Subject: California Update 6/5/01
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Date: Tue, 5 Jun 2001 19:22:00 -0700 (PDT)

Executive Summary
?	Edison's MOU Condemned at this Friday's CPUC Meeting
?	The Idle Plan Z 
?	Angelides Hides State Budget Concerns 
?	House Committee to Vote on Energy Relief

Edison's MOU Doubtful
The unusually calm settling over the California legislature about SoCal Edison's potential bankruptcy has finally affected the relentlessly optimistic investment bank analysts and other company shareholders.  We have reported that through all plans from B-Z, there is not a solid plan to save this company and now executives are even more fearful that this predictions may come to fruition.

Over the last few days, Edison executives have begun pointing hard at the CPUC meeting this Friday as a make-or-break event for the company.  The is because after the meeting, Davis's MOU plan to buy SoCal's grid will have no chance of preventing a potential bankruptcy.  This plan is essentially dead although Governor Daivs has yet to say this in a press releases.  The final nail will happen after the CPUC adjourns its Friday meeting without voting on several necessary MOU provisions.  Unless the CPUC makes a last minute, emergency - amendment to their agenda,  the deal will be dead (despite SoCal's support for letting the deal stand past its deadline).  Sources indicate that CPUC President Loretta Lynch holds reservations on the MOU and continues to distance herself from Davis.  

Attempting to influence policy making, Edison executives have spent the last few investor phone conferences warning that June 8 would see substantially increased risks for a creditor-induced bankruptcy if the Davis plan dies at CPUC.  This is interesting, since no one else seems to have been focused on the date until Edison began mentioning it late last week.  However, there is no more or less threat of bankruptcy than there is now or will be in two weeks.   As reported several times earlier, most everyone had given up on the MOU long before this Friday's CPUC meeting.

Plan Z Shows Little Progress
Meanwhile, the unhurried pace toward a Plan Z that we reported last Friday, has gained little progress.  Legislators continue to pin-point a plan that will secure re-election votes and at the same time, weigh the need for rate hikes for California's corporate and home electricity users.  As they hash it out, the state is spending even more on electricity purchases.  In spite of better than expected levels of conservation, the state's electricity expenditures over the last month rose to an average of $79M/day. The recent rate increases mean more spending by the state and that calls into question the reassuring Angelides scenario for California's budget prospects later this year.

The California Budget Crunch
Even more worrisome than a idle Plan Z is increasing evidence that last month's conference call with State Treasurer Angelides was a little misleading. During that conference call Angelides claimed that State Comptroller Connell and many in the financial committee had the numbers wrong.  Angelides argued that $7.2B already spent to buy power since January was really the total amount of authorized spending through late August.  In fact, he said only $4.3B of that had been "spent."  Sources now indicate that  Angelides was technically correct if you use "spent" to mean only the amount of money for which checks had been written.  This is different than the amount of money California had already promised to energy suppliers who had already supplied energy to the state.  In fact, when Angelides was speaking the state had in fact already promised to pay $7B for energy it had already consumed (the total committed has topped $8B.)  By the time the state gets its "power bonds" auctioned in August, they will have already spent all $12B and be back to dipping into the General Fund.   The idea of RANs being auctioned before the power bonds get issued is still an option if the general fund doesn't make it to August. 

The nearest answer to both of these cash flow deficits lies in part in the painful process that the legislature is undertaking now - another round of huge electricity rate hikes to securitize debt issuance.  Then the hope is that those hikes bridge the gap between now and when new capacity brings wholesale rates down and the debts can be repaid.   The only near term path to bringing generating assets on line immediately is the 3,500 MW from QF plants which are off line because of cash flow problems.  Settling their needs is wrapped up in settling the PG&E and Edison trade creditor issues, which makes the legislature's leisurely approach to the rate hike/haircut situation all the more troublesome.

Energy Relief
The House Energy & Commerce Committee is scheduled to vote on H.R. 1647 (the Emergency Electricity Relief Act) tomorrow at 10:00 am.  The bill which was twice postponed and does not include any provisions on price caps, but during the course of the mark-up, sources indicate that it is possible, even likely, that a Democrat could offer a price cap amendment.  Rep. Waxman (D-CA) offered a price cap amendment at an earlier mark-up of the bill at the subcommittee level.  The Waxman amendment was rejected along party lines (all Republicans and 2 Democrats voted nay).  Sources inside Joe Barton's office report that staff and members have been meeting to work out a compromise on the price cap issue, but nothing has been resolved. As of this afternoon, those discussions have been terminated in favor of an open discourse in the Committee tomorrow.  Since an agreement was not reached, compromise language is not expected to be offered as an amendment tomorrow.  If it is, it would not be something that leaders on the Republican and Democrat sides have crafted together and therefore would not likely pass.  Sources indicate that the committee does expect Waxman, and possibly others to offer price cap language, but it is not expected to pass.