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Date: Thu, 14 Jun 2001 19:59:00 -0700 (PDT)
From: kristin.walsh@enron.com
To: john.lavorato@enron.com, louise.kitchen@enron.com
Subject: California Update 6/14/01
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EXECUTIVE SUMMARY
?=09Bankruptcy Fears Mount With Absent MOU or Plan B=20
?=09California PUC Wagers the Promise of QF Payments=20
?=09SoCal Ring Fencing
?=09California Budget having Problems

Bankruptcy Fears & Plan B=20

Sources are becoming more pessimistic regarding the prospects for a state b=
ailout of SoCal.  At this time the negotiations on Plan B appear to be in d=
anger of falling apart.  The governor's efforts to position the legislature=
 to take the blame if SoCal files (due to lack of movement on the MOU) and =
Senator Burton's hostile response that the governor is the one responsible =
for delays is a sign that sentiment toward working for a bailout may be dis=
appearing.  It now appears more likely that a Plan B alternative to the MOU=
 will not be reached due primarily to a failure to achieve consensus on how=
 to spread the burden of the dedicated rate component.  This could likely l=
ead to a SoCal bankruptcy filing in the foreseeable future and as sources n=
ote, parties to the crisis are not optimistic about reaching a deal. =20

CPUC Moves to Pay QFs
According to media reports on the CPUC QF payment plan, SoCal's payments to=
 QFs are contingent on the legislatures' approval of the MOU.  In a move to=
 publicize their cooperation and facilitate this process, today the CPUC pa=
ssed three of the four MOU provisions set by Davis/SoCal Ed negotiations an=
d promised to examine the last provision at their June 28th meeting.  Thus,=
 with the CPUC posing no hindrance to stabilizing SoCal Ed., the legislatur=
e will bare the burden of debating the MOU or Plan B.  Sources report that =
if it appears that no legislative solution can be achieved, the QFs could f=
ile involuntary bankruptcy against SoCal.  Yesterday's decision raised the =
state's price cap on the QF's substantially, and ought to help increase pro=
duction.  So once again, price caps have kept crucial power generation asse=
ts off the market.  Sources note that the QFs contracts with SoCal now have=
 cancellation clauses built into them in the event of SoCal filing involunt=
arily- this is something the QFs learned from the experience of PG&E's fili=
ng and Judge Montali's subsequent rulings.  The financial question about th=
ese payments to QFs is less whether they will in and of themselves bankrupt=
 Edison, than it is whether other creditors force Edison into bankruptcy ra=
ther than see that money leave the building. The sums in question are not h=
uge, an absolute maximum of $50 million, but we are told some bondholders m=
ay well consider $50 million to be a sum worth fighting for.

Ring Fencing

Edison International (EIX) has issued a $1.2 billion bond via its Mission E=
nergy subsidiary, proceeds of which will be used to pay off certain credit =
lines with banks. Sources report that paying off these credit lines will ne=
gate cross-default clauses in those lines, and insulate EIX from the effect=
s of a bankruptcy at Southern California Edison. This is exactly what PG&E =
did a few weeks before filing Chapter 11, and has further convinced a lot o=
f people that the game plan at EIX includes letting SCE file and restructur=
e in bankruptcy rather than outside of it. Sources comment that when Judge =
Montali approved large bonuses for PG&E senior management after PG&E's fili=
ngs, it made Bryson and members of his team "reconsider" the merits of bank=
ruptcy. =20

California State Budget:

Day-to-day stress relief notwithstanding, the California state budget is st=
ill a shambles. More than $8 billion has been paid to power generators, dep=
leting a political treasure chest which was going to be doled out to specia=
l interest groups for years to come. The only hope for the state comes from=
 the issuance of $12.5 billion in "Power Bonds." Financial market participa=
nts are still questioning whether the State of California is illegally decl=
aring itself to be a senior creditor of the one (soon probably two) bankrup=
t utilities. By declaring that CPUC rate hikes be directed first to holders=
 of "Power Bonds" rather than general creditors of the utilities, the State=
 is saying that the money they spent buying power "on behalf of the utiliti=
es" is a senior claim. The state Treasurer Phil Angelides has given repeate=
d assurances that this is so, and will likely do so again in a conference c=
all next Tuesday, but concern about this opinion reportedly dampened enthus=
iasm for a $1 billion G.O. bond California issued this week. One highly res=
pected Sacramento columnist said this week that the "Power Bonds" are no be=
tter than 50-50 to get issued at all.
