Subject: California Update 6/14/01
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Date: Thu, 14 Jun 2001 19:59:00 -0700 (PDT)

EXECUTIVE SUMMARY
?	Bankruptcy Fears Mount With Absent MOU or Plan B 
?	California PUC Wagers the Promise of QF Payments 
?	SoCal Ring Fencing
?	California Budget having Problems

Bankruptcy Fears & Plan B 

Sources are becoming more pessimistic regarding the prospects for a state bailout of SoCal.  At this time the negotiations on Plan B appear to be in danger of falling apart.  The governor's efforts to position the legislature to take the blame if SoCal files (due to lack of movement on the MOU) and Senator Burton's hostile response that the governor is the one responsible for delays is a sign that sentiment toward working for a bailout may be disappearing.  It now appears more likely that a Plan B alternative to the MOU will not be reached due primarily to a failure to achieve consensus on how to spread the burden of the dedicated rate component.  This could likely lead to a SoCal bankruptcy filing in the foreseeable future and as sources note, parties to the crisis are not optimistic about reaching a deal.  

CPUC Moves to Pay QFs
According to media reports on the CPUC QF payment plan, SoCal's payments to QFs are contingent on the legislatures' approval of the MOU.  In a move to publicize their cooperation and facilitate this process, today the CPUC passed three of the four MOU provisions set by Davis/SoCal Ed negotiations and promised to examine the last provision at their June 28th meeting.  Thus, with the CPUC posing no hindrance to stabilizing SoCal Ed., the legislature will bare the burden of debating the MOU or Plan B.  Sources report that if it appears that no legislative solution can be achieved, the QFs could file involuntary bankruptcy against SoCal.  Yesterday's decision raised the state's price cap on the QF's substantially, and ought to help increase production.  So once again, price caps have kept crucial power generation assets off the market.  Sources note that the QFs contracts with SoCal now have cancellation clauses built into them in the event of SoCal filing involuntarily- this is something the QFs learned from the experience of PG&E's filing and Judge Montali's subsequent rulings.  The financial question about these payments to QFs is less whether they will in and of themselves bankrupt Edison, than it is whether other creditors force Edison into bankruptcy rather than see that money leave the building. The sums in question are not huge, an absolute maximum of $50 million, but we are told some bondholders may well consider $50 million to be a sum worth fighting for.

Ring Fencing

Edison International (EIX) has issued a $1.2 billion bond via its Mission Energy subsidiary, proceeds of which will be used to pay off certain credit lines with banks. Sources report that paying off these credit lines will negate cross-default clauses in those lines, and insulate EIX from the effects of a bankruptcy at Southern California Edison. This is exactly what PG&E did a few weeks before filing Chapter 11, and has further convinced a lot of people that the game plan at EIX includes letting SCE file and restructure in bankruptcy rather than outside of it. Sources comment that when Judge Montali approved large bonuses for PG&E senior management after PG&E's filings, it made Bryson and members of his team "reconsider" the merits of bankruptcy.  

California State Budget:

Day-to-day stress relief notwithstanding, the California state budget is still a shambles. More than $8 billion has been paid to power generators, depleting a political treasure chest which was going to be doled out to special interest groups for years to come. The only hope for the state comes from the issuance of $12.5 billion in "Power Bonds." Financial market participants are still questioning whether the State of California is illegally declaring itself to be a senior creditor of the one (soon probably two) bankrupt utilities. By declaring that CPUC rate hikes be directed first to holders of "Power Bonds" rather than general creditors of the utilities, the State is saying that the money they spent buying power "on behalf of the utilities" is a senior claim. The state Treasurer Phil Angelides has given repeated assurances that this is so, and will likely do so again in a conference call next Tuesday, but concern about this opinion reportedly dampened enthusiasm for a $1 billion G.O. bond California issued this week. One highly respected Sacramento columnist said this week that the "Power Bonds" are no better than 50-50 to get issued at all.