff.dasovich@enron.com, steve.walton@enron.com, susan.mara@enron.com, alan.comnes@enron.com, leslie.lawner@enron.com, w..cantrell@enron.com, donna.fulton@enron.com, christi.nicolay@enron.com, linda.noske@enron.com, dave.perrino@enron.com, don.black@enron.com, robert.frank@enron.com, stephanie.miller@enron.com, barry.tycholiz@enron.com, jennifer.thome@enron.com, tim.belden@enron.com, mike.swerzbin@enron.com, m..driscoll@enron.com, matt.motley@enron.com, robert.badeer@enron.com, diana.scholtes@enron.com, sean.crandall@enron.com, chris.mallory@enron.com, jeff.richter@enron.com, tom.alonso@enron.com, mark.fischer@enron.com, phillip.platter@enron.com, f..calger@enron.com, michael.etringer@enron.com, c..hall@enron.com, christian.yoder@enron.com, tim.heizenrader@enron.com, steve.swain@enron.com, elliot.mainzer@enron.com, bill.williams@enron.com, jake.thomas@enron.com, lester.rawson@enron.com, greg.wolfe@enron.com, paul.kaufman@enron.com
Date: 2001-07-12 23:26:33+00:00
Subject: Summary- Judge's Recommendation re Retroactive Refunds

Commenting on his general perception of the settlement conference, the Chief Judge, in his down home manner, did not miss the opportunity to say that "you can take a horse to water but you can't make him drink."  Below is a Cliff Notes version of the Judge's report and recommendation issued at 4:49 PM today.  Attached is the complete work.  

The Judge opined that very large refunds would be due- "While the amount of such refunds is not $8.9 billion as claimed by the State of California, they do amount to hundreds of millions of dollars, probably more than a billion dollars in an aggregate sum.  ?At the same time, while there are vast sums due for overcharges, there are even larger amounts owed to energy sellers by the CAISO, the investor owned utilities, and the State of California.  Can a cash refund be required where a much larger amount is due the seller?  The Chief Judge thinks not."  Another notable quote:  "?it is the opinion of the Chief Judge that the amount claimed by the State of California has not and cannot be substantiated."  

The Judge noted that he submitted a proposal of his own on July 5, which was summarily rejected by the State of California, and that the five separate offers of the various industry groups to settle with California were also rejected. 
  
Refund Effective Date- Refund effective date of October 2, 2000, for sales in the spot markets of the CAISO and the Cal PX.  The Chief Judge's recommendations do not go beyond that date.  "Spot market" sales are "sales that are 24 hours or less and that are entered into the day of or day prior to delivery." 

Evidentiary Hearing- "The differences between what the State of California believes the buyers in the California markets are owed in refunds and what the sellers in the California market believe should be refunded raise material issues of fact. The appropriate numbers to calculate potential refunds involve factual disputes.  Thus, the Chief Judge recommends that a trial-type, evidentiary hearing be ordered limited to a factual record to apply to the methodology set forth below.  Because of the urgent need for an answer to the refund issues that hearing should be on a 60-day fast track schedule.  It is important that a single methodology be adopted for calculating potential refunds in this proceeding.  However, such a methodology may not be appropriate for all sellers in the CAISO's and Cal PX's spot markets in an after-the-fact refund calculation.    In any event, sellers not using the methodology should bear the burden of demonstrating that their costs exceeded the results of the methodology recommended herein over the entire refund period."

Methodology- The Chief Judge recommends that the methodology set forth in the June 19th Order be used with the modifications discussed below in order to calculate any potential refunds that may be due to customers in the CAISO's and Cal PX's spot energy and ancillary service markets for the period October 2, 2000 through May 28, 2001.  

Heat Rate- The actual heat rates, rather than hypothetical heat rates (associated with recreating the must-bid requirement of the June 19th Order) provide the first step in calculating the cost of the marginal unit.

Gas Cost-  The gas costs associated with the marginal unit should be based upon a daily spot gas price.  "In the event that the marginal unit is located in NP15 (North of Path 15), the daily spot gas price for PG&E Citygate and Malin should be averaged with the resulting gas price multiplied by the marginal unit's heat rate to calculate a clearing price for that hour.  If the marginal unit is located in SP15 (South of Path 15), the daily spot gas price for Southern California Gas large packages should be multiplied by the marginal unit's heat rate to calculate a clearing price for that hour.  The daily spot gas prices should be for the "midpoint" as published in Financial Times Energy's "Gas Daily" publication for the aforementioned delivery points.  The last published gas prices should be used in calculating the refund price for the days that Gas Daily is not published (weekends and holidays)." 

O&M Adder-  An adder of $6/MWh for O&M should also be included with the calculated market clearing price.  

Emissions Costs- Demonstrable emission costs should be excluded from the market clearing price and treated as an additional expense that sellers may subtract from their respective refund calculation.

Credit Adder- The 10 percent adder should be included in the market clearing price for all transactions that occurred after January 5, 2001 when PG&E and SoCal Edison were deemed no longer creditworthy.

Ancillary Services-  Consistent with the June 19th Order, ancillary service prices would be capped at the market clearing price established in the real-time imbalance energy market.  Adjustment bids would also be treated the same as set forth in the June 19th Order. 

Maximum Price for Non-Emergency Hours- Somewhat unclear.  The Chief Judge recommends that for purposes of recreating a competitive market for calculating refunds, the refund methodology should deviate from the 85% non-emergency requirement of the June 19th Order.  To measure the amount that actual prices may have exceeded the refund price, every hour should be recalculated.

Offsets-  "Recalculating the hourly competitive price for purposes of a refund calculation would also permit the Cal PX and CAISO to resettle all charges for the refund period.  Amounts owed to sellers and outstanding amounts due from buyers would be recalculated.  Any refunds could then be offset against accurate amounts receivable without sellers netting out any of their purchases from the CAISO and Cal PX during the refund period."

Interest-  Interest should not be charged against any refund amounts unless the refund amount exceeds the amounts that are past due to the seller.