Enclosed is an article in this morning's San Diego Union, written by one of
their reporters that I know. As indicated, it focuses on Enron. Of particular
interest are the comments by Senator Dunn, which are at odds with his
statements to the Sacramento lobbyists that he has no idea what Enron does.

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Date: Wed, 06 Jun 2001 08:53:28 -0700
From: "Cindy Frederick" <cfred@pkns.com>
To: "Michael Kirby" <mlk@pkns.com>
Subject: IS TRADING AN INSIDER'S GAME?
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IS TRADING AN INSIDER'S GAME?
Buying, selling of electricity is a growth business, but some say deck is
stacked against consumers

By Craig D. Rose
STAFF WRITER

June 6, 2001

While Californians decry deregulation's failure to deliver a competitive
market, electricity wholesalers have quietly developed a vast and rapidly
growing business of buying and selling power among themselves.

The deals take place on high-tech trading floors in Houston and elsewhere
around the country, as well as on Internet-based trading systems.

Some experts say this electricity trading is a key mechanism for raising
consumer power prices, yet it's largely unregulated.

"Electricity trading is like buying stock -- when you have ability to change
the stock price," said Frank Wolak, a Stanford University economics professor
and member of the state grid operator's market surveillance group.

Energy companies say the buying and selling of contracts to deliver power
provides risk management, allowing plant owners to presell their electricity,
lock in prices and avoid fluctuations. The rough and tumble of the free
market, they add, is the most efficient means of allocating a resource like
electricity.

But industry critics say trading is far from a competitive market paradigm.
In their view, it's a means of communication -- a way for energy insiders to
collude and raise prices under the guise of competition.

To be sure, the trading arms of major energy companies have emerged as stars
in an industry where profit surges of 300 percent or 400 percent are not
uncommon.

The transactions, shrouded in secrecy, can leave ownership of a critical
commodity in unknown hands. Consider the case of power generated by AES
Corp.'s California plants.

In 1998, AES made a bold move. Immediately after purchasing power plants that
gave it control of 10 percent of the state's electric generating capacity,
the company sold the output from its plants for the next 20 years to Williams
Cos.

Williams did not sit on this treasure trove of electrons. The Tulsa, Okla.,
company soon sold 80 percent of what it bought.

It is difficult to say who owns that power now. Some might be owned by Sempra
Trading, a sister company of SDG&E. Or some could be owned by Enron Corp.,
the nation's biggest electricity trader.

A spokeswoman for Williams conceded that Williams itself may have repurchased
some of the electricity it sold earlier. But trading companies closely guard
their positions.

This much can be said with certainty: Electricity that AES sold for less than
5 cents per kilowatt-hour to Williams changed hands perhaps 10 times in the
wholesale market and emerged at times in recent months with a price tag for
consumers that was 300 percent higher.

Williams' trading profits increased by 523 percent in the first quarter this
year.

Advance sales
All this buying and selling creates curious confluences.
In their attempt to deflect criticism over high prices, generating companies
such as Duke Energy -- operator of the South Bay Power Plant in Chula and
others in the state -- frequently note that they sell most of their
electricity far in advance. But they acknowledge less often that their
trading units may also be buying power, which could boost the company's
electricity inventory.

Duke was the fourth biggest electricity trader last year and cited its
trading activity as a prime contributor to its wholesale business profits,
which soared 324 percent in the first quarter to $348 million.

It is a company's power traders who frequently direct plant operators to
increase or decrease the generation of power in response to market conditions.

Energy companies have little option but to turn to trading for profits. One
of the better kept secrets of electrical deregulation and its promise of
competition is that there is remarkably little competition in the production
side of the business.

For one thing, electricity is a commodity; power from one company is
indistinguishable from that generated by others.

More important, nearly all modern plants generate power from turbines built
by a handful of manufacturers. The result? Modern plants owned by different
companies produce power at nearly identical cost.

"The cost of power produced by modern plants is all within a mil
(one-thousandth of a dollar)," said Michael Peevey, an adviser to Gov. Gray
Davis and former president of Southern California Edison.

So the extraction of profit in the electricity business relies much more on
trading. Traders' profits rise when prices are volatile -- plunging, or even
better, rising sharply.

Little regulation
But despite the obvious temptation to manipulate the market, the burgeoning
electricity trading business has remained largely unregulated.
The Federal Energy Regulatory Commission does require quarterly filings from
energy traders, but these often provide incomplete information, or at least
little that has been of concern to FERC.

In fact, although the trading of electricity grew more than a hundredfold
from 1996 to 2000, FERC has taken no major enforcement action against a
trader. After the onset of the California crisis last year, FERC has acted
once. That was against Williams, which agreed to pay $8 million without
admitting guilt to resolve an allegation that it withheld supply to pump up
prices.

FERC's record of enforcement in the area of power trading stands in contrast
to a long list of enforcement actions within other markets taken by the
Securities Exchange Commission and the Commodity Futures Trading Commission.

FERC has recently added staff to its market oversight operations. But William
Massey, a FERC commissioner, says the agency's effort is still inadequate.

"Electricity can be flipped, stripped and chopped up," Massey said. "It's an
extraordinarily complicated market.

"The sophisticated marketers and traders have simply moved past us. We're
kind of horse and buggy in our approach and they're out there in rocket ships
flying around ... The problem is that sophisticated traders don't necessarily
produce reasonable prices. They produce profits."

Before deregulation, electricity trading was a low-key affair. Regulated
utilities dealt power back and forth on a reciprocal basis to fill
electricity shortfalls in their control areas. There was little trading for
profit until the mid-1990s, after federal legislation and FERC rulings opened
the market.

Major traders include large energy companies, sister companies of
California's major utilities and Wall Street firms.

Market volatility
In many ways, the trading of power is similar to that of other commodities.
But there are important differences. Because it cannot be stored and its use
is so fundamental, the price of electricity is the most volatile of all.
When supplies are tight, a single supplier can rapidly raise prices to
budget-busting levels, as evidenced by Duke Energy's recent admission that it
charged California nearly $4,000 for a megawatt-hour of power, a quantity
that probably sold hours earlier for one-tenth of that sum or less.

Wolak, the Stanford economist, and state Sen. Joseph Dunn, D-Garden Grove,
who is investigating the state power market, say trading allows companies to
collude under the guise of competition. Instead of wringing out lowest costs,
the wholesale trading market serves to raise prices, they say.

"As I trade to you and you trade to me, we communicate to each other what
price we would like to get," said Wolak. "It's not collusive. It's just
communicating price."

Mark Palmer, a spokesman for Enron, the nation's biggest power trader, said
California's problem is not the result of trading.

"It's a result of shortages," Palmer said.

Underscoring its emphasis on trading, Enron's new headquarters tower in
downtown Houston rises from a six-story block of new trading floors,
including expanded space for electricity trading.

Enron also pioneered trading in cyberspace and its Enron Online site claims
to be the most active computer-based trading market.

The Houston company argues that consumers won't fully benefit from power
trading and deregulation until they have greater choice in choosing their
power supplier. And the company says FERC has not done enough to open access
to transmission lines, which would allow traders to move power around the
country. To that end, Enron has lobbied hard for President Bush's plan for a
national electricity grid.

Palmer says the notion that the price of electricity rises each time it is
traded is mistaken.

"The market is always looking for the real price of a commodity," Palmer said.

Dunn, the California state senator, says his investigation found a different
function for trading. At a time when supply barely meets or falls short of
demand, he noted, companies with electricity to sell have to worry only about
how high to set their price.

"The trader is a pawn in the generator's game to drive up prices," said Dunn.
"Trading develops a level of trust. You, my alleged competitor, will bid in
the same patterns and I will respond not in a competitive pattern but in a
complimentary pattern."

The state senator said his investigation found evidence that on several days,
energy companies appeared to test their ability to drive prices up, without
being undercut by competitors.

This ability to drive up prices without competitive consequence is a key test
of market power, the technical term for manipulation or price fixing.

But Dunn also conceded that antitrust violations can be hard to prove in
court. He suggested that even if the trading behavior falls short of
antitrust violations, it remains anti-competitive and devastating for the
California economy.

To Harry Trebing, a utility industry expert and professor emeritus at
Michigan State University, wholesale electricity trading is reminiscent of
what took place in the 1920s and early '30s. Back then, utility companies
created complex networks of holding companies that traded stock among
themselves, driving up prices in the process.

Undoing that scheme was a focus of President Franklin Roosevelt's
administration. Congress ended up barring national power companies and
tightening regulation of utilities, in an effort to counteract their tendency
to create markets that work only for insiders.

"The broad goals of trading are the same," Trebing said.

"The goal is to maximize profits through raising prices."


Brian,

The attached is the release for the Fort Union Firm Gathering Agreement.


fyi
---------------------- Forwarded by Karen Denne/Corp/Enron on 10/16/2000
04:23 PM ---------------------------
From: Diane Bazelides@AZURIX on 10/16/2000 04:22 PM
To: Elizabeth Ivers, Mark Koenig/Corp/Enron@ENRON, chensle2, Karen
Denne/Corp/Enron@ENRON
cc:

Subject: Litigation Response

Here's the response we're using on the litigation.


Holden

I need to true this transmiision up, any word on those two resevations?

Mike P. Purcell
Settlements Coordinator
Volume Management-Portland
503-464-8297


Kristin,

Excellent reporting on California.

Vince


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