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 15:25:00 -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.