Subject: California Update 3/21/01
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]
Date: Wed, 21 Mar 2001 19:22:00 -0800 (PST)

Executive Summary:
?	Situation "confused" but filing probably postponed until Monday
?	Could be sooner if negotiations completely collapse, or if commercial paper holders file pre-emptively to the QFs
?	QFs pressuring legislature for rate hikes, in-state generators negotiating with FERC
?	Davis's proposed CPUC payment to QFs would require legislative approval--tough to get before Friday
?	Absent rate hikes, bankruptcy filing against Edison is still best option for QFs- doubts about gas supply contracts and market value of Davis' price proposals

1.	Situation Confused, But Bankruptcy Unlikely Before Monday
The situation in California is described as "confused" due to the flurry of activity by the governor over the last twenty-four hours.  It seems likely that this state of confusion will serve to forestall an involuntary bankruptcy filing until next week, when the situation should become clearer.  

2.	Earlier Bankruptcy Possible If....
Sources believe that two events could change this and precipitate an "immediate" filing:  1) a breakdown in negotiations between the governor and the QFs and 2) a PUC order to pay the QFs $1 billion, which would be seen as a preference payment and cause the commercial paper holders to file an involuntary bankruptcy.

3.	QFs Negotiating With Davis, In-State Generators Talking to FERC
Sources report that the QFs are currently either meeting with their lawyers are involved in negotiations with the governor's people and the legislature.  They are reportedly "working on Keeley," since he has actually suggested openly that there needs to be a rate increase.

Sources report that the in-state merchant generators are occupied today with preparing reports for the FERC.  The FERC has made demands that the generators report to them on market conditions, etc. that have governed their reactions.  The reports are due tomorrow.  Sources indicate that FERC has placed these demands to placate the California delegation and to "give the appearance of concern" for the situation in California.  Note, however, that the FERC did not make similar demands on out-of-state generators.

4.	$1 Billion Payment to QFs Requires Legislative Approval, Could Trigger Filing by Commercial Paper Holders
Sources report that the governor continues to focus on trying to get a $1 billion payment made to the QFs to forestall a bankruptcy filing.  He is trying to get the legislature to grant the PUC the authority to order this payment.  This is in spite of the fact that such a payment would be seen by commercial paper holders as a preference payment, and that the money might have to be returned in the event of a bankruptcy filing.  Such an order by the PUC would likely precipitate an involuntary bankruptcy filing by the commercial paper holders.

5.	Why is Involuntary Bankruptcy Still Attractive for the QFs?
Davis/CAPUC plan does not incorporate payments on existing debt and requires a less than "market standard" price concession from the QFs ($75MW 5yrs, $69 MW for ten years).  Current spot market power prices in the West far exceed these values.  QFs who are already off-line have no need to worry about "pre-payments" or future payments for power; they just want payment for the power they have provided.

The key weakness in this proposed plan is the inability of the QFs to fix their costs going forward.  Their biggest cost is natural gas.  The natural gas supply contracts are between the utilities and gas providers.  It would be up to the utilities to fulfill the terms of the contracts.  It does not appear reasonable that a natural gas supplier would enter into a 5- or 10-year gas supply contract with PG&E or SoCal, since in the even of a bankruptcy these contracts could be rejected.  The utilities remain a credit risk.  Unless the price of natural gas is fixed, the QFs cannot enter into 5- or 10-year power contracts at these prices.

Moreover, gas price volatility is expected to increase rather than decrease.  Some sort of state support is needed to fix the gas supply contracts, and there has been no indication that the state is willing to make this sort of commitment.  The state legislature does not seem willing to assume more risk at this point.