Subject: California Power 1/15/01
From: [email-masked]
To: [email-masked]
Cc: [email-masked]
Date: Tue, 16 Jan 2001 00:02:00 -0800 (PST)

Vince- Kristin mentioned that you might be interested in receiving our daily 
updates on the California situation.  Hope that you are doing well and let us 
know if you require any additional information.

RJ
---------------------- Forwarded by Robert Johnston/HOU/ECT on 01/16/2001 
08:08 AM ---------------------------

Robert Johnston
01/15/2001 09:10 PM
To: Michelle D Cisneros/HOU/ECT@ECT
cc: Gary Hickerson/HOU/ECT@ECT, James D Steffes/NA/Enron@Enron, Richard 
Shapiro/NA/Enron@Enron, Jaime Gualy/NA/Enron@Enron, John Greene/LON/ECT@ECT, 
Jeff Kinneman/HOU/ECT@ECT, Kristin Walsh/HOU/ECT@ECT, Scott 
Tholan/Corp/Enron@Enron 
Subject: California Power 1/15/01

As talks continued toward the Tuesday deadline markets have been focused on 
for the California electricity crisis, state officials around Governor Gray 
Davis have
  toughened up their rhetoric on a couple of fronts even as they confirmed 
they would be in the market as early as Tuesday taking bids for energy to be 
paid by the
  State of California. One problem on that front is still how much producers 
want to charge the state for electricity. As we reported last week, Davis and 
his aides
  want to pay around $50 to $55 dollars per megawatt hour and suppliers want 
about $75. Treasury Secretary Summers has suggested an auction as the best 
way to
  determine the price, but California officials are taking a less free market 
approach and still hope to set the price through negotiation over long-term 
contracts.

Our sources in Washington, Sacramento, and California are increasingly of the 
view that Governor Davis is positioning his government to establish long-term 
power contracts with the generators that could be passed through to the 
utilities following a bankruptcy in the near term.  This week's legislative 
activities
in Sacramento will create the vehicle to do so.   State credit backing 
purchases of power would obviate the need for super-priority borrowing to 
finance power 
purchases after utility bankruptcy.

1. Audit- Untangling Utility Relationships

California officials have also toughened their rhetoric on the debt repayment 
front as they say results from a preliminary audit show that 
half of the $9 to $12 billion  the utilities say they owe is actually owed to 
themselves for power they bought from their corporate relations

This strange situation is due to the fact that one holding company owns both 
the power-generating and power-distributing companies under a 
holding company umbrella. Of course, that means that some of the power PG&E 
and Southern California Edison bought at highly inflated prices 
was bought from themselves. 

  But it was not all bad news in the tense negotiations. Sources confirm that 
Davis increasingly understood that the state finance role was a crucial part 
of any 
potential solution. He told our sources this afternoon that he is willing to 
use state credit to eliminate the "risky debt" premium that PG&E 
and SCE are being charged by suppliers because of their shaky finances and 
that he is willing to extend the current 10% rate increase
 utility customers are paying far beyond the initial 90-day deadline. In 
return he is demanding that the companies prepare to "share the 
burden of debt reduction in return for state help and credit extension."

2. Debt Restructuring- Guarantees, but No Direct State Money

 Davis also told the videoconference that he believes the $12 billion in back 
debt owed by the utility companies can be cleared up
during a 90-day forbearance period (whether that period has been agreed to by 
all creditors is not something we are clear about right now). Davis' idea, as
he laid it out in the meeting, is to use the forbearance period to securitize 
the debts and sell them against the utilities' forward rate base or by 
establishing a
medium-term repayment plan backed by continued state guarantees. 

 In both cases the restructured debt would be resolved over a decade without 
direct use of taxpayer money as the utilities use their positive margins to
paydown their debt. One of the reasons Davis wants to stay close to the 
$50-$55 megawatt charge is that it maximizes the rate at which utilities can 
pay
down this debt. There is a strong chance that Davis will agree to use state 
guarantees to sweeten the pot at the end of these negotiations, but he remains
opposed to using direct state money. This frustrates both Clinton 
administration and utility creditors, but Davis has not yet shown much 
flexibility.

3. Eminent Domain/Reregulation

  Perhaps most frustrating to the Washington DC free market crowd at Treasury 
and the White House was the continued comfort Davis and his group of political
  advisers have with "non-market" solutions to the energy crisis. Although 
the Governor's aides actually believe the weapon is more a "way to force 
eventual
  agreement, than an actual solution," the talk returns frequently to these 
non-market mechanisms. "We have the ultimate weapon to enforce compliance by 
the
  Tuesday deadline. If we make no progress. If this thing looks like it will 
turn into a genuine crisis, then we will use our powers of condemnation and 
we will re-take
  the plants and equipment and run them ourselves," a close political aide to 
Davis said. "We will absorb the plants, the transmission lines and the 
reserved parking
  places of the executives. The legislature would agree in a second."