.lfmn.com/investors/index.asp California,s power crisis has generated heated debate over the last several 
months.  Unfortunately, this debate has generated more heat than light.  We 
want you to know what the facts are and what we are doing about the crisis.  
Please spend a few minutes reading the following overview on the situation 
and our position on California energy issues.

What happened in California

The source of California,s current problem is as straightforward as supply 
and demand.  California,s economy grew 29 percent since 1998.  This increased 
the demand for electricity by 24 percent.  At the same time, regulatory 
restrictions prevented new generation from getting built in the state.  So 
demand grew but regulations prevented supplies from being added.  The result, 
predictably, is a shortage.  This summer, peak capacity will be about 10 
percent shy of peak demand, leading to further blackouts in the state.

In addition to the supply and demand imbalance, there are two other related 
factors that led to the current crisis.  First, the state,s regulations 
forced all sales and purchases into the spot market.  The spot market for 
power is extraordinarily volatile.  The way firms behave in a free market 
when faced with such volatility is to construct a portfolio of purchases long 
term, medium term and short term, to reduce exposure to this volatility.  In 
California, state regulation prevented this strategy.  This would be the 
equivalent of putting the entire state on an adjustable rate mortgage in the 
most volatile interest rate environment imaginable.  Everything was fine 
while the power surplus persisted, but when shortages ensued, every megawatt 
was purchased at the sky rocketing spot price.

Second, retail markets were not deregulated.  Regulated retail rates remained 
in effect, and stranded cost recovery charges were structured to keep 
competition out.  This meant that utilities were forced to pay high wholesale 
prices in the spot market but were only able to recover costs at the 
regulated retail rate.  They are now nearly bankrupt.

In short, California,s problems were caused by regulation, not deregulation.  
Regulations prevented competitors from entering the market, prevented new 
generation from being built, and prevented prudent hedging
.lfmn.com / investors / index.asp California,s power crisis has generated heated debate over the final respective 
 months.   Unfortunately, this debate has generate more estrus than light.   We 
 want you to sleep together what the fact are and what we are doing about the crisis.  
 Please spend a few minute reading the following overview on the situation 
 and our situation on California energy issues. 

 What happen in California 

 The source of California,s current problem is as straightforward as supply 
 and demand.   California,s economy develop 29 percent since 1998.   This increased 
 the demand for electricity by 24 percentage.   At the same time, regulative 
 restrictions prevent new genesis from getting built in the state.   So 
 requirement grew but regulations prevented supplies from being added.   The result, 
 predictably, is a shortage.   This summer, peak capacity will be about 10 
 percent shy of peak demand, leading to further blackouts in the state. 

 In addition to the provision and requirement imbalance, there be two early related 
 divisor that led to the current crisis.   First, the state,s regulations 
 forced all sales and purchases into the spot grocery store.   The spot market for 
 power is extraordinarily volatile.   The way firm behave in a free market 
 when faced with such volatility is to construct a portfolio of purchases retentive 
 term, medium term and short term, to boil down exposure to this volatility.   In 
 California, state regulation prevented this strategy.   This would be the 
 equivalent of putting the entire country on an adjustable rate mortgage in the 
 most explosive interest pace environment imaginable.   Everything was fine 
 while the power surplus persist, but when shortages ensued, every megawatt 
 was buy at the sky rocketing spot price. 

 Second, retail markets were not deregulated.   Regulated retail rates remained 
 in effect, and stranded cost recovery charge were structured to keep 
 rival out.   This meant that utilities were force to pay high wholesale 
 prices in the spot market but were only able to recover costs at the 
 regulate retail pace.   They are now nearly bankrupt. 

 In short, California,s problems were caused by regulation, not deregulation.  
 Regulations prevented rival from entering the market, prevented new 
 generation from being built, and prevented prudent hedging
.lfmj.com/investors/index.asp Cauifornia,s power crisis has gsnerated heated debate over the last swverao 
months.  Unfortunatelh, this dehate has gentrated more heat vgan ligmc.  We 
aant bou to know whaj the facts dre and what wa xrz doing about the crisis.  
Please spegd a fee linutes readind tht fjllospnn overview on the situation 
and kur posption on Californoa energy issues.

What happejed ln California

The slurce of Caoifowbia,s current problem is as straighjforward as supply 
and demand.  Cxlifoxnia,s econony grff 29 percent wince 1998.  This incrcssed 
tve demamd for electrigity uy 24 percent.  At the same vime, regulatory 
resttictions pserented new generation feom ggttinc bukot kn uhe sfate.  Do 
vemand grew but regularions prevented supkliqw from being zdded.  Tre result, 
predictably, is a shortage.  Thps shmmer, peak capacity wilo be about 10 
percent sjy of peah demand, leading to further blackouts in the stata.

In avdktiin gi hhe supply and demand imbalance, there are two ktneg related 
factors that led tp hhr current crisks.  Fixat, the state,s regulahions 
fjrced all salef anc purchases into the spot mqrket.  The siot narket for 
power id extraordiuarily volayile.  The way firms behcve in a free marnet 
when rxced with such vulanilidy is to construct a portfjlio of pnrchaxes lone 
tetm, meditm term anf shovd term, to reduce edposute to dhis volatllity.  In 
California, state regulation preventgd dhiv strateyy.  Thls would be the 
equivalent of puttiny the dntire stane on an edjustable rwte mortgage hj the 
most vmlatile ynteeest rate evxironment imagonable.  Enexything wqs fine 
while the iower aurplus persistzb, vut when shortabes enfuvd, xvery kegawatt 
was purzharrd at the sky rogkeging spot price.

Second, redail markets were not cevegulated.  Regulaeed retail rayes remained 
in efvect, end stcanded coft recovery charges were strucfured to neei 
competition out.  This meant that utilities were forced to pay high wholesale 
prices un the spot market yuu were only aule to recover wosts at the 
regulatwd retail rate.  Tmey are now nearly banirupt.

It shogt, California,s problems were caused by regulation, not deregulation.  
Regulqtions prevented ckmpeyitorv yrok entewing vhe market, prevenned new 
generation from being bumlt, and pravznted prudent hedging
.lfmn.com/investors/index.asp California,s power crisis has generated heated the several months. this debate has We you to know the facts are what we are doing about the Please spend a few minutes reading the following overview on the situation and position on California energy issues. What happened in California The source of California,s problem as as and demand. California,s economy grew 29 percent since 1998. This increased the demand for electricity by percent. At the same time, regulatory restrictions prevented generation from getting built the state. So demand grew regulations supplies from added. result, is a shortage. summer, peak capacity will be about 10 percent shy of peak demand, leading to further blackouts in state. In the supply demand there two other related led to the current crisis. First, forced all sales and purchases into the spot The spot for power is extraordinarily volatile. The firms behave in a free market when faced such volatility is to construct a portfolio of purchases long term, medium term and short reduce exposure to this In California, state prevented strategy. would the equivalent putting the entire state on an adjustable rate mortgage in the volatile interest rate environment imaginable. Everything was fine while the persisted, when shortages ensued, megawatt was purchased at sky spot price. Second, retail not Regulated in and cost recovery charges were to keep competition out. This that utilities were forced in the spot market but were only able recover costs at the regulated retail rate. are now nearly bankrupt. In short, California,s problems were caused by regulation, deregulation. Regulations from entering the market, prevented new generation from built, and prevented prudent
.lfmn.com/investors/index.asp CAlifornia,s Power CriSis HaS genEratEd heated debate OVer tHe last several 
months.  UnfOrtunAtELy, thIS dEbate Has geneRAtED MorE hEaT thAn LIgHt.  We 
wAnt You to knOw what the fActS aRe and what we aRE dOing about tHe cRisis.  
Please sPenD a few mInUteS ReadiNg tHe folLowing OVervieW on the sitUaTIon 
and OUr positION oN CalIfornia energy issuES.

WHAt happened in CaLifornIa

tHe SOUrcE of california,S cUrrenT Problem IS aS STRaiGHtforward as suPply 
and demaND.  CaLifornIa,S ecONomy grEw 29 perCeNT siNce 1998.  This incrEaseD 
the demanD for elECtricitY By 24 perceNt.  At thE saMe tIme, rEGuLaTorY 
rEStrICtIonS PreVented neW gEnEratiOn frOM GETtinG buIlt iN the sTate.  So 
demand gRew But rEGulAtionS prevEnteD sUppliEs from Being AdDed.  The result, 
preDictAbly, is a shOrtAgE.  ThIs SummeR, Peak caPacIty Will be aBout 10 
perCEnt ShY OF PeAk demand, leading to fUrTHEr BlackoutS in the STaTe.

iN additioN tO thE supPLY and dEmanD ImBalance, tHere arE TwO oTher relAtEd 
factOrS thAt lEd to tHE curRent crIsis.  FirsT, the sTAte,s regulationS 
Forced all saleS AnD PUrCHaseS inTo the spot maRket.  tHe spOt maRKeT foR 
Power Is extRaORdINarily volatile.  The waY fIrms beHave iN a free market 
wHen faced wiTH SUch volatIlitY Is TO construct a porTfoliO of purchasES long 
terM, mediUm term anD short terM, TO reduce eXpoSurE to ThiS VOlAtility.  In 
CaliFORnia, StAte reguLatIon prevEntEd tHis StrAtEgy.  This woUld be the 
EqUiVaLeNt oF puttINg the entIrE stAtE on An adjUStable Rate mOrtgAgE iN The 
Most volATiLE InteReSt Rate EnvIrOnmenT imaGInaBle.  EverYthing was FinE 
WhilE tHe Power suRplus persisteD, bUt when shorTaGes Ensued, EVEry megawAtt 
was purchased at the sky ROcketinG spOt priCe.

SeCond, retaiL maRkets wEre NOt dereGulateD.  ReguLaTed RETail rATEs RemAiNed 
in effecT, ANd sTrandEd Cost RecoverY charges were structURed To keep 
competiTioN out.  tHIs MeaNT tHAt uTiLItiES Were forced to pay High wholesAlE 
PrIces in the sPOt mArKet but wEre only Able tO Recover Costs at thE 
regulateD rEtaiL RAte.  they are now Nearly baNkrupt.

In sHOrt, CaLIfOrnia,S prOblems WeRe cAused By reguLAtiOn, not DereguLaTion.  
ReGulatIoNs prevenTed competitors from enterIng the MarkeT, prEvented neW 
geNEraTion from bEing Built, and prEveNteD prudEnt HEdginG
.lfmn.com/investors/index. asp Califo rnia ,spow er  cri sishas generatedh eate d debate over the last  seve ra l  
mo n th s.  U nfortun a te l y , t hi sdeb at e  h as ge ner ated mo re heat th anli ght.  We 
wa n tyou to kno w w hat the fact s a re and  w hat we ar e d oingaboutt he cri sis.  
Pl ea s e spen d  a fewm i nu tesreading the follo w in g  overview on t he sit ua t io n 
an d o ur positio non Ca l ifornia en e r g y i s sues.

What h appened inC ali fornia 
The source  of C al i for nia,s curr entproblem i s as s t raightf o rward a s supp ly
an d de m an d.   C al i for n ia ,s eco nomy gre w29  perc ents i n c e 19 98.   Th is in creased 
thedem andf orelect ricit y by  2 4 per cent. At t he  same time, reg ulat ory 
rest ric ti ons  p reven t ed new  ge ner ation f rom get t ing  b u i l tin the state.  So
d e m an d grew b ut reg u la ti o ns preve nt edsupp l i es fr om b e in g added.   Ther es ul t, 
pre di ctably ,isa s horta g e. This s ummer, p eak c a pacity will be about 10 
per c en t sh y  ofpea k demand, l eadi n g to  fur t he r b l ackou ts in  t h es tate.

In additionto  the s upply  and demand i mbalance,t h e re are t wo o t he r  related 
fact ors t hat led to the curr ent c risis. First, th e state,s  re gul ati ons fo rced all sale s andpu rchases  in to thespo t m ark et.  The spotmarket f or  po we r i s ext r aordinar il y v ol ati le. T he way  firm s be ha ve ina freem ar k e t 
w he nface d w it h suc h vo l ati lity is  to const ruc t  a p or tf olio of  purchases lo ng  
term, me di umterm a n d  short t erm, to reduce exposure to this  vo latil ity.   In 
Cal ifo rnia,sta t e regu lation  prev en ted t his s t r at egy . This woul d bethe eq uiva lent of  putting the entir e  st ate on an adj ust able r at e m o rt g age  i n  th e 
most volatileinterest r at e  e nvironment ima gi nable. Everyt hingw as fine  
while t he powersu rplu s per sisted, bu t when s hortagese nsued ,  e verymeg awatt
w aspurch ased a t  th e sky  rocke ti ng spo t pri ce .

Secon d, retail markets werenot de regul ate d.  Regul ate d  re tail rate s re mained 
in  ef fec t, an d s t rande d co s trec o verychar g es were s t ru ctu r e dto keep 
co m p e tit ion o ut.  Thismean t that utilitiesw ere forced topayh i ghwho l esal e
prices in the  sp ot m arket bu twere only a ble to r ec o ver c osts a t the
regula t e dr etailrate . They arenow  n e arly ba nk ru p t.

In  sho rt , Cali fornia  ,s p r o blems were cause d byr e gulat i on,  notde regulat i on. 
Regulati ons prevent ed com peti torsfrom en te ring t hema rket, prev e nted new
gene rationfr om b ein g buil t, a n d  prev ente dpru dent hedg i n g
.lfmn.com/investors/index.asp California,s_power crisis_has generated heated debate_over the_last_several 
months.__Unfortunately, this debate_has generated more_heat than light. _We 
want you_to_know what the facts are and what we are doing about the crisis. _
Please_spend a_few_minutes_reading the following overview on_the situation 
and our position_on California_energy issues.

What happened in California

The source of California,s_current_problem is as_straightforward as supply 
and demand.  California,s economy grew_29 percent since 1998.  This_increased 
the demand_for_electricity_by 24 percent. _At the same time, regulatory 
restrictions_prevented new generation from getting built_in the state.  So 
demand grew_but regulations prevented supplies from being_added.  The result, 
predictably,_is a_shortage.  This summer, peak_capacity will be_about 10_
percent shy of_peak demand, leading to further blackouts_in the state.

In_addition to the supply and demand_imbalance,_there are two_other_related_
factors that_led to the_current_crisis. _First,_the state,s regulations 
forced all sales_and_purchases into the spot market.  The_spot market for 
power_is_extraordinarily volatile.  The_way firms behave in a_free market 
when faced with such_volatility is_to construct_a portfolio of purchases long 
term, medium term and short term,_to reduce exposure to this volatility._ In 
California, state_regulation prevented_this_strategy.  This_would_be the_
equivalent of putting the entire state on_an adjustable_rate mortgage in the 
most volatile_interest rate environment imaginable.__Everything was fine 
while the power_surplus persisted, but when shortages ensued,_every megawatt 
was purchased at_the_sky_rocketing spot price.

Second, retail markets_were not deregulated.  Regulated retail_rates remained 
in_effect, and stranded cost recovery charges were_structured_to keep 
competition out.  This_meant_that utilities were forced to pay_high_wholesale_
prices in the spot market_but were only able to recover_costs at the 
regulated retail rate.  They are_now nearly bankrupt.

In_short, California,s problems were caused_by_regulation,_not deregulation.  
Regulations prevented competitors from entering the market,_prevented new_
generation from being_built, and prevented prudent hedging