Subject: California Update 3/01/01
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]
Date: Thu, 1 Mar 2001 18:30:00 -0800 (PST)

According to a source who attended a private dinner last night with Gov. Davis in NYC:

1. Davis tried to express confidence on a positive outcome for the California situation, but when repeatedly pressed, continually failed to point to specific reasons for optimism.

-Most of the long-term contracts the state has signed are strictly "in principle" with no details.
-All of the long-term contracts the state has signed have an April 9th escape clause.
-A deal with PG&E on a transmission purchase is at least 30 days away, and thus far PG&E has not agreed to anything in the negotiations.
-Davis is "terrified" that a third party will bid on the transmission assets.

2. The state financial picture is worsening.  

-In Davis's "quixotic" quest to avoid rate hikes, the state is spending $40-$50 million per day to keep the lights on, buying power through the California Department of Water and Resources.
-If a deal is not reached by summer, these costs would rise to $75-80 million per day.
-The state has already used $3 billion of the $10 billion allocated for the power crisis and if this trend continues the state's surplus could be in jeopardy.  If the state switches to a deficit, its shaky credit rating could result in an expensive nightmare scenario for Davis, including state tax increases, cuts to core state services and electricity rate increases.

3. Davis Was Less Emphatic About Avoiding Bankruptcy

-Davis told our source that he "could understand" why PG&E would prefer bankruptcy to other options, such as the transmission sale.
-The source believed that Davis is hoping that bankruptcy court or the LA Federal Court hearing in front of Judge Lew on March 5th will again provide Davis with political cover for rate hikes.

Meanwhile, a Sacramento based source reports that:

1. FERC Chairman Curt Hebert is determined to "find" regulatory authority over the transmission line purchase proposal by Davis.

-FERC involvement could postpone resolution of the current Edison and prospective PG&E deals.
-Hebert would use FERC's reciprocal agreements with other publicly owned utilities as a basis for exerting jurisdiction over the proposed California Power Authority.

2. The legislature continues to lose faith in Davis.

-The Democrat caucus is concerned about state finances and the likelihood of rate increases.
-The Republican caucus sees a political opportunity in portraying Davis as wasting time on the transmission asset purchase proposal, rather than dealing with more direct solutions to the crisis.
-Both the Democrats and Republicans are concerned that Davis's plan will not work and all agree that there is no way around increased rates.  Even if a transmission asset deal goes through, the state will still be on the hook for $40 - $50 million per day for power purchases.
-AB IX requires that the money spent by DWR be repaid to the General Fund.  However, because it may be a while before the revenue bonds are issued, the Legislative Analyst Office (LAO) noted cash flow concerns.  The Department of Finance expects to have revenue bonds issued by mid to late May.