Draft of 4/1622/01

April  __,23, 2001

VIA FACSIMILE AND
HAND DELIVERY
(415)   973-9176 / (415)   973-0750

Pacific Gas & Electric Company	Pacific Gas & Electric Company
77 Beale Street	77 Beale Street
San Francisco, CA  94177 	San Francisco, CA  94177
Attention:  Mr. Joseph C. Henri	Attention:  Contract Administration

Re:	Master Power Purchase and Sale Agreement between Pacific Gas & Electric Company ("PG&E") and Enron Power Marketing, Inc. ("EPMI") dated as of  October 9, 2000 (the "Master Power Agreement" or "MPA").

Pacific Gas and Electric Company
Mail Code B7A
77 Beale Street, Room 727C
San Francisco, CA  94105
Attn:  Risk Management Accounting

Re:	ISDA Master Agreement between PG&E Core, a division of PG&E, and Enron North America Corp. ("ENA"), dated as of May 15, 2000 (the "Master ISDA Agreement")

PG&E Core
Gas Procurement Mail Code N14B
P.O. Box 77000
San Francisco, CA  94117
Attn:  Contract Administration

Re:	Enfolioâ Firm General Terms and Conditions and Confirmation dated November 27, 2000 (Trans. No. QB8206.1/500415) between PG&E and ENA (the "US Gas Agreement")

[Add notices for Canadian gas}

Dear Sirs:

As you are aware, PG&E filed a voluntary Chapter 11 petition under Title 11 of the United States Code (the "Bankruptcy Code") on April 6, 20012001, in the United States Bankruptcy Court for the Northern District of California, San Francisco Division (No. 01-30923) (the "Bankruptcy Filing").    As a result of such filing or in connection with Enron's exercise of certain termination rights under ourthe parties' forward and swap agreements with PG&Econtracts, a number of transactions between Enron and PG&E have been terminated, consistent with Sections 556 and 560 of the Bankruptcy Code.  Final settlement of such forward and swap contracts is exempt from the automatic stay pursuant to Sections 362(b)(6) and (17) of the Bankruptcy Code.  The following is a list of all the transactions that have been terminated, together with our determination of the amounts owed in connection with each such termination.

A.	TERMINATION OF COMMODITY FORWARD AND SWAP TRANSACTIONS BY ENRON

US Power Transactions

	Pursuant to the Master Power AgreementMPA, EPMI was selling power to PG&E pursuant to 3 transactions prior to the termination of such transactions.    A summary of the terms of thethese transactions is set forth   in Appendix A, together with a copy of the Master Power AgreementMPA.   Pursuant to the Master Power AgreementMPA, EPMI provided notice to PG&E that EPMI was terminating the 3 transactions effective April 9, 2001.2001 due to the Bankruptcy Filing.  A copy of this notice is attached inas Appendix A.-1.

	Pursuant to Section 5.2 of the MPA, the non-defaulting party, in this case EPMI, is required to compute the termination payments that may be due in connection with such termination consistent with the parameters set forth in such agreement.  Based on EnronEPMI's calculations, PG&E owes EPMI $_______ (U.S.) in unpaid receivables in connection with the 3 US power transactions for power previously delivered by EPMI to PG&E and EPMI owes PG&E a total termination payment (after netting the termination values for all of the transactions) of $_________ (U.S.), for a total amount owing from EPMI to PG&E under the MPA of $_____________ (U.S.).     Appendix A sets forth athe history and amount of the unpaid receivables, due and owing to EPMI and the calculation of the termination payment for each of the transactions, as well asincluding a description of the method EnronEPMI used to determine the amount of the termination payment owing to PG&E as required by the MPA.

US Gas Agreement

	Pursuant to the US Gas Agreement, ENA was obligated to supply natural gas to PG&E.   A summary of the transaction subject to the US Gas Agreement is set forth in Appendix B, together with a copy of the US Gas Agreement.    Pursuant to the Section [__] of the US Gas Agreement, this transaction was automatically terminated as a result of , and effective as of the filing by PG&E on date of, the Bankruptcy Filing (April 6, 2001.2001).  ENA notified PG&E of this automatic termination pursuant to a letter dated April 9, 2001, a copy of which is attached inas Appendix B-1.  

Like the MPA, the US Gas Agreement requires, in Section 3, the non-defaulting party, in this case ENA, to calculate the termination payment that may be due in connection with such termination consistent with the parameters set forth in such agreement.  

	Based on EnronENA's calculations, PG&E owes ENA $________ (U.S.) in unpaid receivables in connection with theprevious deliverydeliveries of gas by ENA to PG&E under the US Gas Agreement and a termination payment pursuant to Section __ of such agreement of $_________ (U.S.), for a total amount owing from PG&E to EPMIENA of $_____________ (U.S.).  Appendix B sets forth athe history and amount of the unpaid receivables, and the calculation of the termination payment, as well asincluding a description of the method EnronENA used to determine the amount of the termination payment owing to EnronENA as required by the US Gas Agreement.

Canadian Gas Transactions

	Pursuant to the [Canadian Gas Sales Agreement ("CGSA")] and the transactions subject thereto, [ECC] was selling gas to PG&E   pursuant to 11 transactions prior the termination of such transactions.  A summary of the terms of the transactions is set forth in Appendix C, together with a copy of the Canadian AgreementCGSA.   Pursuant to the Canadian Agreementthereto, ECC provided notice to PG&E that ECC was terminating the 11 transactions effective April 12, 2001.  A copy of this notice is attached inas Appendix C.-1.

	Like the MPA and the US Gas Agreement, the CGSA requires the non-defaulting party, in this case ECC, to calculate the termination payment that may be due in connection with such termination consistent with the parameters set forth in such agreement.  Based on EnronECC's calculations, PG&E owes ECC $24,960,484 (U.S.) in unpaid receivables in connection with the 11 Canadian gas transactions and ECC owes PG&E a total termination payment (after netting the termination values for all of the transactions) of $_________ (U.S.), for a total amount owing from PG&E to EPMIECC of $_____________ (U.S.).     Appendix C sets forth athe history and amount of the unpaid receivables, and the calculation of the termination payment for each of the transactions, as well asincluding a description of the method EnronECC used to determine the amount of the termination payment owing to PG&E as required by the CGSA.

US Financial Transactions

	Pursuant to the Master ISDA Agreement, ENA entered into __ (U.S.) financially-settled, gas basis swaps with PG&E which were documented under ___ separate confirmations.    A summary of the terms of the transactions is set forth   in Appendix D, together with a copy of the Master ISDA Agreement.   Pursuant to the Master ISDA Agreement, EPMIENA provided notice to PG&E that EPMIENA was terminating the ___ transactions effective April 9, 2001.  A copy of this notice is attached inas Appendix D.-1.

	Like the other agreements described above, the Master ISDA Agreement requires, in Section 6(d) of such agreement,  the non-defaulting party, in this case ENA, to calculate the termination payment that may be due in connection with such termination consistent with the parameters set forth in such agreement.  Based on EnronENA's calculations, PG&E owes EPMIENA $_______ (U.S.) in unpaid receivables in connection with the ___ financially-settled, gas basis swap transactions and PG&E owes EPMIENA a total termination payment (after netting the termination values for all of the transactions) of $_________ (U.S.), for a total amount owing from PG&E to EPMIENA of $_____________ (U.S.).     Appendix D sets forth athe history and amount of the unpaid receivables, and the amount of the termination payment for each of the transactions, as well asincluding a description of the method EnronENA used to determine the amount of the termination payment owing to PG&E as required by the Master ISDA Agreement.

Interest Rate and Conversion Factor

To the extent any of the above calculations of a termination payment required Enron to present value the payment, Enron used a LIBOR-based curve.     Appendix E sets forth thesuch LIBOR-based curve used by Enron, together with an explanation onconcerning how it was derived.  To the extent any of the above calculations of amounts owed required conversion from Canadian dollars to U.S. dollars, Enron ____________________.  Appendix E sets forth the conversion factor[s] used by Enron.

A.	SUMMARY OF AMOUNTS OWED BETWEEN ENRON AND PG&E IN CONNECTION WITH CERTAIN COMMODITY FORWARD AND SWAP TRANSACTIONS

The following is a summary of the net payments due and owing between Enron and PG&E in connection with the above commodity forward and swap transactions:

EPMI owes PG&E			($86,000,000)
under the on account of  the U.S. power
transactions under the MPA

PG&E owes ENA			$24,000,000
under the U.S. Gas
Agreement

PG&E owes ENA			$23,000,000
under the Canadian gas
transactions

PG&E owes ENA			$71,000,000
under the U.S. financial
transactions

In addition to the above amounts, PG&E owes EPMI significant amounts in connection with both (1) PG&E's non-payment to the California Power Exchange ("CalPX") of substantial sums due and owing by PG&E to such exchange, which non-payments by PG&E are charged[(a) resulted in a shortfall in payments due and owing by the CalPX to EPMI  and (b) may result in a "charge back liability" to EPMI for a portion of such payment failures pursuant to the CalPX tariff (collectively, the "CalPX Unpaid Amounts")], and with respect to which EPMI is entitled to seek recourse against the defaulting party, in this case PG&E; and (2) PG&E's non-payment of certainsubstantial "direct access credits," often referred to as "negative CTCs" ("Direct Access Credits"), that were accrued but not yet paid CalPX credits attributableand owing prior to the Bankruptcy Filing and which related to the provision of retail electric power by two Enron retail energy service providers for direct access customers served by Enron ("PX Credits")located in PG&E's service territory.  [Should we give estimates of amounts?]  AsThe claim against PG&E for payment of the Direct Access Credits is held by EPMI pursuant to an assignment and transfer by the two Enron retail energy service providers (Enron Energy Services, Inc. and Enron Energy Marketing Corp.) of their portfolio of wholesale power contracts to EPMI effective January 1, 2001, consistent with (a) Enron's objective of having EPMI, its wholesale power company, manage all risks and exposures associated with the purchase, sale and cost management of wholesale power and (b) the direct linkage between the determination and calculation of the Direct Access Credits and the wholesale cost of power. 

 Because of the delay in the completion of the CalPX's accounting and reconciliation statements and invoices due, in part, to the cessation of CalPX's ongoing operations and certain unresolved valuation and tariff application questions affecting the CalPX and its properties, EPMI has not been informed of the amount of the claims it has against PG&E resulting from PG&E's defaults on certain of its CalPX obligations. [Enron estimates, however, based on certain financial information it has received to date from the CalPX, that it may have a claim against PG&E pursuant to the CalPX  tariff in the range of approximately $___ to ___.  EPMI will inform PG&E as soon as practicable of the amounts it is owed on account of PG&E's defaults promptly upon receipt of such information from the CalPX or its successor or designee.]

Enron also estimates that PG&E owes EPMI approximately [$380 million] in unpaid Direct Access Credits as of the date of the Bankruptcy Filing.  

Lastly, as you are also aware, under the terms of the above referenced master agreements, PG&E will also be responsible for all reasonable attorneys' fees and expenses incurred by Enron in connection with the termination of transactions.

A.	EXERCISE OF SETOFF RIGHTS

Sections 5.6 and 5.4 of the Master Power AgreementMPA (as amended by EPMI and PG&E, effective as of _____, 2000), respectively, expressly provide as follows:

[Section 5.4]

"After calculation of a Termination Payment in accordance with Section 5.3, if the Defaulting Party would be owed the Termination Payment, the Non-Defaulting Party shall be entitled, at its option and in its discretion, to (i) set off against such Termination Payment any amounts due and owing by the Defaulting Party to the Non-Defaulting Party under any other agreements, instruments or undertakings between the Defaulting Party and the Non-Defaulting Party (which agreements shall include any natural gas purchase and sale agreements between EPMI’s Affiliates and Party B.).  Notwithstanding anything to the contrary in this Agreement, any right of setoff to which any Party may otherwise be entitled (whether by operation of law, contract or otherwise) shall not apply with respect to any amounts owed under any other agreements between the parties that are based on the International Swaps and Derivatives Association Master Agreement, and/or (ii) to the extent the Transactions are not yet liquidated in accordance with Section 5.2, withhold payment of the Termination Payment to the Defaulting Party.  The remedy provided for in this Section shall be without prejudice and in addition to any right of setoff, combination of accounts, lien or other right to which any Party is at any time otherwise entitled (whether by operation of law, contract or otherwise). (Emphasis added). 

		[Section 5.6]

Notwithstanding any provision to the contrary contained in this Agreement, the Non-Defaulting Party shall not be required to pay to the Defaulting Party any amount under Article 5 until the Non-Defaulting Party receives confirmation satisfactory to it in its reasonable discretion (which may include an opinion of its counsel) that all other obligations of any kind whatsoever of the Defaulting Party to make any payments to the Non-Defaulting Party under this Agreement   or any  physical natural gas purchase or sale agreement(s) between Party B and Party A or Party A’s Affiliates   which are due and payable as of the Early Termination Date (including for these purposes amounts payable pursuant to Excluded Transactions) have been fully and finally performed. [Section 5.4]" (Emphasis added.)

Pursuant to thisthe foregoing express contractual rightrights and in accordance with the rights granted in Sections ___362(b)(6) and ___(17) of the Bankruptcy Code, EPMI is exercising its rights to setoff amounts EPMI owes PG&E under the Master Power AgreementMPA against amounts PG&E owes EPMI andas well as its affiliates, ENA and ECC, pursuant to the US Gas Agreement and the CGSA, respectively.  These contractual setoff rights are a recognized exception to the general mutuality provisions of bankruptcy setoff law.  Enron will file a claim in the bankruptcy court for any amounts remaining unpaid by PG&E after EPMI's exercise of its setoff rights.

	We note from the record that James L. Lopes of Howard, Rice, Nemerovski, Canady, Falk & Rabkin represents you with respect to the bankruptcy proceedings in the United States Bankruptcy Court for the Northern District of California, San Francisco Division (No. 01-30923).  We are therefore are providing Howard, Rice, Nemerovski, Canady, Falk & Rabkin with a copy of this letter.

						Very truly yours,

	
	By:  	
	Name:  	
	Title:  	

cc:  James L. Lopes (by facsimile:  415-217-5910)