Photo by Joe Klein

Malcolm pleaded guilty to one felony count of conflict of interest following an investigation of his ties to Duke Energy and the South Bay power plant.

David Malcolm was born to be a prince of San Diego politics. Malcolm grew up poor in Chula Vista and ached to be rich, as he repeatedly confided to reporters. In 1972, while still attending Chula Vista High, the then-18-year-old Malcolm got his real estate license. He never stopped selling. He leveraged one fixer-upper into 2, then 4, then 14 units, he once told the L.A. Times.

Malcolm's wife Annie introduced him to her old high school chum Steve Peace, another young Chula Vistan, who later became an assemblyman and state senator.

Photo by Joe Klein

In his early 20s, Malcolm started a mortgage company that he called Suncoast Financial. The company catered to the South Bay's monied elite -- eye doctors, surgeons, dentists, car dealers, and elected officials. Malcolm moved into an expensive home in Coronado Cays, the bayside collection of mini-mansions on the Coronado Strand.

Malcolm's wife Annie introduced him to her old high school chum Steve Peace, another young Chula Vistan, who later became an assemblyman and state senator. Peace got his start as an ambitious protégé of liberal Democratic assemblyman Larry Kapiloff.

Willie Brown. Malcolm used his influence with Mayor Willie Brown and staff in an attempt to set up a deal to allow Duke to operate that city's Hunter's Point power plant.

Others who counted as Malcolm's friends and business partners included Greg Cox, then Chula Vista mayor; developer Tawfiq Khoury; and George Gorton, Pete Wilson's chief political consultant who earlier served in Richard Nixon's Watergate-tainted 1972 reelection campaign. In 1982, at age 28, Malcolm was elected to the Chula Vista City Council. By age 30, he was on the state coastal commission, appointed by then-assembly speaker Willie Brown.

John Einhorn gave Malcolm (now 49 and balding) just 120 days in a work-furlough facility at 35th and Ocean View, which Malcolm entered last week.

Photo by Joe Klein

In October 1986, when Malcolm was 32, a disgruntled ex-partner surfaced and claimed he had a tape recording of Malcolm urging him to blow up a house for $1.3 million in insurance money. "Why couldn't somebody just go in and turn on the gas downstairs, leave the burner on upstairs with a candle burning, and when the gas gets to that, it would just blow up?" Malcolm was heard saying on one tape provided to the Los Angeles Times. Malcolm denied the charges and said he was "just playing along" with the man to gather extortion evidence against him. Malcolm said the tapes were doctored. Then-district attorney Ed Miller investigated and declined to prosecute.

Tawfiq Khoury: "Richel and I are grateful to you and Annie for your friendship."

Photo by Joe Klein

That same year, Malcolm and Willie Brown arrived together by helicopter at a lavish groundbreaking ceremony hosted by developer Roque de la Fuente III in a 12,000-square-foot red-and-white tent to celebrate de la Fuente's 312-acre business park on Otay Mesa. Months later, the 33-year-old Malcolm was profiled by the Los Angeles Times as one of two "prominent swing votes" on the state coastal commission. The other was another Willie Brown appointee, Mark Nathanson, a 48-year-old Beverly Hills real estate investor.

While the Congressman [Filner] has an excellent environmental record his words were, "Well, EHC is wrong on this issue."

Photo by Joe Klein

Malcolm and Nathanson voted consistently in favor of developments favored by Brown's campaign contributors, and their votes frequently represented the margin of approval for controversial projects. Malcolm refused to talk about his fundraising relationship with Brown, other than to say that they were "real good friends." Nathanson was described by an unidentified legislator as "the one who gets Willie into Spago after hours." Later Nathanson was sentenced to five years in prison for extorting cash from developers in exchange for voting for their coastal permits.

Larry Cushman. Malcolm enlisted the financial backing of two old associates: developer Tawfiq Khoury and investor Lawrence Cushman — the brother of Malcolm's fellow port commissioner, Jaguar dealer Steven Cushman.

Over the years, there were other brushes with notoriety. A 1988 investigation by the state's Fair Political Practices Commission (FPPC) into Malcolm's alleged conflicts of interest was dropped for lack of evidence. Termed out of his Chula Vista City Council seat in 1992, Malcolm was voted a seat on the San Diego Unified Port District board by his former city-council colleagues after leaving the coastal commission in 1995. In the port's world of loose-and-easy ethics, Malcolm survived repeated allegations that he used his position to peddle influence to a eager bidders.

In 1998, Malcolm was named to San Diego Magazine's list of "50 San Diegans to Watch," ranking just a bit behind singer Jewel. "A seasoned deal-maker, Malcolm sees the Port's future in terms of 'partnering,' " the magazine wrote in a glowing account of Malcolm's career. "We need to move away from trying to be our own complete little kingdom and think in terms of niche marketing -- doing what we do best," Malcolm was quoted as saying. "We need to compete with other ports less and partner more."

The full meaning of that quote only became clear this April, when Malcolm pleaded guilty to one felony count of conflict of interest following an investigation of his ties to Duke Energy and the South Bay power plant, located on the Chula Vista bay front. Under an arrangement with the state Public Utilities Commission, which allowed the merger of SDG&E and Pacific Enterprises, the plant was supposed to be auctioned off to the highest bidder. But Malcolm wanted it sold to the port and leased to an operator, to be chosen by port commissioners.

SDG&E initially opposed such a direct sale, but Malcolm intervened. In August of 1998, according to a sentencing memo, "Senator Steve Peace, a longtime friend of Malcolm, requested SDG&E President Edwin Guiles and SDG&E Vice President of Regulatory Affairs, William Reed, to come to Sacramento and meet with him and Malcolm. After several hours of negotiations at Senator Peace's office involving Malcolm, Guides, Reed, Senator Peace, and his aide, John Rozsa, the basic terms, including the price, were resolved under which SDG&E would agree to remove the [power plant] from the auction process and sell it to the Port District."

The port commission approved the deal on December 4, 1998, with Malcolm voting in favor. Prior to the vote, the memo says, "Malcolm had already commenced developing a personal relationship with Duke Energy." On November 16, he met with the city manager of Carlsbad to "facilitate Duke Energy's purchase of the Encina Power Plant." Two days later, he wrote a memo to Richard Duzsynski, a Duke vice president, which solicited the company's interest in taking over the plant. On December 1, 1998, the memo says, Malcolm, Peace, and Duke executives met for dinner at Rainwater's steakhouse downtown, the $432 cost of which Malcolm charged to the port.

The Encina deal fell through, but Malcolm continued to cultivate his relationship with Duke. He went to company headquarters in Houston, where he asked Duke to pay him for his efforts to find other power plants for Duke to operate. The company declined any "up-front money" but offered him a finder's fee if he succeeded at closing any transactions. Thus encouraged, Malcolm set up a corporation he called Public Benefit Power in January 1999, and enlisted the financial backing of two old associates: developer Tawfiq Khoury and investor Lawrence Cushman — the brother of Malcolm's fellow port commissioner, Jaguar dealer Steven Cushman.

In San Francisco, the memo says, Malcolm used his influence with Mayor Willie Brown and staff in an attempt to set up a deal to allow Duke to operate that city's Hunter's Point power plant. By April 1999, the San Diego Unified Port District had closed escrow on the South Bay plant and leased it to Duke. During another series of votes regarding Duke and the South Bay plant in May 1999, Malcolm was absent from the commission but continued to work on behalf of Duke offstage. He prospected on behalf of Duke for other power plants in Alexandria, Virginia, and Washington, D.C.

In May 2000, Duke and Malcolm's Public Benefit Power cut a deal. Malcolm's company received $20,000 a month for consulting services. He collected a total of $210,000 before the contract was terminated a year later. Under the contract, the port commissioner from Chula Vista advised Duke on the South Bay plant, lobbied for an enterprise zone to provide the company favorable tax treatment, and secretly agreed not to "assist any competitor or potential competitor of [Duke Energy], including, but not limited to San Diego Gas & Electric Company and the San Diego Unified Port District."

In the wake of Malcolm's guilty plea, prosecutors argued for a tough sentence. "Malcolm pursued an ongoing and flagrant course of conduct with the purpose of placing his personal interests over the public's interest," prosecutors wrote. "His behavior was deceptive and sophisticated. All attempts to reform or rehabilitate Malcolm should be of secondary consideration to the primary objective of imposing punishment on him."

Spurning that advice, superior court judge John Einhorn gave Malcolm (now 49 and balding) just 120 days in a work-furlough facility at 35th and Ocean View, which Malcolm entered last week. Malcolm will have to fork over $260,000 in fines and restitution. As a felon, he will no longer be able to vote or hold public office. The investigation yielded a mountain of e-mails, memos, and letters documenting how the former port commissioner masterminded his scheme with help from Peace, Willie Brown, and others, a selection of which follows.

September 11, 1998

• To: Bob Weisenmiller
• From: Paula Rosput [Duke Energy]
• cc: Richard Duzsynski
• Subject: Congratulations

I absolutely would like for you to set up the David Malcolm meeting -- just do it with Rick Duszynski. Frankly, we sat down with Sempra last week and they'd be eager to see us involved. Rick and I both agreed that this one could be worth the effort.

September 14, 1998

• To: David Malcolm
• From: Bob Weisenmiller [port energy consultant]
• Subject: Congratulations

David -- think about your availability for dinner. (I am on vacation from Sept. 23 through October 6, so while it would be best if I am there if it screws up the timing I'll have one of my colleagues there.) I had told Paula that I thought it was too late for the San Diego plays but that she should find a relationship with you to be very useful for their Northern California power plants.

September 16, 1998

• To: David Malcolm
• From: Bob Weisenmiller
• Subject: Duke

David -- I had a long talk with Rick Duszynski of Duke yesterday about meeting you. Rick indicated that he needs to pick Paula's brain between now and close of business Friday, when she leaves for her new job, and also Duke is going through its internal personnel process, so he could not leave Houston this week. Given your schedule, that pushes things back until late next week or the following week. I indicated that I was out after the middle of next week for two weeks, so I suggested that he contact you directly and work out a mutually convenient time rather than put everything on hold for a couple of weeks. I also indicated that my colleague Steve McClary would be happy to step in to facilitate things, since Duke is familiar with him. (While I am out, I have told Chris and Tom that they should deal with either Steve or Bill Monsen on Port issues. Steve is Mr. ISO/RMR issues and Bill is Mr. Cash Flow modeling and South Bay assumptions issues. They are both principals of the firm and I have relied upon them on the detail of these issues, so you are in good hands.) However, we at MRW are trying to facilitate the meeting rather than having my availability become an obstacle.

I was relatively clear to Rick that I thought you could help them on their PG&E assets and that there may or may not be an opportunity for them to help the Port on South Bay. Rick was pretty clear they would not hesitate for a second on ISO/RMR contract issues (and given Kent's noises lately you may need this card), Duke has world class engineering capability, and very deep pockets. He thought Don Felsinger was going to call you and say some good words about Duke...

October 15, 1998

• To: David L. Malcolm
• From: Richard J. Duszynski
• Re: South Bay Power Plant

Dear David:

I can imagine that everyone is in quite a festive mood out there in San Diego after last night's victory. Since Houston ended up having to lose, it is at least a small consolation that they did so to the eventual NL Champion. It would be even nicer if we could say "World Series Champion," so rest assured I will be lining up behind the Padres in their upcoming series.

Anyway, as you are aware, I have been trying to get in contact with you to follow-up on the South Bay situation in order to get started on several things here on my end that will be necessary to meet the tight timetable we will be working under. Included in these efforts will be an informational presentation to the Duke Energy Corporation management and Board. Summaries of this presentation will need to be sent out today, and so before I distribute this information I would like to confirm that the Port had no substantive outstanding issues associated with selecting Duke Energy Power Services as its operating partner in the South Bay transaction.

Additionally, both Keith Head and Brad Porlier are in San Francisco today on Independent System Operator-related business, and would like to fly down to San Diego to begin discussions with the appropriate Port staff either this afternoon or tomorrow. Obviously, the sooner we can get started on this the easier it will be to meet the November 17th signing date. Therefore, if you can supply me with the names and telephone numbers of the right people to contact to arrange this first meeting, I will see to it that Keith and Brad make themselves available.

I will follow this letter up with a telephone call later this morning. However, please feel free to give me a call sooner at 713-627-6567 if you have a chance to do so.

October 29, 1998

• To: Bob Weisenmiller
• From: David Malcolm

I'm in the country Down-Under. I don't like this place.

Have you heard anything that I should know? Any thoughts? Everybody is happy with Duke. They really know what they are doing. Even SDG&E is cooperating with Duke.

October 30, 1998

• To: David Malcolm
• From: Bob Weisenmiller

David: I had heard from the Port folks that the Duke folks were a breath of fresh air relative to dealing with USGEN and also from the Duke folks that they were working pretty hard to pull this together. I think Duke is flying its team out tomorrow to try to put everything together. Regardless of the Duke vs. USGEN issues, I assume the Port has a real challenge in terms of getting its arms around everything in the time available. There may be a new angle of the time issue, the California Public Utilities Commission decision on SDG&E's divestiture said that SDG&E cannot make any final decisions on buyers until the California Environmental Quality Act document is adopted...

I guess they have a new problem with SDG&E on the O&M contract where SDG&E has raised its charges for O&M for South Bay by $5 million a year from the bid documents and is being fairly inflexible (relative to Duke's experience with PG&E), which will complicate things. I think you and the Senator may need to deal with this O&M issue after tomorrow, but I would assume first priority is making sure you have enough time to do what you need to do.

Let me know how I can help.

November 18, 1998

• To: Richard Duzsynski
• From: David Malcolm

We did it!

Very confidentially, would you be interested in the Carlsbad plant? Please let me know either way ASAP.

November 19, 1998

• To: David Malcolm
• From: Richard Duzsynski

David: Thanks for the note and the support you gave us in getting us in the door and helping to clear a few roadblocks. I will give you a call tomorrow morning to go over a couple of other Duke issues I wanted to give you an early alert on and to discuss Carlsbad.

Thanks again.

November 20, 1998

• To: Richard Duzsynski
• From: David Malcolm

First let me congratulate you on hiring Pat Barnes. Pat will do a great job for you here in San Diego.

I think we can meet on Dec. 1 but Steve Peace will let me know shortly. He hasn't been in the office all day.

November 20, 1998

• To: Richard Duzsynski
• From: David Malcolm

Dec 1 is ok with Steve Peace.

November 20, 1998

• To: David Malcolm
• From: Richard Duzsynski

David -- I'm glad we got a chance to speak on the telephone the other day. I have emphasized with all of my team, with respect to the location of any replacement plant for South Bay, that we should stress that we have contractually committed to spending money in an attempt to find a suitably commercial site away from the current plant and the waterfront. Also, I have told them to stress the fact that locating a replacement plant on any part of the existing site is strictly a last ditch fall-back position. I would offer up, if you think it would be of any benefit to you in your public relations campaign, that we would be glad to provide you with pictures of what a current, low profile, all enclosed, state-of-the-art 750 megawatt power plant looks like. Additionally, even as unobtrusive as these plants look today, certain improvement in efficiencies will make them even smaller and less intrusive five to ten years from now (your computer analogy was great and right on point!).

As far as dinner with Senator Peace is concerned, the best dates for me would be either December 1st or 2nd, obviously out in San Diego. Either of these dates will fit my travel schedule, and perhaps more importantly, they will coincide with our early roll out of information to key government and community leaders regarding our expansion plans at two of our other plants in Moss Landing and Morro Bay. In addition to discussions about these expansion plans, and of course a recap of the status of the South Bay deal (and possibly the Encina deal as well), I would also like to brief the Senator on some of our thoughts regarding our Oakland plant, as well as specific concerns and issues we have regarding the ISO contract terms and conditions and formula rate negotiations currently going on between the generation owners and the ISO/FERC.

Therefore, if you can arrange dinner on either of these two dates, please let me know and I will make all of the necessary arrangements to come out. Conversely, if neither of these nights fits either your or the Senator's schedule, then please offer up an alternative, and I will do everything I can to make it work.

November 20, 1998

• To: Richard Duzsynski
• From: David Malcolm

Dec 1 is ok with Steve Peace.

November 21, 1998

• To: David Malcolm
• From: Richard Duzsynski

Then December 1 it is. Just let me know the exact time and place when you have the arrangements made. I will likely be bringing one other person from Duke.

November 21, 1998

• To: Richard Duzsynski
• From: David Malcolm

We will have dinner at Rainwaters at 7:00. 1201 Kettner Blvd. 619-233-5757.

I need to talk to you about the Encina Power Plant first thing Monday morning. Or if you get e-mail over the weekend please call me at home or my portable.

November 24, 1998

• To: David Malcolm
• From: Richard Duzsynski

I am sorry that I have been tied up this morning. I left a message with your office that I returned your call, but they weren't sure when you would get it. Just in case, I will be in my office all the rest of today, at (713) 627-6567. However, you should feel free to try me at home this evening, or tomorrow morning until about 10:00 am your time, at (281) 364-8051. After that I should be back in my office.

Also, I will be bringing Bill Hall, my Vice President of California Operations, with me to dinner on December 1st.

Talk to you soon.

December 7, 1998

• To: Aimee Brown and Robin Wiessmann
• From: David Malcolm
• RE: Retreat Information

You had requested a list of the three things I'm most proud of this year. I am assuming the question is business related and not personal.

1. Being chairman of the Port of San Diego I had very little time for business development. Even with this handicap I was able to generate a significant amount of business.
2. Acquiring San Diego Gas and Electric's power plant has opened several doors in the electric industry. I expect a significant amount of business from this industry in 1999.
3. Moving the toll road project forward and signing an agreement with Smith Barney.

I'm not sure what I could have done better given my time constraints.

December 7, 1998

• To: David Malcolm
• From: Richard Duzsynski
• cc: Brad Porlier, Keith Head
• Subject: Carlsbad Negotiations

I found out this morning that the City of Carlsbad is not able to agree to our terms in the Memorandum of Understanding. We have actually offered them two versions, one you saw where we keep the land and take responsibility for decommissioning and removal of the existing plant, along with remediation of the soil and the siting of the RGP. In the second version the City keeps the land and takes on all of these responsibilities. Amazingly, the one issue the City cannot come to grips with is responsibility for finding and acquiring a suitable site for the RGP and making it available to us for free.

Apparently they simply will not let go of any of the land for free, even if it is to re-site the plant. This being the case we have thanked them for allowing us to work with them on this proposal, and are sorry that some arrangement could not be made. We have also asked that Duke's name not be surfaced as a party in any meeting that they may have today with SDG&E. However, given this recent turn of events I don't see the benefit associated with you orchestrating such a meeting.

You are absolutely correct in your assessment of the City, they are not businessmen, and they are so greedy that they are going to end up with nothing, except maybe a protracted litigation over condemnation or land use issues. I am starting to feel like we dodged a bullet here on this one, as I don't think that I would look forward to partnering with them for the next 14 years. I can see why SDG&E developed such an adversarial relationship with them over the years, and stepping into those shoes would probably not be worth the benefits.

Anyway, even though this deal is dead, we are still interested in pressing the South Bay template in other situations where it is applicable. Maybe we can talk some more about a possible next target when I am out there this Friday for the signing ceremony.

January 26, 1999

• To: Keith Head
• From: Mark Peters
• cc: Brad Porlier, Richard Duzsynski, Joe Synnott
• Subject: Re: David Malcolm, Hunters Point, SF

That's pretty much it. Big-time environmental problems, plant is located close to public housing projects, security and labor issues, very inefficient, and old. Over the years there has been significant media attention (much more so than South Bay) about high rates of cancer and respiratory disease that special interest groups try to tie to the facility's emissions.

Here are a few more useful facts:

423 MW's in total. Units 2, 3, and 4 were built in 1948, 1949, and 1958. Unit 1 was built in 1976. The average heat rate for Unit 4 has exceeded 10,400 btu/kwhr for the last five years, and heat rates for other units have averaged over 13,200. Substantial NOx improvements will be needed by 2002 for Units 2 and 3. I'm doubtful these plants could make it in the market alone.

As a reminder, as part of the deal with the City and County, PG&E agreed to switch these units to Form "C" of the must-run agreement. This was done to limit the units' operations to reliability purposes only. Form "C" units cannot participate in any market transactions. It's not clear whether or not the Form "C" status could be changed.

The San Francisco transmission corridor (5-115kv, overhead line, 1-60kv overhead, and 1-230kv underground line) is not capable by itself of supplying area load via imports. Thus, Hunters Point and the Potrero facility (1.3 miles north of HP) are required at various times to meet load: Potrero is one of the facilities being acquired by Southern.

Elimination of must-run status will require one of three types of projects: new generation, transmission upgrades, or a relaxation of reliability criteria. It's my understanding that Potrero Unit 3 (207 MW) and Hunters Point Unit 4 (163 MW) are generally sufficient to meet the San Francisco Area Transmission Operating Criteria. Thus, any generation capacity expansions at Potrero could place Hunters Point's must-run status in jeopardy.

In summary, I think it's probably worth discussing, but I would consider this a longshot. It may be worthwhile to talk to Southern as well to get a better understanding of what their repowering plans are.

In summary, the value of this facility will be determined by must-run economics and length of time under must-run status.

February 9, 1999

• To: Drehn
• From: Brad Porlier [Duke Energy]
• cc: Jim Donnell, Keith Head
• Subject: David Malcolm Plan

As you know, David Malcolm is pursuing opportunities with DEPS for certain kinds of acquisitions that have attributes much like South Bay. The discussions with Rick Duszynski and the mayor of San Francisco have already commenced about the PG&E Hunters Point plant. Malcolm is expanding serious time and resources to execute this plan. His ability to bring legitimate deal flow to us should not be underestimated. A transaction like Hunters Point could close in late 1999. Some of the possible transactions will be in the eastern US as well as the west. I am overdue in calling Malcolm about the details of Hunters Point and the development agreement with DEPS. Before we let Malcolm know that Rick has left the company, we need to ensure management is behind the plans and that we are clear on how and who will interact with Malcolm. If he senses that DEPS is losing interest or there is no longer high level sponsorship in DEPS, he will certainly take this to one of our competitors without hesitation. I will call you ASAP to discuss.

February 14, 1999

• To: David Malcolm
• From: Tawfiq Khoury
• CC: Jason Khoury, Brian Khoury, Noelle Khoury
• Subject: Public Benefit Power Corp. LLC

David: First of all, Richel and I are grateful to you and Annie for your friendship. I told you before, and will repeat, that if I understand your deal with Duke correctly, you probably do not need to include anyone else in your ownership. The fact that you decided to include is prudent judgement on your part. The fact that I was your choice, out of many potential backers, is appreciated, not only for the profit opportunity, but because it gives me, and hopefully one or more of my children, the pleasure of working with you on a challenging series of projects. Further down the road, one or both of your children can hopefully do many ventures with one, two or all three of mine. With both of us guiding them, and eventually you after I can no longer carry on, it will be a great association, with capital and contacts all around the world. I had hoped to do that with Lee, but, as we got going, I realized that it was best to conclude the one deal I had started with him, and no more. Fortunately, it worked out, and we parted ways in a peaceful fashion at the end. I also told you that whatever deal you propose is OK with me, and I will not negotiate it. Therefore, what follows are a series of questions, some of them with a proposed solution, others needing answer from you, and one major one that I don't yet know how to solve, but there must be a solution that we can all live with. The issues are:

1. Since Duke will not be an original incorporater, how do we set up the original corp. percentages? One possible way is that you start out with 100% ownership. We loan you the 100,000 needed via a nonrecourse note secured only by your stock in the LLC. The note will carry an interest rate of say 8% and a one (or longer?) term, and an additional consideration allowing us to buy up to 10% of the shares for $100 during the lifetime of the note. You may have other thoughts.
2. Loan LLC up to $400,000. This again will be a note that is the obligation of the Corporation and will carry the same interest rate, but what term? Since I do not know the timing of the LLC's receiving any cash income, am not sure as to the duration here.
3. When a transaction is signed, LLC can borrow an additional $300,000. Although I am not objecting to that, I don't know why it will be needed. Perhaps a better understanding on my part of the anticipated cash inflow/outflow is needed. Such a quick and rough projection and understanding will help answer not only this point, but #2 and #4 as well.
4. Your compensation: more than reasonable figures and terms. Again, the cash flow outline referred to in #3 above will explain the timing of the deferred portion and how it relates to repayment of the corporate notes.
5. This one is the hardest, and so far I have not come up with an answer. How do we mechanically go from a 10% ownership to 5%? Although I am not objecting to the concept, I am not sure I know how to do it, without major tax consequences and/or a major loss in our interest given your plan to go [public] after 10 or so deals (a concept with which I fully agree.) Factor one other requirement here as well: at some point, you will have to give stock options to your key people, be it Jack and Steve's guy and whoever else is deserving. How will you do that? Am thinking loud, but perhaps after 2 deals, the company buys back 3 or 4% from us at some multiple, payable either in cash (if the cash flow allows that), or a preferred that can be convertible if or when the company is publicly held. I mentioned 3 or 4% not to renegotiate your numbers, but to account for the ongoing 10% ownership in the first 2 projects, and preserve that additional or differential 5% we had earned on the first 2. If some variation of this idea works, the LLC will have corporate stock to use for options without further diluting your ownership. As I said, these are thoughts and questions, not answers. It is still your deal. We would like to be included, and can bring "value added" in tangible and intangible ways besides the initial investment. There are only 2 minor points to mention. As now, I don't see where that should come in to the picture. The other point is that of course I will not draw any salary, but in some instances there may be some fairly substantial expenses which should be reimbursed by the LLC, and which you will have known about in advance; but you know how the game is played, so you understand that. Let me know your thoughts. Hope I did not put anything down here that you find objectionable. Good luck in Houston. Please keep me posted. Love to Annie.

February 14, 1999

• To: Tawfiq Khoury
• From: David Malcolm
• RE: Public Benefit Power LLC/Duke Agreement

Proposed answers:

1. You lend $100,000 with stock of LLC as security. You have right to trade note and $1 for 10% of stock in LLC during two-year period.
2. Your loan of $400,000 will have a two year due and payable clause with 8% interest. Corporation will sign note.
3. The additional loan of up to $300,000 can only be called if there is a signed transaction. Timing of a transaction is as follows: 60 days due diligence then 4 months for escrow. The So. Bay transaction will close first of April but the $5,000,000 nonrefundable went up in the first week of December. It is my hope that we will be spending legal fees on more than one transaction due to timetable. In a perfect world the LLC will have several signed deals which will require more than the $800,000 outlined above. This will be a great problem to have.

My first thought on the ownership issue was to have an option to buy back 4% for $3,000,000. After much thought, I think dropping the issue is best. We should address the issue of selling the company. I hope nothing happens to either one of us but a buy/sell agreement should address the issue. I'm open to any thoughts.

All expenses you incur for the LLC will be reimbursed.

The So. Bay transaction had 3 Port attorneys plus outside legal fees of $300,000. I would expect legal fees in the $200,000-$300,000 on the first transaction plus ongoing expenses of $30,000 per month until a deal is signed then additional staff will be needed.

In the So. Bay transaction, Duke will reimburse the Port for all expenses at close of escrow. I plan on asking Duke for the same provision in our agreement.

February 16, 1999

• To: Patty G., Mayor Willie Brown's Office
• From: David Malcolm

see attached

Patty, I need Willie to:

1. Order SF PUC to sign agreement protecting my ideas with Duke Energy.
2. Decide if he wants SF PUC to make money on deal. If he does then the plant must stay up longer. I would advise against this because everything done is public record and the press will blame Willie for extending the life of the plant.

FYI -- Duke and I are the ONLY people who have bought a plant in the State of Ca. with the goal of decommissioning. The following Cities have tried and failed.

a. SF

b. Huntington Beach

c. Carlsbad

d. Morro Bay

e. Moss Landing

f. Ventura County and the list goes on.

We can get this plant down with a financial guarantee from Duke. 90 billion company.

February 17, 1999

• To: Tawfiq Khoury
• From: David Malcolm

I hope you got my e-mail with the answers to your questions.

The meeting with Duke went great. We are proceeding with the SF deal and we'll hopefully sign an agreement shortly. Duke's president directed their attorneys (they were in the meeting) to get an agreement signed between Duke and Public Benefit Power ASAP.

I'm presently in Texas and will be back in SD late Thursday night.

February 17, 1999

• To: Bob Weisenmiller
• From: David Malcolm

We need to talk about Port and a few other opportunities. I'll be in the office on Friday. Please call.

March 20, 1999

• To: Tawfiq Khoury
• From: David Malcolm

We won every point with Duke. Final documents will be sent on Monday and I'll sign them on Wed. when I get home from Washington.

After I see each site in D.C. area I'll let you know what I think.

Jack said deal is off but I set up a meeting for next week with Sol and a new buyer. I'm not sure what to do with the investment. I do however like Safeskin in the mid 7's.

Hope you enjoy your trip.

March 28, 1999

• To: Tawfiq Khoury
• From: David Malcolm
• RE: Public Benefit Power -- (PBP)

As I stated earlier, the new site in Alexandria, Virginia is great. The Mayor and City Council seem to support our efforts. I'm meeting with the mayor the week of the 5th to get his approval on an exclusive negotiating agreement.

Duke is flying into San Diego Tuesday to meet with me on SF, Alexandria and a game plan for the US. The gentleman I started the negotiations with at Duke has been replaced. I met his replacement when I was in Houston and he seems very supportive. They have been moving very slow so I hope things will improve with management now in place. I'll let you know how the meeting goes on Tuesday.

You have heard me talk about Ethan Penner before. The Pritzgers and Penner want to team with BPB. I would like your thoughts on having hem as the financial partner vs. Duke. I'm sure the first thing every mayor would think is the property might be redeveloped with a Hyatt. It will also allow us to bid different power companies against each other.

I would like to talk you about the above. If we can set a time after the Tuesday meeting with Duke I would appreciate it.

Hope you are having fun.

March 31, 1999

• To: Jim Donnell, Keith Head
• From: Brad Porlier
• cc: Stephen Schaefer
• Subject: PBP

Had dinner with David Malcolm to discuss H Point. We also discussed a possible plan to shut down South Bay early and we will need to run the numbers on this. It may have some possibilities. Chula Vista and the Port are lining up to support a plan on the site, which is obviously our best prospect. Senator Peace is involved as well.

Today he said that the mayor of Alexandria, VA, requested a meeting Monday am and requested that we attend. This is related to the PEPCO Potomac plant that Keith and I discussed. Assuming I attend the DC meeting, I would plan to take Malcolm up to Bridgeport to look at new and old plants side by side. He will someone from Chula Vista meet us for the tour. (Maybe the mayor.) We need to continue to warm up people to the new plant concepts since most have little appreciation for what we are talking about.

I would like someone to give us a good tour at Bridgeport. Suggestions? Other recommendations?

April 22, 1999

• To: Brad Porlier
• From: David Malcolm

When you're in San Diego you should call so I can show you the PBP office. Today I mailed you the signature page of our agreement plus a proposal on the South Bay Plant.

After you review everything please give me a call.

May 6, 1999

• To: Keith Head, SH
• From: Brad Porlier
• Subject: San Diego Trip

We should probably try to see Malcolm at the PBP offices during that trip. Let's discuss. I have heard nothing from him about Hunters Point for a long time.

What is happening on Alexandria? Have we lost the momentum/relationship with him?

June 4, 1999

• To: Brad Porlier
• From: David Malcolm

I got both your messages.

I have a meeting with the top PUC commissioner on Wed the 9th @ 10:00AM in SF. The Mayor set up the meeting so I have high hopes. If he gives the go ahead, I'll call you to set up a meeting with SF PUC staff. We need staff to sign an exclusive agreement with us before we show them how we might make the deal.

I'll call after the meeting.

We also need to talk about South Bay. I think you are missing an opportunity. If you are out this way call me so we can get together.

July 30, 1999

• To: Richard M. Sherrill
• From: David Malcolm

Thank you for taking the time to discuss the relationship between Duke Energy and Public Benefit Power with me. It was extremely impressive how quickly you understood the financial benefits for the incumbent power company under our purchase plan. Your commitment to help look for other opportunities using this business plan is greatly appreciated.

There remains an opportunity to build a new plant on the South Bay site in San Diego. Like all transactions, timing is extremely important. I will arrange meetings with Senator Peace, ARB and ISO at your convenience.

I look forward to hearing from you soon.

September 3, 1999

• To: Keith Head
• From: David Malcolm

I promised a white paper for the Mayor and Congressman no later than today. You told me that your people are reviewing the documents. I would like to know what that review produced. I have called several times with no return phone call.

If Duke has lost interest in Alexandria that is your right, but please let me know.

P.S. When Richard wanted a meeting with Senator Peace next week, I had Steve cancel an important meeting to accommodate Richard's request. I could use the same help.

October 25, 1999

• To: David Malcolm
• From: Brad Porlier

If you are in S Diego on Fri on Nov. 5, I would like to come by to discuss where we are on South Bay details. Are you available?

October 26, 1999

• To: Brad Porlier
• From: David Malcolm

Yes Friday is ok except I have a 9:30 meeting. At 6:00 p.m. I have another meeting with Mayor Willie Brown (San Francisco). You are welcome to join Steve Peace, Willie, and I if you want.

November 22, 1999

• To: Brad Porlier
• From: David Malcolm
• Subject: CEO

Do you need me to do anything for next week's visit to SD? Do you need Steve Peace anywhere? Let me know.

December 14, 1999

• To: LC, Tawfiq Khoury
• From: David Malcolm
• Subject: Update

Duke has agreed to meet the week of Jan. 10th to sign an agreement on the replacement plant for the South Bay. The terms are as follows:

They will pay PBP $25,000 per month, 10% of savings/success fee which should equal $3,000,000.

The D.C. deal is moving forward but slowly. We should know by the end of the year if we are going to make this transaction.

January 3, 2000

• To: Brad Porlier
• From: David Malcolm

I had a great meeting with U.S. Filter (They are the largest desalinization operators in the world, so they say). The Chairman and I then had dinner with Senator Peace, and he likes the idea of the new plant + desalinization. The Chairman and I then had dinner with Governor Davis, and he said he will do everything he can to help. I'm eating too much at these dinners!!!!!!!

When do you want to sit down and finish our agreement?

Happy New Year.

January 3, 2000

• To: David Malcolm
• From: Brad Porlier
• cc: RS, William Hall III

Happy New Year to you. The discussion with the Governor sounds encouraging. Perhaps the 13th or 14th or more likely the week of the 24th. What does your schedule look like?

February 14, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: South Bay

Thanks for the dinner in SF. Were you going to give me a written proposal? There was a front-page story in Sunday's paper that said we need more power plants or we might go dark in San Diego.

February 16, 2000

• To: Stephen Schaefer
• From: David Malcolm
• Subject: DC

Thanks for taking care of the legal bills.

My good friend is a cabinet member in El Salvador, and he says Duke is there. If I can help let me know we are really close. The President made him the Sec. of Trade and Commerce.

February 18, 2000

• To: David Malcolm
• From: Brad Porlier
• Subject: Re: South Bay

Sorry I have been out of touch. Had a family medical emergency so I am spending several days in Arkansas with my parents. We can draft a proposal and I will call you next week to discuss that item and our plants to get the ball moving forward.

March 5, 2000

• To: Larry Cushman, Tawfiq Khoury
• From: David Malcolm
• Subject: Power Plants

This is an overall update.

Washington, D.C. Plants. We are trying to acquire 2 plants within the District of Columbia. While we have the mayor's and city council's support, the seller Potomac Electric Power Company (PEPCO) does NOT want to enter into any transaction until they complete their auction process for their 5 other plants. This has pushed everything back until late spring early summer.

Alexandria, Virginia Plant. While we have a contract with the City of Alexandria we were unable to convince PEPCO to remove this plant from the auction process. Duke is bidding for the plant in the auction. If they are the winning bidder, we will team with the city and Duke to close the transaction. We will know in late April if Duke is one of the final three in the auction.

San Diego. Duke has a requirement to decommission the Chula Vista power plant and rebuild a new power plant in San Diego. The City of Chula Vista wants the replacement plant built on the present 150+ acre site. A new plant will cost $300,000,000, use only 15 acres and generate $3,000,000+ a year in property taxes for their redevelopment agency. We are very close to a contract with Duke.

San Francisco. I have a meeting on the 14th that should decide if we can proceed with the purchase of this plant.

Diablo Canyon. PG&E's chairman asked to meet with me several weeks ago. Steve Peace attended the meeting to discuss Public Benefit power's unique acquisition model. PG&E suggested that our model fits perfectly with their desire to liquidate Hunters Point (our pending San Francisco deal). They also thought we might be of help in their Diablo Canyon Plant. They want to use our model to sell their excess land around the plant (11,000 acres) in San Luis Obispo. It turns out that the new planning director for the county served 7 years with me on the Coastal Commission. I have spent several days recently in San Luis Obispo and believe there might be a deal for us. Mark Kelton (Larry, I'm sure you know him) has a few projects in the area and has been very helpful.

Florida. It looks like the legislature will NOT pass deregulation this year. The following are key plants for us. Three plants are great, Fort Lauderdale, Miami, Tampa. West Palm Beach has potential but the land is not nearly as valuable as the other three. We have now visited every plant in the state.

Georgia. We have looked at every plant in the state. There is one great plant and that is Savannah. The legislature is trying to pass deregulation this year.

North and South Carolina. We have looked at each of the over 80 plants. There are NO plants worth pursuing.

Texas. We have looked at all plants that are scheduled for deregulation. There are no plants that meet our guidelines.

Michigan. We have looked at every plant and there are none that fit our guideline.

April 17, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: South Bay

We have a meeting with John Robertis, ex-director of the Water Quality control Board (WQCB) Tuesday the 25th at 4:30 p.m. I'll set up the meeting with the air board for the morning of the 26th.

April 19, 2000

• To: David Malcolm
• From: Brad Porlier
• Subject: Re: South Bay

Great. Is he ex-director, and if so what is his position with the water board now? I think just the air and water meetings are fine for this week. Based on what they say we can solidify the plans and get moving.

April 19, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: South Bay

Wed at 8:30 at Supervisor Cox office with the director of APCD. Do we need to have other meetings other than air and water?

April 20, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: South Bay

The presentation is good but do we want to have to separate presentations, one for water and one for air? My concern is will the air authority be less likely to approve our request when they know we are asking for water waivers?

Or maybe it's best that everyone knows everything up front as your presentation suggests.

April 20, 2000

• To: David Malcolm
• From: Brad Porlier
• Subject: Re: South Bay

We will not number the pages and therefore can pull them out if need be. I think that the air people will not concern themselves with water matters so I tend not to be too concerned.

April 21, 2000

• To: Brad Porlier
• From: Thomas Guthrie
• Subject: In San Diego

Brad, Pat Barnes was setting up a conference call next week with David Malcolm so that we could get him involved with Rule 69 and help us with EHC. She found out that you and David were going to talk to the Air District and the Water Board next week. David was reluctant to share what the meetings were all about with Pat and since she didn't know about them, it caught her off guard. (David did share the purpose of the meetings.)

I'm concerned that when the development people are talking to people in the community and we don't know about it, it doesn't leave a good impression of Duke Energy. The reason is that as I or Pat talk to people in the community (Greg Cox, the regulators, even David Malcolm), they know more than we do about what is going on with development. Just knowing you are in town is a big help as we talk to people in the community. When someone from Duke is in town, Pat or I will hear about it whether we are told or not.

Is there some way you can give us a heads up when you are in town and talking with someone about development? If there is something you don't want us to know, I can respect that. Just letting us know would be a tremendous help in dealing with the community.

April 23, 2000

• To: Thomas Guthrie
• From: Brad Porlier
• Subject: Re: In San Diego

Tom: This is totally my mess up, and I forgot to cut you in. Nothing intentional and I will try to do better. My apologies to Pat and you. We are having a meeting with John Roberts at the Water Board on Tuesday afternoon at 4:30 and with Supervisor Cox/APCD on Wed a.m. at 8:30. You and or Pat can come. Malcolm, Seedall and I were meeting with both, especially the water people to talk about accelerated replacement and what that might mean to the, their issues, etc. Thermal discharge in a similar configuration to today's plant is the real topic we are most interested in getting feedback. I have attached a handout for use at the meetings. We were going to come to the plant on Tues afternoon before getting with Malcolm. Mark and I also plan to have dinner with Bill Keller with Sempra to discuss the history of South Bay repowering and the water situation. You are welcome to join us. We are seriously discussing a joint venture 500 MW plant in Mexicali on their proposed pipeline from Yuma to the West Coast.

Let me know if you want to attend any of these meetings. Sorry for the lack of coordination.

June 9, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: South Bay

Sen. Peace has assigned his top utility guy to work out the money Duke needs for early decommissioning. He would like us to meet in Sacramento. Please advise on dates.

June 12, 2000

• To: David Malcolm
• From: Brad Porlier
• cc: MS
• Subject: RE: South Bay

The next few weeks are not available. I would say perhaps June 29 to pencil in at this point.

June 13, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: Re: South Bay

I have an all-day Port retreat on the 29th. How about the 28th or 30th?

June 14, 2000

• To: David Malcolm
• From: Brad Porlier
• Subject: RE: South Bay

June 28 is better for me. And we need to meet with the Port, we are way overdue on this, perhaps with you on 27th or 28th?

We are starting to mobilize some of our team on S. Bay. Pillsbury Madison is engaged now. When you get a chance please give me a call to discuss the cooling for the plant.

June 21, 2000

• To: David Malcolm
• From: Brad Porlier
• Subject: Senator Peace meeting in Sacramento

The Senator has called a meeting regarding repowering the 28th of June. We will try to set up the San Diego discussion right after that. I am in Alaska the rest of the week. Let's circle up on Monday. You need to submit us an invoice per the contract.

July 13, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: Agreement

Mark Sebrand told Mark Mathews (reporter) that we have a contract on the South Bay Plant. In fact, we have a contract to help plants throughout the US. Duke's comment on our contract has created a few problems.

Please do not respond to the press.

This will go away.

July 27, 2000

• To: Brad Porlier
• From: David Malcolm
• RE: Update June/July

Attached you will find a detailed report on the expansion of the existing Enterprise Zone to include the South Bay Power Plant property. As we have previously discussed, this expansion will have a positive financial impact on the feasibility of a new plant.

I have had discussions with the following:

Mayor Horton, City of Chula Vista -- Mayor Horton is a strong proponent of expanding the Enterprise zone.

Mayor Golding, City of San Diego -- Mayor Golding is willing to consider the expansion but wants a City Council Committee recommendation prior to taking any formal action.

Councilman Vargas, City of San Diego -- Councilman Vargas is one of two councilmen who represent the surrounding property. He strongly supports expanding the Enterprise Zone to include the Chula Vista waterfront.

Councilman Wear, City of San Diego -- Councilman Wear is the other councilman who represents the surrounding area. He also supports the expansion and will take the lead for the City of San Diego.

Julie Meyer Wright, President of San Diego Economic Commission -- Ms. Wright strongly supports the expansion of the Enterprise Zone to include the Chula Vista waterfront. She was formally Secretary of Trade and Commerce for the State of California. As you will note in the briefing paper, Trade and Commerce must approve this expansion. Ms. Wright is also on of Mayor Golding's "Kitchen Cabinet Members." Her support makes this process much easier.

David Roland, City Manager, City of Chula Vista -- The City Manager office has directed the Redevelopment Director, Chris Salomone to provide staff necessary to accomplish the expansion.

Council members Moot and Davis, City of Chula Vista -- While all council members support the expansion of the Enterprise Zone, these members appear eager to take the lead and help expedite the process.

Air Resources Board -- As you may recall, Supervisor Cox continues to support the early decommissioning of the South Bay. I have told him we will update him PRIOR to submitting any plans to the Board.

Water Quality Control Board -- They are waiting for our submittal. The newly appointed members of this board are very reasonable businessmen.

Environmental Health Coalition -- While they continue to support he early decommissioning of the South Bay Plant, their concerns remain the same, water. I still believe their concerns can be addressed and their support, or at worst their neutrality, will be obtained.

Special Note: With soaring utility costs in San Diego, the environment to construct new facilities has NEVER been better. Everyone is saying the only way to lower the utility bills is to build new facilities. With the present outrage over utility bills, it seems Duke would be well served to bring additional focus to the South Bay Plant. Presently you have the Supervisor and Mayor supporting your project. With utility bills doubling and in some cases tripling, the general public is supporting the building of additional plants. You can't imagine the anger the average citizen is having over their utility bill.

Morro Bay/Moss Landing -- As we have previously discussed, I believe you should meet with key California Coastal Commissioners. This will help keep Morro Bay on track. The front page of today's (7-27-00) San Francisco Chronicle B-1 (Lead Story) is about soaring utility bills in San Diego. The article says that next year Northern California will experience the same. Politically, this should help you in developing and repowering these plants. I'll set up the meeting with the Coastal Commissioners the next time you are in San Diego.

August 30, 2000

• To: Brad Porlier
• From: David Malcolm
• The Political Side.

I met with Congressman Bob Filner (D) regarding the South Bay Plant. Congressman Filner represents Chula Vista and wants a new plant built yesterday. I explained the bay water issue and the Environmental Health Coalition's concern. While the Congressman has an excellent environmental record his words were, "Well, EHC is wrong on this issue."

The general public (San Diego) is screaming for relief in their utility bills. Many small businesses will not make it unless action is taken to build new plants quickly. The opportunity to replace the South Bay Plant with a new expanded plant has never been better.

October 26, 2000

• To: Tawfiq Khoury, LC
• From: David Malcolm
• RE: Alexandria/DC Power Plants

I leave shortly for meetings in D.C. I'm attaching portions of the D.C. bill that requires Pepco to negotiate on the D.C. plants (I thought it was included in the monthly statement package).

Congressman Moran, Duke and I are requesting the same language for the Alexandria Plant. We are so close to acquiring all three plants that Duke is sending 4 people to this meeting! But that is nothing; we are sending 50% of our workforce!

November 28, 2000

• To: Brad Porlier
• From: David Malcolm
• Subject: Senator Peace

I talked to Senator Peace after our conference call. He thought that Duke missed "hitting a home run" on your proposal to SDG&E. (5-year fixed-price contract). He thinks you should make an offer that is retroactive to June 2000. The Senator said, "I know that will cost Duke money so they might need a 6 year contract in order to make up the loss created by going back to June."

Steve really believes you can look like a hero and yet change the terms so you don't lose any money.

I promised to pass his thoughts along to you.