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Date: Tue, 29 May 2001 14:31:00 -0700 (PDT)
From: kristin.walsh@enron.com
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Subject: California Update 5/29/01
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Executive Summary
?=09California Treasurer Angelides Sets Dates for Bridge Loans & Bonds
?=09California's Supreme Court May See Challenge to "Plan B"

Angelides on Bridge Loans and Bonds
CA Treasurer Angelides has said that beginning 15 August, the state will se=
t up a bridge loan.  The revenue bonds will not be issued until September o=
r October.  Angelides is not concerned about a cash crisis in July or Augus=
t.  However, he is quite worried about problems with cash flow in October a=
nd November.  This is based on calculations he has done with numbers from t=
he DWR and from other parts of the government, not on payment terms for pow=
er.  He fears there will be a cash management problem.

California Supreme Court to Challenge "Plan B"
California Attorney Michael Sturmwasser is expected to challenge "Plan B" b=
efore the California Supreme Court on the basis that it results in a retroa=
ctive rate increase and that it removes the PUC's authority to review power=
 purchases.  This is because "Plan B" enables SoCal to collect a dedicated =
rate component to pay both its undercollect and its expenses going forward.=
  SoCal (and PG&E) would have to be guaranteed this dedicated rate componen=
t to be able to operate going forward and remain credit-worthy.  This takes=
 the burden of financing the energy crisis away from the state and off the =
state's balance sheet, a key goal of lawmakers.  However, at the same time,=
 it also abrogates the PUC from its responsibility to review power purchase=
s.  The state cannot give the utilities a blank check (in the form of a ded=
icated rate component) to operate without taking authority away from the PU=
C.  According to the California constitution, the legislature can add to th=
e responsibilities of the PUC, but it cannot take away powers from the PUC.=
  At the same time, ratepayers will be paying an additional surcharge for p=
ower that they have already used.  Sources describe Sturmwasser's case as "=
arguable"; in other words, it has a fair chance of succeeding.  However, re=
gardless of whether the challenge succeeds or fails, it is very likely to c=
loud the issue of the bail-out and significantly deflate the prospects of t=
he Plan B.

If FERC were to impose cost-based controls on power prices, sources believe=
 it might "go a long way toward avoiding these problems."  Were this to hap=
pen, the PUC could declare FERC's rates "just and reasonable," which would =
likely greatly lessen the crisis and keep SoCal liquid.  However, such meas=
ures by FERC require significant lead time.  Sources state that "the state =
needs to tease the feds into doing this."  This can be done by conducting s=
tudies to obtain current cost data and update the data FERC would use for d=
etermining the cost controls.  Sources report that this process of "teasing=
" FERC has not yet started.  This is chiefly because California politicians=
 are focused on flat price caps, which FERC is very unlikely to impose.  It=
 appears the state is asking FERC for the wrong measures, which is delaying=
 the process.  The only way for the state to avoid these constitutional iss=
ues would be for the state to purchase the utilities, as municipal entities=
 would not be subject to PUC regulation.  However, there remains very signi=
ficant opposition to this idea, especially on the Republican side.  A state=
 purchase of the utilities would likely only gain momentum once Plan B bega=
n to fail for the reasons cited above.  Additionally, a state purchase of t=
he utilities would be less expensive were both utilities in bankruptcy.

Sturmwasser is a partner at Sturmwasser & Woocher, a Santa Monica law firm.=
  (His offices are on the top floor of the tallest building in Santa Monica=
, overlooking the beach.)  He has been a utilities lawyer for over 30 years=
.  His clients include the consumer advocacy group TURN (Toward Utilities R=
ate Normalcy), among others.  Sturmwasser will reportedly look for funding =
to support the legal challenge, but if he cannot find money elsewhere, he w=
ill likely be able to support it out of his own pocket.

