Continental Power Todd Hall September 2000

Introduction n The purpose of this document is to address the topics below: Y P&L Allocation from Book Split Project Y EnPower Structure Modification Y Transmission Evaluation n The information compiled in this document is to serve as a follow-up to my time in London which included discussions with personnel from Risk, Commercial, and London IT.

P&L Allocation n A review of the Pool Book’s P&L allocation was performed. n In August 2000, Paul Mead (Head Desk Trader - Pool) approached James New (Dir. Of Operations) about the possibility of misallocation of P&L resulting from the Secondary Book Split Project n The purpose of the Secondary Book Split was to further split the P&L for the Pool and Bilateral Books into multiple sub-portfolios.

P&L Allocation - continued n The EnPower enhancements to handle the split by sub-portfolio was achieved in the first book split. n Results of the Pool Book review are as follows: Y P&L in total is correct (ITD, YTD, QTD) Y P&L between portfolios is incorrectly allocated n Anthony MacDonald was assigned to investigate and correct misallocations. As of Sept. 18, 2000, Anthony has transferred into another group. n Bottom line split between Pool/Bilateral not affected

EnPower Structure n Modification of EnPower needed per discussion with Paul Mead n Paul stated the following difficulties or issues: Y choosing the correct Enron entity Y excessive rework time by Risk to correct Y inability to book desk-to-desk trades n Paul has spoken to Brian Hudson (London IT) about the issue

Power Transmission n There has been a general understanding within Enron as to the valuation of power transmission and gas transportation n Although the proper valuation of transmission and transportation has had Commercial consensus as spread options between the locations, Enron has had a difficult time in modeling and implementing this methodology in any system. n West Power desk is testing the latest version

Power Transmission - continued n Within Enron, West Power desk has done all testing n Current work-around for CP is to book as forwards positions when utilization is determined Pros n Recognition of the spread value n Eliminates need to establish provision for Annuity n Time value is recognized

Power Transmission - continued Cons n Does not allow for optionality n Does not allow for volatility n Creates confusion as to which Forwards are truly 3rd Party physical commitments n In order to prevent overvaluation by using the contracted volumes, Commercial or Risk personnel are currently required to modify the contracted deal volumes in EnPower

What This Means n Ignoring the simple fact that transmission is difficult to value, the operational risk created by modifying contracted deal volumes and the uncertainty around the distinction between actual physical deals and transmission is of concern n Transmission auctioning for Calendar 2001 will begin in December 2000 n Contingency plans should be established in case the spread option valuation is not ready by year-end

Contingency Plan Plan A n Testing by both offices must be done to ensure that the solution addresses business needs n Coordinated effort between Houston and London IT Plan B n Use current Excel models to value transmission n Make modifications to incorporate a multiplier which is changed as Commercial projects utilization

Contingency Plan - continued Plan C n Modification of EnPower to reflect a new deal type which values as a Forwards position n The new deal type enables the Transmission Forwards to be distinguished from Physical Forward positions n Create functionality to allow for valuation of the spread to take into account the fact that the entire volume will not flow (forecast volume)

Next Steps n Coordinated meeting with Paul Mead, Gregor Baumerich, and Risk personnel on Sept. 15, to present the different Plans n Recognizing that Plan B would require the least amount of EnPower modifications and that it closely resembles the current processes, the decision was made to proceed with Plan B until Plan A can be tested and implemented