In the spring and summer of 2000, power reserves dropped dangerously low in California. In August 2000, California Gov. Gray Davis called for an investigation into whether energy marketers had manipulated prices in the California market. Enron executives began to prepare to answer the questions they would ultimately face.

To: Steve Kean [Enron executive vice president and chief of staff]
From: David Haug [CEO, Enron Caribbean, Enron Middle East]
Date: Aug. 14, 2000
Subject: Re: Talking Points re "reregulation" in California

Steve, thanks for the helpful materials. However, if the experience in overseas deregulating electricity markets where price increases and spikes have occurred is any precedent, we will need to have some more down-to-earth responses to a some of the potentially inflammatory issues facing the politicians:

1. When the prices spike, who reaps the windfall? Who sells that most expensive 1% of the kwh? Is it a careful planner or a lucky speculator or market manipulator? Someone is making a bunch of money off the screwed up system. Who is it, and why is that OK?

2. We do not allow people to inflate water prices to consumers in times of drought, or food prices in times of hurricanes or floods. Even gasoline price increases in periods of high demand are within 20%-30% of the base, not 2, 5, 10 or 100 times the average like spot electric prices. The issue isn't whether the system is broken or not or how bad partial regulation is or how much demand has increased versus supply. This will be seen as "ivory tower" discussions. The populist political issue is, until the problem is fixed, why should some shrewd big electric company or middleman be allowed to profit off the misfortune of consumers who did not cause the problem? Why should anyone be allowed to profiteer by selling at multiples above their generation cost?

3. The hedges, fixed price contracts and other de facto insurance against volatility that Enron or others offer could be seen as a symptom of the problem rather than the solution. Enron could be seen as at best a band aid and at worst an opportunist made possible only by a broken system -- sort of like the guys who ran the old style protection rackets, or Colombian "security consultants" who "guard" pipelines from the threats their guerilla affiliates create, or political risk insurance that you shouldn't really need if the host country wasn't so screwed up. Don't worry about high crime in your neighborhood -- just hire an off-duty policeman. Who needed these new electricity risk management products in the old days before deregulation?

We have to be able to answer these types of questions at the level of the ordinary citizen, not merely have the correct long-term competitive market solution, or the forces of ignorance and re-regulation will gain momentum. Are we sure we shouldn't back a temporary peak hour price cap until the regulatory problems we're all familiar with are worked out, to avoid a much worse long term rollback?

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As the summer of 2000 drew to a close, Enron executives -- and Lay family members -- were focused on politics on two fronts: the fallout from California, and the prospects of getting the Bush-Cheney ticket elected in November. As some executives began to plot their message in California, one of their colleagues -- an Enron vice president named Joe Hillings -- appeared to worry about positioning himself for a job in the Bush administration.

To: Ken Lay
From: Joe Hillings [Enron vice president for governmental affairs]
Date: Aug. 25, 2000
Subject: My Retirement

Ken: It is my desire to retire from Enron at the end of March 2001. Thanks to you, my financial position far exceeds what I had ever thought would be the case.

I am still in great health, have plenty of competitive drive and have no desire to reduce my natural speed. I shared with you my desire to seek an ambassadorship in a George W. Bush presidency...

You have been a great leader to follow and my entire family is grateful to you for the blessing and rewards you have brought to us. My thanks to you...

P.S. I enjoyed the time with you, Linda, Elizabeth and Jose Luis in Philadelphia.

To: Ken Lay
From: Elizabeth Lay
Date: Sept. 8, 2000
Subject: Contributions, Jobs, etc.

Dear Dad,

I just sent in an additional contribution to the Bush Campaign and I put your number on the check, but I want you to be aware so that you can assure it is credited to your fundraising efforts...

Thanks, Dad!

Love,

Elizabeth

To: Jeff Dasovich [Enron governmental affairs executive]
From: Jeff Dasovich
Date: Sept. 14, 2000
Subject: Observations on the Hearings this Week

...Observation -- The pressure to finger somebody for "price gouging" [in California] is increasing. The administration is hell bent on finding a "fall guy." The price spikes pose real political risks for [California Gov. Gray] Davis and he and his folks need and want an easy way out. His press release following the hearing renewed the call for "refunds" ... The utilities repeatedly called on FERC to do a "real" investigation, with hearings, testimony, data discovery -- the works...

Implication -- It seems prudent for Enron to understand better its risks of getting fingered. In the best case, the clamoring for a "refund" subsides. In which case, the only cost to Enron is the internal cost incurred to understand better the risks of getting fingered. In the medium case, investigations find that Enron (like others) "played by the rules," but the rules stunk, and Enron profited at the expense of California consumers.

To: Kenneth Lay
From: Joe Hillings
Date: Sept. 25, 2000
Subject: Selection of My Successor -- My Concern

Ken: I have "heard" from two sources in this office that Enron will announce my successor today. I have not been advised of the selection and am concerned that this announcement will not treat my retirement in an appropriate and deserving manner...

Frankly, I think this matter has not been handled in a caring way and I have been accused of giving information on the selection to Tom DeLay, which is untrue. My office mates are all more aware of the candidates and their status than I have been.

I regret having to contact you on this matter but feel that despite my total cooperation, allegiance and dedication to Enron, I am not being treated with the courtesy and sensitivity that this matter deserves.

To: Members of the Lay family
From: The newly married Elizabeth (Lay) Vittor
Date: Nov. 1, 2000
Subject: New York City

Dear Family,

Heather and I were talking about NYC and thought we should make some reservations for dinner for the entire family on Friday and Saturday night. I am trying to get reservations for the entire family at Le Cirque 2000 for Friday night at 7:30 but we will be very lucky to get in. Does anyone have other suggestions or an objection to Le Cirque? I am attaching a review of the restaurant. It is definitely a little "Haute" but I've heard it is also a lot of fun...

Luv to all,

Liz

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As the nation awaited the results of the presidential recounts and lawsuits, Enron executives began plotting their own roles in the new Bush administration. Ken Lay apparently had more pressing concerns: The phone wasn't working right in one of his planes.

To: Ken Lay
From: Steve Kean [Enron executive vice president and chief of staff]
Date: Nov. 16, 2000

As I mentioned at the executive committee meeting, we have a number of people who either have expressed interest in serving on the transition team or who I would like to approach to serve on the transition team for Bush. We believe that a call from you to Cheney may be required.

David Haug. David will be returning from his honeymoon on Dec 4 and has expressed a strong interest in serving on the Bush team.

Woody Wodraska. Woody would like to work on environmental and water issues and has been in touch with Bush campaign folks in both California and Florida. He would appreciate a call on his behalf to Cheney. Amanda is aware of his interest and is amenable to his service.

James Steffes. You know Jim. He is one of the most creative and talented people in my organization. He is familiar with state and federal energy regulation as well as the state and federal policy makers who have played an active role in deregulation efforts. He would be great to have on a vetting team for commission nominees. I have talked to Jim and he is interested.

Others. We can make another 4 people available from the government affairs organization with qualifications in energy, communications and market regulation. The question is more a matter of how many Enron people they would like to have. Among them: Dan Allegretti (who will be chair of NEPOOL next year) who campaigned for Bush in New Hampshire; and Sue Landwehr, a Republican who works for us in the upper Midwest.

Linda Robertson has suggested that we try to put as many people on the "vetting" team as possible. Let me know how I need to proceed.

To: Gary Fitch [Enron's aviation manager]
From: Keith Jones
Date: Nov. 20, 2000
Subject: N5737 -- Ken Lay's phone

Gary,

Least I forget! On N5737 the other day ... Mr. Lay reported to Bill Reddick that when his phone (#2 R/H seat) rings and he answers that it disconnects on him. He told Bill that this is the third time he has reported this problem...

Lyndel checked the system and there does seem to be a problem with it disconnecting if you pick it up before the third ring. After the third ring it works fine. That is all I know at this time. Garrett AV is coming over today to check the system...

Keith

To: Ken Lay
From: Gary Fitch
Date: Nov. 20, 2000
Subject: N5737 -- Ken Lay's phone

Mr. Lay, we are looking into the problem and hope to have the problem resolved ASAP. Thanks.

P.S. Our best to you and your family this Thanksgiving.

To: Gary Fitch
From: Rosalee Fleming
Date: Nov. 20, 2000
Subject: N5737 -- Ken Lay's phone

Gary, every time Ken tells me to report it, I tell Anna or Kristi and they, in turn, pass it on to whoever they deal with in Maintenance. It has been at least 3 times.

Rosie

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