From: ray.alvarez@enron.com
To: james.steffes@enron.com, jeffrey.hodge@enron.com, robert.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, rebecca.cantrell@enron.com, donna.fulton@enron.com, christi.nicolay@enron.com, jalexander@gibbs-bruns.com, phillip.allen@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, michael.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, carla.hoffman@enron.com, christopher.calger@enron.com, michael.etringer@enron.com, steve.hall@enron.com, christian.yoder@enron.com, tim.heizenrader@enron.com, stephen.swain@enron.com, elliot.mainzer@enron.com, bill.iii@enron.com, jake.thomas@enron.com, lester.rawson@enron.com, greg.wolfe@enron.com, gwolfe@enron.com, phillip.allen@enron.com, paul.kaufman@enron.com, sscott3@enron.com, melinda.pharms@enron.com
Date: 2001-07-12 18:26:00+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.8  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.8  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.8  

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.8

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).8 

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.8

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