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                                                                 EXHIBIT 10.5

[MORGAN STANLEY LOGO]                                  MORGAN STANLEY
                                                       1585 BROADWAY
                                                       NEW YORK, NY 10036-8293

March 12,2004

To:      Calpine Generating Company, LLC
         50 West San Fernando Street
         San Jose, CA 95113

Ladies and Gentlemen:

Morgan Stanley Capital Group Inc. (hereinafter "MSCG") and Calpine Generating
Company, LLC ("Counterparty") have entered into an ISDA Master Agreement
(Multicurrency-Cross Border) and the related Schedule (together, the "Master
Agreement"), dated the date hereof, providing, among other things, that the
parties may enter into one or more commodity transactions relating to the
purchase, sale, exchange or similar physically-delivered and/or
financially-settled transactions (or options thereon) with respect to crude oil,
natural gas, electricity or other energy commodity or energy related services,
or emission allowances (each, a "Transaction"), based on prices of such
commodities as the parties may agree, and the terms and conditions of which
shall be set forth in individual confirmations issued by MSCG or exchanged
between the parties (each, a "Confirmation"), including that certain
Confirmation, dated the date hereof (the "Index Hedge Confirmation") (the Master
Agreement, the Transactions, together with each Confirmation (including the
Index Hedge Confirmation), collectively hereinafter the "Agreement"). In
consideration of Counterparty entering into such Transactions, Morgan Stanley
("MS") hereby irrevocably and unconditionally guarantees to Counterparty, with
effect from the date of the Agreement, the due and punctual payment of all
amounts payable by MSCG under the Agreement when the same shall become due and
payable, whether on scheduled payment dates, upon demand, upon declaration of
termination or otherwise, in accordance with the terms of the Agreement and
giving effect to any applicable grace period. Upon failure of MSCG punctually to
pay any such amounts, and upon written demand by Counterparty to MS at its
address set forth in the signature block of this Guarantee (or to such other
address as MS may specify in writing), MS agrees to pay or cause to be paid such
amounts; provided that delay by Counterparty in giving such demand shall in no
event affect MS's obligations under this Guarantee.

MS hereby agrees that its obligations hereunder shall be unconditional and will
not be discharged except by complete payment of all amounts payable under the
Agreement and this Guarantee, irrespective of any claim as to the Agreement's
validity, regularity or enforceability or the lack of authority of MSCG to
execute or deliver the Agreement; or any change in or amendment to the
Agreement; or any waiver or consent by Counterparty with respect to any
provisions thereof; or the absence of any action to enforce the Agreement, or
the recovery of any judgment against MSCG or of any action to enforce a judgment
against MSCG under the Agreement; or any similar circumstance which might
otherwise constitute a legal or equitable discharge or defense of a guarantor
generally.

MS hereby waives diligence, presentment, demand on MSCG for payment or otherwise
(except as provided hereinabove), filing of claims, requirement of a prior
proceeding against MSCG and protest or notice, except as provided for in the
Agreement with respect to amounts payable by MSCG. If at any time payment under
the Agreement is rescinded or must be otherwise restored or returned by
Counterparty upon the insolvency, bankruptcy or reorganization of MSCG or MS or
otherwise, MS's obligations hereunder with respect to such payment shall
continue to be effective or be reinstated, as the case may be, upon such
restoration or return being made by Counterparty, all as though such payment had

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not been made. MS hereby waives all legal and equitable defenses arising out of
the liquidation, insolvency, bankruptcy or other legal disability of MSCG.

MS represents to Counterparty as of the date hereof, which representations will
be deemed to be repeated by MS on each date on which a Transaction is entered
into and on each date on which a Transaction becomes effective, that:

1. it is duly organized and validly existing under the laws of the jurisdiction
of its incorporation and has full power and legal right to execute and deliver
this Guarantee and to perform the provisions of this Guarantee on its part to be
performed;

2. its execution, delivery and performance of this Guarantee have been and
remain duly authorized by all necessary corporate action and do not contravene
any provision of its certificate of incorporation or by-laws or any law,
regulation or contractual restriction binding on it or its assets;

3. all consents, authorizations, approvals and clearances (including, without
limitation, any necessary exchange control approval) and notifications, reports
and registrations requisite for its due execution, delivery and performance of
this Guarantee have been obtained from or, as the case may be, filed with the
relevant governmental authorities having jurisdiction and remain in full force
and effect and all conditions thereof have been duly complied with and no other
action by, and no notice to or filing with, any governmental authority having
jurisdiction is required for such execution, delivery or performance; and

4. this Guarantee is its legal, valid and binding obligation enforceable against
it in accordance with its terms except as enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights or by general equity principles.

By accepting this Guarantee and entering into the Agreement, Counterparty agrees
that MS shall be subrogated to all rights of Counterparty against MSCG in
respect of any amounts paid by MS pursuant to this Guarantee, provided that MS
shall be entitled to enforce or to receive any payment arising out of or based
upon such right of subrogation only to the extent that it has paid all amounts
payable by MSCG under the Agreement and provided, further that, notwithstanding
any payment made by MS hereunder or any setoff or application of funds of MS by
Counterparty, until the expiration of the Agreement and payment in full of all
amounts due to Counterparty under the Agreement and this Guarantee, MS shall not
(a) exercise any right of subrogation to the rights of Counterparty against MSCG
or any right of indemnity, contribution or similar right or remedy, against MSCG
or any of its assets or property in respect of any amount paid by MS under this
Guarantee or (b) file a proof of claim in competition with Counterparty for any
amount owing to MS by MSCG on any account whatsoever in the event of the
bankruptcy, reorganization, insolvency or liquidation of MSCG. All payments that
MS is required to make under this Guarantee shall be without any setoff,
recoupment, counterclaim or condition.

The rights and remedies set forth in the Agreement and this Guarantee are in
addition to and not exclusive of all rights and remedies available to
Counterparty by law in respect of the Agreement or this Guarantee. Counterparty
shall be entitled to apply any amount received by it from MSCG or MS in respect
of MSCG's obligations under the Agreement to the discharge of those obligations
in such order as Counterparty may from time to time elect in its sole
discretion.

MS shall reimburse Counterparty on demand for all reasonable costs and expenses
(including reasonable fees and expenses of counsel) incurred in connection with
the successful enforcement of Counterparty's rights under this Guarantee.

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MS shall not transfer any of its rights or obligations hereunder without the
prior written consent of Counterparty, which consent shall not he unreasonably
withheld, and any purported transfer without that consent shall be void,
provided that MS may assign its rights and obligations hereunder without consent
only if MS sells or transfers MSCG, or MS merges into, or is acquired, by
another entity, so long as (i) in the event that MSCG is sold or transferred,
the assignee is an entity that has a credit rating equal to or greater than MS's
at the time of the assignment and upon such assignment MS shall be released from
its obligations under this Guarantee, or (ii) in the event that MS merges into,
or is acquired by, another entity, the surviving entity of such merger or
acquisition assumes all of MS's obligations hereunder. Counterparty shall not
transfer any of its rights or obligations hereunder without the prior written
consent of MS, which consent shall not be unreasonably withheld, except that
Counterparty may, without the consent of MS, (a) transfer its interest in this
Guarantee to any person or entity to which any interest or obligation in or
under the Agreement is transferred in a manner consistent with the terms of the
Agreement; (b) any affiliate of Counterparty or any person or entity succeeding
to all or substantially all of the assets of Counterparty, provided that the
nature of the business of the assignee shall be substantially similar to that of
Counterparty and such assignee would not have any greater right of set-off than
that of Counterparty and (c) Counterparty may at any time create a security
interest in all or any portion of its rights under this Guarantee in favor of
any party providing financing to the Counterparty. This Guarantee shall be
binding on MS and its successors and assigns and shall inure to the benefit of
Counterparty and its successors and assigns.

This Guarantee shall remain in full force and effect until the expiration or
termination of the Index Hedge Transaction. Such expiration or termination shall
not, however, affect or reduce MS's obligation hereunder for any liability of
MSCG incurred prior to such expiration or termination.

This Guarantee shall be governed by and construed in accordance with the laws of
the State of New York. All capitalized terms not otherwise defined herein shall
have the respective meanings assigned to them in the Agreement.

MORGAN STANLEY

 By:         /s/JACQUELINE T. BRODY
             ---------------------------
 Name:       JACQUELINE T. BRODY
 Title:      Assistant Treasurer
 Address:    1585 Broadway
             New York, NY 10036