---------------------- Forwarded by Phillip K Allen/HOU/ECT on 12/29/2000 10:13 AM --------------------------- From: Steven J Kean@ENRON on 12/28/2000 09:19 PM CST To: Tim Belden/HOU/ECT@ECT, Phillip K Allen/HOU/ECT@ECT, David Parquet/SF/ECT@ECT, Marty Sunde/HOU/EES@EES, William S Bradford/HOU/ECT@ECT, Scott Stoness/HOU/EES@EES, Dennis Benevides/HOU/EES@EES, Robert Badeer/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron, Sandra McCubbin/NA/Enron@Enron, Susan J Mara/NA/Enron@ENRON, Richard Shapiro/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Paul Kaufman/PDX/ECT@ECT, Mary Hain/HOU/ECT@ECT, Joe Hartsoe/Corp/Enron@ENRON, Mark Palmer/Corp/Enron@ENRON, Karen Denne/Corp/Enron@ENRON cc: Subject: Meeting with Governor Davis, need for additional comments/suggestions We met with Gov Davis on Thursday evening in LA. In attendance were Ken Lay, the Governor, the Governor's staff director (Kari Dohn) and myself. The gov. spent over an hour and a half with us covering our suggestions and his ideas. He would like some additional thoughts from us by Tuesday of next week as he prepares his state of the state address for the following Monday. Attached to the end of this memo is a list of solutions we proposed (based on my discussions with several of you) as well as some background materials Jeff Dasovich and I prepared. Below are my notes from the meeting regarding our proposals, the governor's ideas, as well as my overview of the situation based on the governor's comments: Overview: We made great progress in both ensuring that he understands that we are different from the generators and in opening a channel for ongoing communication with his administration. The gov does not want the utilities to go bankrupt and seems predisposed to both rate relief (more modest than what the utilities are looking for) and credit guarantees. His staff has more work to do on the latter, but he was clearly intrigued with the idea. He talked mainly in terms of raising rates but not uncapping them at the retail level. He also wants to use what generation he has control over for the benefit of California consumers, including utility-owned generation (which he would dedicate to consumers on a cost-plus basis) and excess muni power (which he estimates at 3000MW). He foresees a mix of market oriented solutions as well as interventionist solutions which will allow him to fix the problem by '02 and provide some political cover. Our proposals: I have attached the outline we put in front of him (it also included the forward price information several of you provided). He seemed interested in 1) the buy down of significant demand, 2) the state setting a goal of x000 MW of new generation by a date certain, 3) getting the utilities to gradually buy more power forward and 4) setting up a group of rate analysts and other "nonadvocates" to develop solutions to a number of issues including designing the portfolio and forward purchase terms for utilities. He was also quite interested in examining the incentives surrounding LDC gas purchases. As already mentioned, he was also favorably disposed to finding some state sponsored credit support for the utilities. His ideas: The gov read from a list of ideas some of which were obviously under serious consideration and some of which were mere "brainstorming". Some of these ideas would require legislative action. State may build (or make build/transfer arrangements) a "couple" of generation plants. The gov feels strongly that he has to show consumers that they are getting something in return for bearing some rate increases. This was a frequently recurring theme. Utilities would sell the output from generation they still own on a cost-plus basis to consumers. Municipal utilties would be required to sell their excess generation in California. State universities (including UC/CSU and the community colleges) would more widely deploy distributed generation. Expand in-state gas production. Take state lands gas royalties in kind. negotiate directly with tribes and state governments in the west for addtional gas supplies. Empower an existing state agency to approve/coordinate power plant maintenance schedules to avoid having too much generation out of service at any one time. Condition emissions offsets on commitments to sell power longer term in state. Either eliminate the ISO or sharply curtail its function -- he wants to hear more about how Nordpool works(Jeff- someone in Schroeder's group should be able to help out here). Wants to condition new generation on a commitment to sell in state. We made some headway with the idea that he could instead require utilities to buy some portion of their forward requirements from new in-state generation thereby accomplishing the same thing without using a command and control approach with generators. Securitize uncollected power purchase costs. To dos: (Jeff, again I'd like to prevail on you to assemble the group's thoughts and get them to Kari) He wants to see 5 year fixed power prices for peak/ off-peak and baseload -- not just the 5 one year strips. He wants comments on his proposals by Tuesday. He would like thoughts on how to pitch what consumers are getting out of the deal. He wants to assemble a group of energy gurus to help sort through some of the forward contracting issues. Thanks to everyone for their help. We made some progress today.