Subject: California Update 4/20/01
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 20 Apr 2001 05:25:00 -0700 (PDT)

Executive Summary
? Davis struggles to find Senate support for SoCal transmission deal
? Only chance of deal going through is a one-time quick vote; if deal has to 
go to hearings - it will probably die
? If not transmission deal, legislators will seize assets and seek price caps
? Asset seizure would target power contracts, then power plants; as a result 
the endless court battles will ensue, but this gives Davis opportunity to 
continue to blame generators and marketers
? Bankruptcy for SoCal is still the most likely scenario, with the QFs or 
SoCal itself likely to file if the transmission deal dies or gets amended
? Congressional democrats rally around Davis and seize opportunity to blame 
the Administration
 
Transmission Deal and Democratic Support
As Governor Gray Davis scrambles to build support for his SoCal Ed. 
transmission proposal, one thing is evident; the longer the deal is exposed 
to public debate, the less likely it is to pass.  In fact, politicians have 
been so leery of the deal that Davis has been unable to locate even one 
sponsor to introduce the bill in the Senate.  In the eyes of many Democratic 
legislators (and all Republicans) forcing SoCal Edison into bankruptcy is 
looking like a better option than buying the transmission lines; that is why 
the Governor's senior strategists have quietly been trying to schedule a 
quick "up or down" vote on the transmission line purchase as early as next 
week.  The bill is currently not scheduled to be voted on in effort to avoid 
debate, however, if there is an opening within the next two weeks and Davis 
feels he has enough support, it will be pushed through.  Because the SoCal 
deal needs every piece in place as "negotiated" by Davis' team, the team 
wants no amendments allowed on the Assembly floor and a quick vote.  If this 
unlikely fast track strategy fails for Davis, the prospects for the 
transmission lines purchase will deteriorate steadily (keep in mind that that 
it cannot even be resubmitted to the Assembly until it has been vetted by 
SoCal Edison attorneys).  According to sources, the legislature is going to 
try to modify the Memorandum of Understanding between Gov. Davis and SCE.  
However, the Senate leadership does not believe there will be sufficient 
support to pass even a modified MOU. Burton reportedly believes that at least 
6 Democrats will vote against it along with the Republicans.  The more that 
bill gets picked apart in public, the uglier it looks and the more Democrats 
will realize that they are all alone in supporting it. 
 
Another problem faced by the legislatures is the deal is in favor of SoCal 
and not the state.  Among other things, the state is overpaying by about $1.5 
billion for the transmission lines.  Additionally, the MOU Davis has with 
SoCal. Ed nearly matches, point for point, the deal Davis condemned with PG&E.

Asset Seizures
Since before the PG&E bankruptcy filing, we have maintained that asset 
seizures through eminent domain would become a major pursuit for increasingly 
frustrated Democrats.  Davis' legal office has thoroughly scrubbed the law on 
eminent domain seizures of everything from power generating assets across 
California to existing power contracts negotiated by, whom Davis's calls, 
"profiteering power brokers".  Of course, everyone in the Governor's office 
understands that any seizing would immediately end up in state and federal 
courts, and would be a legal nightmare (there are a few minor Constitutional, 
legal and interstate commerce problems). The main thing is that the seizing 
would continue Davis's main approach to this problem -- management by press 
conference -- and it would put the Governor and Democrats on the right side 
of the issue -- punishing the capitalist leeches.  According to one senior 
Democratic legislator, there is movement within Democratic members of the 
state Assembly to demand that Davis agree to seize the power contracts in 
return for their vote in favor of the power transmission purchase. Of course, 
taking the contracts would only be setting a precedent for taking the power 
plants.  The appeal of seizing the contracts is that it would allegedly put 
California state officials in charge of where the power is sold and reduce 
mark-ups substantially as they used the contract power authority to provide 
spot-market power purchases before peak emergency conditions drive the price 
through the roof. 

Price Caps
One strong indication as to whether or not summer price caps will occur 
depends powerfully on decisions made by the three Republican Governors from 
Colorado, Alaska and Wyoming. These three were the key players during the 
Portland Western Governor's Conference last January and, according to senior 
White House officials, it took the personal and prolonged intervention of 
President Bush himself to peel these three away from an otherwise unanimous 
call for price caps from the governors. "If they had signed that price cap 
appeal," the administration source said, "we would already have price caps. 
So if they start to make it clear something has changed, we will have to 
listen."  Sources indicate that if these Republican leaders begin to rethink 
their opposition to price caps, the Bush administration will be forced to 
reconsider price caps as a remedy for the West. 

Cost Plus Caps -- Think of these as Republican price caps in that their first 
duty is to make sure private companies make money and have incentives to 
provide power into the affected grid. Just to give some idea of magnitudes in 
a cost plus deal, current discussions would put a cap on power costs at 
something like $250 per kilowatt hour. That is a long way down from the 
August futures contract that is pricing in $750 per kilowatt hour, but a long 
way above last August's $150/kwhr price and a particularly long way above the 
cost of generating this power, which is something like $25-30/kwh. 

Market-Price Exceptions -- The option allows the Bush administration to have 
political credit for imposing price caps. As we write, FERC is currently ,in 
the process of considering permit renewals for five companies generating 
power in California (Duke, Dynegy, AES, Reliant and Williams).  The permit 
grants a further three-year waiver that allows them to sell power into 
California in the existing "whatever price the market will bear".  In other 
words, FERC could simply not grant these companies the right to sell energy 
at the market price, perhaps by changing a definition of controlling market 
share, and then power to control prices would revert back to FERC. 

Technically, in granting the extension of these permits, FERC has to 
establish a formal finding that the five power companies do not wield "market 
power" -- that means they cannot affect the price of energy by withholding 
power at crucial times. Of course, FERC has just found on three different 
rulings in the last four months that the companies wield exactly that kind of 
ability over market prices and has ordered minor rebates to adjust for the 
subsequent price spikes. But that would mean FERC would have to want to wield 
effective power over price capping in California and they have shown no 
desire on that front. The escape clause for FERC simply to renew the waivers 
is that they are routinely renewed unless the company applying for waivers 
controls more than 20% of an electricity market and none of these companies 
come close.

In other words, the waivers option lets FERC escape if the Bush 
administration and FERC commissioners really want to escape. Once again, that 
decision may be more in the hands of the three Republican Governors than 
anywhere else in the country. But you can be certain that in the past few 
days Administration officials have become fully aware of the potential 
political liabilities of doing nothing except advocating more nuclear and 
coal power plants. 

Democrats Seize Opportunity to blame Bush
Senior political leaders now think the total energy bill for the year could 
come in as high as $60 billion, which would destroy state finances for a 
decade.  Add to that the constant drumbeat of numbers that voters hear 
everyday about their own direct out-of-pocket electricity costs (they paid $7 
billion for electricity in 1999, $27 billion in 2000 and are expected to pay 
$70 billion this year -- ten times the rate two years ago. Then, of course, 
they open bills with massive rate increases that bring all those incredible 
numbers home in a very direct way, and, well, who can blame the Democrats for 
saying there is a simple solution, but the White House won't allow it.

National level Democrats realize California,s power crisis is a prime 
opportunity to chastise the Bush administration and its free-market advocate, 
FERC Chairman Hebert, over their resistance to summer price caps.  As 
California,s leaders calculate this year's taxpayer energy bill at 
potentially $60 billion, a rogue's gallery of Democratic congressional 
leaders are currently meeting with Governor Davis and coordinating efforts to 
fan out across the eight western states of the power grid with a singular 
message: "the solution to all western voters electricity problems lies right 
in Washington DC, at FERC headquarters controlled by Bush Administration 
appointees."  And as the political dialogue takes on a more aggressive 
national tone and its possible impact on control over the US Congress comes 
more into focus, the solutions articulated by California's Democrats who 
sense they have Republicans on the run in the West become less and less "free 
market" focused.  The two strains of the Democratic solution that are 
becoming an unavoidable part of the energy picture are asset seizures and 
price caps.