Subject: California 3/23
From: [email-masked]
To: [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Fri, 23 Mar 2001 11:41:00 -0800 (PST)

Executive Summary:

Bottom line- QFs better off today, utilities in worse shape
After passing Senate, the QF Bill fails on technical grounds in Assembly
Cal Energy ruling provides possible escape for QFs from utility commitments
California net short gas supply for the summer worsens if QFs break contracts
Hedge funds acquiring utility commercial paper, further litigation expected

1.	QF Bill Fails In Surprise Twist

AB 8X (the QF  bill) failed in the Assembly (48-24). The Republicans were opposed because three  measures, the SDG&E fix, the AB 1X fix, and the QF fix were all rolled  into one bill by the Senate. They want the three measures split up. Concern  was raised by San Diego members regarding those provisions and they wanted to  see it separately in the bill form that it is currently in SB 43X.   As noted yesterday, the QFs will now await a CPUC ruling on Tuesday.

2.	Cal Energy Ruling Sets Stage for "Dozens" of Similar Q.F. Suits
 
The CPUC ruling is now less important because of the Cal Energy ruling yesterday, which gave the QFs another tactic to escape their commitments to the near bankrupt utilities. Cal Energy reportedly would have filed an  involuntary bankruptcy tomorrow (Friday) had they not won their law  suit.  Dozens, if not hundreds of suits identical to  that filed by CalEnergy can now be expected from the other QFs.  The QFs  reportedly see themselves as free from the utilities now and want to sell direct  into the merchant market, possibly out-of-state.  They also want to avoid  any deal whereby the state would force them to supply power in a Stage 2 or  Stage 3 alert, and will contest any such measure with the FERC.
 
3.	Summer Outlook Worsens

 The outlook for the summer now appears much  grimmer for the state.  If the gas-fired QFs alone manage to extricate  themselves from their contracts with the utilities, the state will be a net  10,000 MW short for the summer rather than 5,000 MW.  This is a much larger  net short position to fill, and will be much harder for State Treasurer Angelides to sell to  Wall Street.  If all of the QFs break their contracts, the state will be  14,000 to 15,000 MW short.  Essentially, if the QFs are successful in court  (as it appears they would be), they are no longer part of the pool of low,  fixed-rate power that the state can count on.  The onus now appears to be on Treasurer Angelides  to come up with a rate schedule.  The QFs may go to him and ask for the  state to act as forward cover for their gas contracts (the state would, of  course, charge for this privilege) and negotiate a more flexible rate  structure.  

4	Pressure Mounts on Utilities

None of this helps the utilities'  situation.  In fact, now that the QFs have a way out of their contracts  through the courts, it appears that the business base of the utilities is  reduced, so they are actually in a worse situation.  Reportedly some of the utilities' commercial  paper now has been sold to hedge funds.  As one source put it, "the vultures  have moved in."  These are "the types of people who litigate."