Subject: California Update 7/13/01
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Date: Fri, 13 Jul 2001 12:25:22 -0700 (PDT)

EXECUTIVE SUMMARY
FERC Settlement Developments
SoCal Ed. MOU/Plan B
The CPUC's New Rate Proposal

FERC Developments
FERC's publicly recognized autonomy regarding California power talks likely has a less public, less autonomous, role in determining the outcome of debated refunds.  The following analysis emphasizes the multiple dimensions and variables now at play in the California settlement negotiations:

The Bush Administration does have influence over what FERC decides -- especially now that Pat Wood and other Republicans are there. The influence is certainly not formal (as FERC is supposed to be an independent agency), but the commissioners generally do not issue decisions without taking the "political lay of the land" -- particularly regarding the positions of the White House.
Bush and Davis do not like each other (no surprise there). Communication between the Davis Administration, the White House and FERC is not free flowing. Interaction between FERC and White House is frequent -- but with Davis only on an as-needed basis. (Staff level contacts are more regular -- especially staff of the Democrat commissioners).
Administrative Law Judge C. Wagner will probably recommend a refund at under or close to $1 B -- and the Commission will not go higher than what the judge recommends. This would be for October forward. Wagner thinks there may be additional refunds ordered later.  
Wagner has also strongly advised FERC and Bush (as well as his top advisors) that they will have to put price caps on, stick with them and show real efforts to deal with this issue (even though those steps run afoul of the "free market" position of the Admin -- and his own members). He has a great deal of influence with Bush.  

MOU & Pan B
Late Thursday (7/12) Assembly Speaker Robert Hertzberg called a briefing for business community leaders regarding a new proposal to alter the terms of the Edison MOU.  The new proposal (now ABXX 82) reduces the value of SoCal's transmission system to 2 times book value (the state had previously agreed to pay 2.3 times the book value, or $2.76B).  Given the dire financial condition of the Socal Edison's parent company (EIX), the legislature now realizes that they are unlikely to see any cash infusion above the $420M already promised by EIX.  Assembly moderate Democrats led by Keeley and Hertzberg feel that a $4.5B generator refund, a profit from the State's sale of the SoCal transmission lines, and an additional $1B from a dedicated rate component are all distant, but hopeful possibilities that could fuel progress for a SoCal bail-out.  Of course, two thirds of these suggestions require FERC approval.

PG&E predictably views the new proposal "DOA" because it is a less attractive model to be applied in their bankruptcy proceedings than the initial SoCal MOU.  Alternately, at least one of Edison's executives indicated that SCE was confident that there would be a legislative proposal flowing from the MOU that the utility would ultimately be able to accept. He went on to describe the contours of such a proposal: It has to "make it look like Edison is getting hurt" to counter consumer group criticism that it is a bailout. This would be accomplished by providing something less than the $3.8 billion in under-collections. He also noted that the tricky part would be picking the right percentage below 100% -- go too low, and the generators drag SCE into bankruptcy.

CPUC Rates
The PUC will likely publish shortly (in a matter of days) a new rate agreement giving the DWR first call over the utilities on any money available for purchasing power.  If this rate agreement leaves SoCal with too little cash to operate going forward, the likelihood will increase that SoCal will file for bankruptcy protection.  It does not appear that there is enough cash for purchasing power under the current structure for both DWR and SoCal to remain solvent; therefore, in order to save SoCal from bankruptcy, the legislation governing DWR's power purchases will likely have to be revised.