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Date: Tue, 5 Jun 2001 19:22:00 -0700 (PDT)
From: kristin.walsh@enron.com
To: john.lavorato@enron.com, louise.kitchen@enron.com
Subject: California Update 6/5/01
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Executive Summary
?=09Edison's MOU Condemned at this Friday's CPUC Meeting
?=09The Idle Plan Z=20
?=09Angelides Hides State Budget Concerns=20
?=09House Committee to Vote on Energy Relief

Edison's MOU Doubtful
The unusually calm settling over the California legislature about SoCal Edi=
son's potential bankruptcy has finally affected the relentlessly optimistic=
 investment bank analysts and other company shareholders.  We have reported=
 that through all plans from B-Z, there is not a solid plan to save this co=
mpany and now executives are even more fearful that this predictions may co=
me to fruition.

Over the last few days, Edison executives have begun pointing hard at the C=
PUC meeting this Friday as a make-or-break event for the company.  The is b=
ecause after the meeting, Davis's MOU plan to buy SoCal's grid will have no=
 chance of preventing a potential bankruptcy.  This plan is essentially dea=
d although Governor Daivs has yet to say this in a press releases.  The fin=
al nail will happen after the CPUC adjourns its Friday meeting without voti=
ng on several necessary MOU provisions.  Unless the CPUC makes a last minut=
e, emergency - amendment to their agenda,  the deal will be dead (despite S=
oCal's support for letting the deal stand past its deadline).  Sources indi=
cate that CPUC President Loretta Lynch holds reservations on the MOU and co=
ntinues to distance herself from Davis. =20

Attempting to influence policy making, Edison executives have spent the las=
t few investor phone conferences warning that June 8 would see substantiall=
y increased risks for a creditor-induced bankruptcy if the Davis plan dies =
at CPUC.  This is interesting, since no one else seems to have been focused=
 on the date until Edison began mentioning it late last week.  However, the=
re is no more or less threat of bankruptcy than there is now or will be in =
two weeks.   As reported several times earlier, most everyone had given up =
on the MOU long before this Friday's CPUC meeting.

Plan Z Shows Little Progress
Meanwhile, the unhurried pace toward a Plan Z that we reported last Friday,=
 has gained little progress.  Legislators continue to pin-point a plan that=
 will secure re-election votes and at the same time, weigh the need for rat=
e hikes for California's corporate and home electricity users.  As they has=
h it out, the state is spending even more on electricity purchases.  In spi=
te of better than expected levels of conservation, the state's electricity =
expenditures over the last month rose to an average of $79M/day. The recent=
 rate increases mean more spending by the state and that calls into questio=
n the reassuring Angelides scenario for California's budget prospects later=
 this year.

The California Budget Crunch
Even more worrisome than a idle Plan Z is increasing evidence that last mon=
th's conference call with State Treasurer Angelides was a little misleading=
. During that conference call Angelides claimed that State Comptroller Conn=
ell and many in the financial committee had the numbers wrong.  Angelides a=
rgued that $7.2B already spent to buy power since January was really the to=
tal amount of authorized spending through late August.  In fact, he said on=
ly $4.3B of that had been "spent."  Sources now indicate that  Angelides wa=
s technically correct if you use "spent" to mean only the amount of money f=
or which checks had been written.  This is different than the amount of mon=
ey California had already promised to energy suppliers who had already supp=
lied energy to the state.  In fact, when Angelides was speaking the state h=
ad in fact already promised to pay $7B for energy it had already consumed (=
the total committed has topped $8B.)  By the time the state gets its "power=
 bonds" auctioned in August, they will have already spent all $12B and be b=
ack to dipping into the General Fund.   The idea of RANs being auctioned be=
fore the power bonds get issued is still an option if the general fund does=
n't make it to August.=20

The nearest answer to both of these cash flow deficits lies in part in the =
painful process that the legislature is undertaking now - another round of =
huge electricity rate hikes to securitize debt issuance.  Then the hope is =
that those hikes bridge the gap between now and when new capacity brings wh=
olesale rates down and the debts can be repaid.   The only near term path t=
o bringing generating assets on line immediately is the 3,500 MW from QF pl=
ants which are off line because of cash flow problems.  Settling their need=
s is wrapped up in settling the PG&E and Edison trade creditor issues, whic=
h makes the legislature's leisurely approach to the rate hike/haircut situa=
tion all the more troublesome.

Energy Relief
The House Energy & Commerce Committee is scheduled to vote on H.R. 1647 (th=
e Emergency Electricity Relief Act) tomorrow at 10:00 am.  The bill which w=
as twice postponed and does not include any provisions on price caps, but d=
uring the course of the mark-up, sources indicate that it is possible, even=
 likely, that a Democrat could offer a price cap amendment.  Rep. Waxman (D=
-CA) offered a price cap amendment at an earlier mark-up of the bill at the=
 subcommittee level.  The Waxman amendment was rejected along party lines (=
all Republicans and 2 Democrats voted nay).  Sources inside Joe Barton's of=
fice report that staff and members have been meeting to work out a compromi=
se on the price cap issue, but nothing has been resolved. As of this aftern=
oon, those discussions have been terminated in favor of an open discourse i=
n the Committee tomorrow.  Since an agreement was not reached, compromise l=
anguage is not expected to be offered as an amendment tomorrow.  If it is, =
it would not be something that leaders on the Republican and Democrat sides=
 have crafted together and therefore would not likely pass.  Sources indica=
te that the committee does expect Waxman, and possibly others to offer pric=
e cap language, but it is not expected to pass.

