PLEASE KEEP THIS NOTE, AND THE INFORMATION CONTAINED IN THE NOTE CONFIDENTIAL. As folks are aware, we have been engaged in closed-door negotiations for the past two weeks regarding a possible market-based solution to California's electricity crisis. In the room are the major large customer groups, environmentalists, small customers (TURN), Independent Energy Producers, labor, the Western States Petroleum Association, and Enron. The negotiations were convened by the Speaker of the Assembly (Bob Hertzberg). When Hertzberg convened the meeting, he told the parties that he wanted to achieve a core/noncore structure, similar to the structure in place in California's gas market (i.e., large customers are required to buy gas from the market, with Direct Access available to all other customers). In effect, "core" customers (rez and small business) would be served by the utilities' retained generating assets and QF contracts; and large customers would go to market. The core/noncore structure would begin 1.1.03. The negotiating group has struggled over the past two weeks, but is close devising a framework for core/noncore in Californis (but who pays for the utilities' past debts and the costs of DWR power purchased between January and today remain very contentious). Unfortunately, with the release of the information regarding the DWR contracts last Friday, it is now clear that achieving a core/noncore structure will be very difficult unless something is done to mitigate the contracts. The problem is that, if core is served by utility gen and QFs, and large customers are in the market, there is no (or very little) need for the DWR contracts. Instead, they look like a signficant stranded cost. Hertzberg and the negotiating group are looking to Enron for creative ways to address "the DWR contract problem" in order to prevent the contracts from 1) killing the core/noncore deal and 2) forcing California to accept a structure focused on a state power authority headed-up by David Freeman that does not include Direct Access. Christian Yoder and Steve Hall are reviewing the contracts to analyze any "out clauses" that the buyer and/or the seller might have under the contract provisions. (My cursory review of the contracts suggests that "outs" for the state are minimal or nonexistent.) In addition, we've started batting around ideas about how the State might reform the contracts. All this said, want to let everyone know that we have made it extremely clear that Enron fundamentally opposes any and all attempts to unilaterally abrogate anyone's contract rights. We'd like to have a quick call tomorrow (30-60 minutes) to brainstorm some options that we can offer Hertzberg to handle the contracts and keep the core/noncore solution alive. We'd like to try to have the the call at 1 PM PDT. Please let me know if this works for you, and if it doesn't, please let me know if there's a time after 1 PM PDT that works for you. Thanks,
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Call to Discuss Possible Options to Mitigate Effect of DWR Contracts--Privileged and Confidential