Subject: California Update 8/20/01
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Date: Mon, 20 Aug 2001 11:16:18 -0700 (PDT)

EXECUTIVE SUMMARY
?		Legislators Prepare to Address SoCal Bailout Options 
?	$5.7B Revenue Notes Request in State Treasurer's Hands

Bonds & Bankruptcy:

The Edison MOU is expected to be the major issue on the political agenda this week, and the legislative leadership wants to pass some bail-out measure by this Friday (8/24).  While analysts are confident that there will be an MOU passed, many are skeptical that the current proposals will be able to cobble together 41 votes in the Assembly.  The Davis Administration has said proceeds from the November bond sale will be used to repay the $6.2B borrowed from General Fund to purchase energy.  However, repeated delays in the bond sale have caused concern. And PG&E is upset that the money will be first used to pay off the state without offsetting some of the funds the state owes PG&E.

Assembly Republican leader Dave Cox has said that his members will not vote for any plan that is not a clean bailout (i.e. without additional provisions related to environmental mitigation).  Thus, he is essentially saying his members will vote for Assembly Member Rod Wright's proposal, and no other current plan.  But Wright's proposal does not have much support from Democrats.  Sources report that at least one prominent legislator, Senator Mike Machado, has apparently remarked that he is not certain of the need to pass an MOU.  Others may be muttering similar things, but an MOU is still likely.

Strangely, though, no discussions were held at the staff level this week on MOU legislation.  The key driver in the MOU debate is how much of a "haircut" SCE will be required to take (as a hit to the parent company).  Sources report that SCE will accept a haircut of $500M. However, should the haircut be placed in the range of $1B, we are told that SCE's Bryson has informed his team that he would take SCE into bankruptcy voluntarily. This represents a significant turnaround in SCE's previous optimism, which is attributable to legislative indifference to the SCE bankruptcy threat as well as growing tension between Bryson and Governor Davis.  As for the middle range between $500M and $1B, it is difficult to ascertain how high SCE will go before pulling the bankruptcy trigger.

Short Term-Anticipatory Notes

State Controller Kathleen Connell has asked for an emergency sale of a $5.7B short term note (possibly in the form of a Revenue Anticipation Note/RAN) to cover California's electricity costs until November, when $12.4B in state bonds are expected to be issue by the Legislature.  The State Controller's request was made because of her legal obligation to issue a demand to the Treasurer at any time she determines that the General Fund has or will have insufficient funds for the payment of all appropriations by the Legislature.  Connell claims the RAN, which could be offered as early as September, is necessary because the state's general fund is running dry from recent power purchases.  

State Treasurer Angelides is studying the plan, but has yet to publicly comment.  According to sources, he has also yet to comment to legislators, but was in New York last week meeting with people on Wall Street about the bond issuance.  Mandated by state statute, Angelides can issue these notes unilaterally and does not need approval from the Legislature or anyone else.  He has total discretion on the issuance, its timing, and its amount.  However, the state's general fund would not be depleted by November 15th, even without the RAN revenue.  RANs are not that unusual.  RANs were previously issued from FY 95-96 through FY 99-00 with the largest being the $5B RAN in FY 92-93.  Because of California's recent economic growth, RANs were not necessary last year and were expected to be unnecessary this year. 

Concerns surrounding the PG&E suit filed earlier last week (PG&E seeks priority in the $12B revenue bond allocations) are somewhat eased by a well-placed utility source who report that the suit will have little impact the revenue bond or anticipatory notes' issuance.  However, there is suspicion among some that the Administration is increasingly concerned that investor confidence is weakening and that the bond issuance might be deemed a failure, and is thus promoting the idea that PG&E's actions are responsible, rather than investor uncertainty over revenue stream allocation and DWR contracts.  In the event that the revenue bonds' issuance is delayed past the October 31st bridge loan maturity, the interest rate charged to the state would reportedly jump from four percent to seven percent.