Subject: California Update 8/24/01
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Date: Fri, 24 Aug 2001 13:42:52 -0700 (PDT)

EXECUTIVE SUMMARY
?	A New MOU Takes Shape in the Assembly
?    The Fate of Direct Access
?    DWR Rate Agreement

California's Assembly Rallies 'Round a New MOU
The lights were burning late in the California Capitol last night as lawmakers in the Democratic caucus volleyed final versions of the newly consolidated Edison MOU bill, AB82.  Details leaked to the public concentrate on disputes over the valuation of SoCal's transmission line assets, however, sources report this matter is only a prelude to even greater contentious language buried in the bill's various sub clauses.  Earlier media reports noting that the bill would be based on Senator Burton's preferred legislation are also far off the mark.  The draft bill tries to get the State out of the power business as fast as possible and binds power users to decades of high prices.  The proposed language also significantly reduces the chance of a SoCal Ed bankruptcy and provides the company with lavish concessions.  SoCal Ed is complaining about some technical details in public, but the draft bill offers probably the most generous deal any electricity utility has seen from regulators.  Sacramento insiders tell us the bill has "a pretty good chance" of passing in the next 3-4 days, but could touch off a political and legal storm because of its draconian impact on Californian power users. 

The Assembly's AB 82 contains three primary additions that distinguish it from thee Senate's SB 78XX bill and: 

1)	The Governor and Assembly Democrats propose to charge a massive 'exit fee' to any end user wanting to switch a future alternative power providers.  All California electricity users will be liable for the cost of Governor Davis' expensive long-term power contracts for their whole term (save municipalities like SMUD and LADWP).  This is apparently the only acceptable compromise for legislators that would both secure revenue to cover the State's long-term power costs and maintain the promise of direct access established at the onset of California's deregulation.  The clause sidesteps some of the obstacles the California State Constitution places in the way of stopping direct access, particularly for municipalities.  But it could still be open to legal challenge.  California officials hope that it will be enough to quiet the issue until the October power bond sale is finalized.

2)	The Assembly expanded the rate base of "commercial class" users to pay back SoCal's bailout bonds by incorporating small businesses that use 20 kW.  It appears likely that this change was made because S&P told the state that a larger rate base would be needed to support the bailout bonds.  S&P wants all ratepayers to help repay and secure the bailout bonds; including small businesses.  This change is likely to draw heavy fire from the powerful California Technology and Manufacturers' Alliance (CTMA).

3)	The PUC will be mandated to set rates at any level necessary to preserve SoCal Edison's solvency and borrowing ability.  This regulation essentially links consumer electricity rates with maintaining SoCal's investment grade credit rating.  Arguably, SoCal would need to do little more than make a case that that S&P might downgrade them and the CPUC would necessarily respond with a rate increase. If SoCal can get this concession, the nickel and dimes issue of transmission line valuation will be muted, a promising sign to those fearing bankruptcy.

Sources within the Sacramento Capitol inform us that the Governor and Hertzberg are likely to get their way for now. The precise wording of the clauses may be toyed with in the final markup session, but we understand there is considerable momentum behind the substance.  There are some indications that the Governor may have overestimated the amount of support AB82 has in the Assembly.  Republicans are not on board, so if the bill passes it will be subject to 90 days delay before taking effect.  It remains unclear whether the plan will come to a vote next week.  When/if the plan does pass, it will likely have no more than a 50% chance of escaping the Senate.  Senator Burton, the consumer advocates, and the CTMA are staunchly against any plan that would include small businesses in paying off SoCal's bailout bonds.  Sen. Minority leader Burlte told several lobbyists yesterday that the Republicans would walk away from any amended SB 78XX that emerged in the House, having already agreed to the Sher bill (SB 78XX) before the recess. This is reportedly the same attitude Brulte's counterpart in the Senate, John Burton, has articulated -- and not a good sign for Edison.

Direct Access 
Contrary to the CPUC's press release explaining their decision to delay the direct access ruling to allow more time to review the case, sources report the reason for the delay is that the Commission prefers to wait for the Legislature to act on SB 18XX (bond repayment) before ruling.  Key business community leaders expect the PUC to formally end direct access on Sept. 6. However, the Legislature has the authority to reinstate direct access in whatever form it may choose. 
Presuming the PUC carries out the expected action and permanently suspends direct access; the following are some possible outcomes: 

?	The Legislature, under pressure from a unified business community, could restore direct access before the end of the session allowing moderate Democrats in swing districts to say they protected the economic climate, but only with exit fees and time commitment restrictions that are unpalatable to businesses. Many in the business community are willing to accept having to "eat" a DWR surcharge for long-term power contract commitments and a surcharge to pay for a substantial portion of Edison's accumulated debt. But according to our sources, Legislative Democrats are insisting on exit fees substantially beyond these surcharges to head off the need for additional residential rate increases that might be needed to satisfy DWR commitments.

?	If this occurs, or if the Legislature simply stands idle and declines to restore direct access, business leaders may likely give up on direct access and shift their efforts to restructuring the rate allocation to shift a greater portion of the burden to the residential ratepayer classes. (The March rate increase by the PUC placed a disproportionate share of the revenue requirement burden on the industrial ratepayer classes.) This would present a huge political challenge. But because the amount of net short power expected to be available for direct access agreements is so small -- one estimate places it at no more than 5000 MW (or about 10% of demand) through 2007 -- there is growing sentiment in the business community that it is no longer really worth fighting for direct access given the political obstacles.

?	Additionally, there is the interesting prospect that DWR itself might expand and dominate the market for net short power sales, given the agency's expected surplus supply via the forward contracts. There is nothing in law or regulation currently that would prevent DWR from acting as a market participant and selling excess power; indeed, DWR already sells excess power to municipal utilities, private utilities and power managers outside California. 

DWR Rate Agreement and Edison Rescue 
In the Senate informational hearing today on the DWR rate agreement, DWR representatives acknowledged that the agency is still negotiating contracts for additional forward power.  This prompted concern by some legislators and consumer activists who believe DWR has already over-purchased long term power, causing sales by DWR of excess power for as little as $1 per MW at times this summer.