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Date: Thu, 15 Mar 2001 19:55:00 -0800 (PST)
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Subject: California Update 3/15/01
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Executive Summary
?=09Davis might concede to rate hikes for future power consumption but not =
for past utility debt
?=09Davis and PG&E negotiations at a standstill, sticking point is net shor=
t for PG&E this summer=20
?=09As the days go on with no word of a secured deal, involuntary bankruptc=
y chances increase significantly among small generators and QFs
?=09FERC would probably approve transmission deal but with several conditio=
ns for California

California Public Utility Commission Rate Increases=20
Today may be the turning point as the CA PUC reviews the size of the Depart=
ment of Water Resources  (DWR) rate increase to be passed along to consumer=
s on their electricity bills.  Until now, Davis has considered rate hikes t=
o be political suicide, but there may be some relief for him from consumer =
groups.   Sources indicate that one of California's main consumer advocate =
leaders may tolerate rate increases for future power consumption, but remai=
ns adamant about not raising rates to cover past utility debt.  DWR, which =
is currently buying power on behalf of the state, needs more income to secu=
ritize the planned $10B bond issue that is key part of Davis' plan to sign =
long term power contracts.  As DWR continues to spend $40 to $60 M every da=
y on power purchases, a well placed source informed us the DWR is essential=
ly bankrupt.  It currently has no money for normal activities such as order=
ing supplies, purchasing new equipment, etc.  The Department of Finance is =
forwarding DWR money from where ever it can (parks, other programs) to purc=
hase power, but DWR's hands are tied until revenue bonds are issued.  The C=
alifornia State Treasurer Phil Angelides will be submitting a recommendatio=
n on rate increases in order to secure revenue and cover $10 billion worth =
of state bonds.=20

Davis & PG&E at Odds=20
Sources report that Davis and PG&E negotiations are facing two difficult ch=
allenges: 1) PG&E wants 2.9 times book, which is far more than consumer gro=
ups recommend for the sale of its transmission lines (SCE accepted 2.3), an=
d 2) PG&E needs relief from Davis for PG&Es legal responsibility to be the =
ultimate power purchaser for the state, and at this point Davis wants to li=
mit further state energy power purchases (especially for summer).  The util=
ities refuse to sign a deal which will leave them billions of dollars furth=
er in the red ($3 to $4 B) and PG&E may declare bankruptcy for their utilit=
y subsidiary if Davis tries to force the issue.  Additionally, Davis is bei=
ng hounded by the press and Harvey Rosenfield to publish details of the sta=
tes' 40 long-term power contracts; a measure that if accomplished would pro=
vide Davis with even less negotiating power.

With all this activity, Davis is starting to lose support in the state legi=
slature.  Sources report increasing tension between the Governor and State =
Senate President Pro-tem John Burton.  Burton has just announced a special =
Senate Committee will investigate the generators for evidence of price mani=
pulation, and the State Auditor is also planning an investigation.  Davis i=
ncreasingly realizes he has to protect any deal he signs against being pick=
ed apart by the legislature and consumer groups later.

QF's Most Likely Source of Involuntary Bankruptcy
Sacramento insiders fear that a group of small generators will lose patienc=
e and force bankruptcy on the utilities.  SB 47X may have been California's=
 Qualified Facilities last hope at avoiding an involuntary bankruptcy filin=
g against PG&E, SoCal Ed, and SDG&E.  The bill designed to cut the QF's cos=
ts and provide them with a better rate structure is being held up in the St=
ate's senate.  Sources indicate that a filing could come at anytime and fur=
ther investigations are underway to ferret out the most likely candidates.

Out with Hebert, In with Wood
The Bush administration favors replacing Hebert, Jr. with Texas PUC head Pa=
t Wood.  There is an intense battle behind the scenes between Senate Republ=
ican Leader Trent Lott , who favors Hebert, and President Bush, who wants W=
ood.  The administration would prefer Wood because they do not want FERC to=
 pick a fight with Davis which means Bush might ultimately lose some wester=
n states in 2004.  In effort to tone down the recent press reports, Hebert =
has made several token concessions to California, including $69 million wor=
th of power refunds and streamlining the federal permitting process for pip=
eline and power plant installation. =20

It's is expected that FERC would most likely approve any transmission deal =
that Davis could complete but with a list of conditions.  Some conditions m=
ight include bring the lines formally into the regional grid system as well=
 as other elements to pave the way for more dramatic Administrative actions=
 in the West next year.  The Bush Administration is opposed to price caps a=
nd believes in free market solutions.  The Administration is also consideri=
ng whether it might be a good idea to privatize Federally-owned assets such=
 as BPA.


