Subject: California Update 6/22/01
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Date: Fri, 22 Jun 2001 20:07:00 -0700 (PDT)

EXECUTIVE SUMMARY
?	State Budget Discussions Deteriorating -Bonds Issuance Jeopardized
?	PG&E Bankruptcy Advisor Comments on SoCal

Budget & Bond Concerns
Sources report that discussions within the state's budget conference committee have completely disintegrated.  Although last Tuesday's tentative $2.7B reserve agreement between the parties offered some hope to  the situation, Republicans have since completely broken with Democrats and are begging for a number nearly half of the previously agreed amount.  The legislative recess is scheduled to begin July 20th, and prior to the Davis administration, the legislature very rarely took month-long recesses due to the budget battle (there usually was a Democrat-controlled legislature and a Republican governor).  Sources report that if legislators take leave without a budget resolution, it would most likely compromise their ability to pass the budget and MOU, before the MOU's deadline of Aug. 15th.

Sources also indicate that delays in establishing the state's budget could prompt Wall Street investors to once again downgrade California credit rating.  A lowered rating could complicate the $12B bond issuance the state expects to offer in late September 2001 by forcing the state to offer a higher rate of return, which could mean fewer bonds.  Sources recently conducted a private interview with parties close to David Wiggs, head of the LA Department of Water & Power, (DWP is in constant contact with both SoCal and PG&E and is a creditor of both utilities and the DWR. -- Wiggs is close to and in constant contact with Governor Davis, Hertzberg and Burton, and he knows every other state official relevant to energy issues).  Wiggs' position on the bonds and SoCal follows:
?	The state is "really worried" about the bond issuance.  The state believes it can sell $3B in bonds now, but as for $11 - $12B, they are "not confident."  The state is currently trying to put its revenue streams in place, then it will have to prep Wall Street regarding the revenue streams. 
?	Wiggs saw Treasurer Angelides Wednesday (6/20) and told him that, "I wouldn't buy these bonds."  Wiggs stated that, "There is not a clear enough path for those rates."  
?	Wiggs was Hertzberg's advisor on energy.  He was also at El Paso (energy company, not gas company) during its bankruptcy.  Wiggs commented that he is worried because he lives in SoCal territory rather than DWR territory.
?	Both Wiggs and his DWR staff believe that an MOU/Plan B deal will not pass.  They are not thinking in terms of counting votes, but rather of the very large number of things that need to be done simultaneously in order to make a solution work.  

PGE Advisor on SoCal
Sources recently interview the attorney who is currently acting as bankruptcy advisor to PG&E, and may be the potential advisor to SoCal in bankruptcy proceedings.  Comment follow:
?	The attorney believes that the likelihood of a SoCal voluntary filing is 60 to 70%, but he does not know when it will happen.  The attorney would not speculate as to the likelihood of an involuntary filing, stating that he did not know. 
?	Concern was expressed that if a solution were passed to make SoCal liquid again, DWR (under instructions from the state) would then refuse to purchase the net short, leaving SoCal with a huge bill for power that it could not pay.  SoCal would then be faced with borrowing money to pay for the bill (an unlikely event, given their current status) or declaring bankruptcy.  The attorney commented that DWR had already tried to send power bills to PG&E in bankruptcy; Montali refused to force PG&E to pay them.  The attorney therefore believes that DWR is likely to force SoCal (and PG&E if it were made solvent) to resume paying for power as soon as possible.  The attorney believes that SoCal is aware of this problem and that it must be taken into account as part of a bailout solution.