Subject: California 02/16/01 pt.2
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Date: Fri, 16 Feb 2001 18:54:00 -0800 (PST)

Our source reports the following regarding  today's developments. In sum, due to the governor's sudden panic and  resultant willingness to negotiate, all parties are in a wait-and-see mode that  makes it unclear whether or not there will be an involuntary bankruptcy filing  early next week.  Our consensus view is that bankruptcy is still the most likely outcome, but the timing is subject to the ups and downs of these negotiations over the weekend.  Creditors, especially the small IPPs are close to the end on forbearance and highly frustrated with the erratic nature of the negotiations.

The events given in this report are  chronological:
 
- The original plan proposed by Governor Davis to  the utilities this morning contained the following points:

The parent companies of the utilities would have  to return to their subsidiaries $1.5 billion.  This money was originally  tranferred to the parent companies ostensibly so that the parents could use it  to pay taxes.  However, as was revealed in the audit, this money was in  excess of what was needed for taxes in reality.
The state would purchase the transmission assets  for $3.5 billion.
It was proposed that the utilities would issue  bonds to pay for the utilities' undercollection.  These bonds would be  secured against a "distribution charge" added to power bills.  This money  would be collected by DWR and transferred to the utilities, thereby involving  the state, but with less than a "full faith and credit"  commitment.

- In contradiction to preliminary reports that  appeared in the press, this plan was rejected by the utilities.  One reason  for this rejection was the low price on the transmission assets.
 
- While the bondholders pressed for further  negotiations at this point in order to see if a deal could be reached; this is  because the bondholders are less impaired than the generators. The generators,  however, demanded that they be paid the money they are owed and threatened to  move quickly toward an involuntary bankrtupcy filing.
 
- Local sources report that Governor Davis  "panicked" at this point.  He then offered to purchase the transmission  assets for $6 billion (almost twice the earlier offer) and pay the generators'  undercollection (which amounts to $9 to $12 billion).  Reportedly, the  suggested term of the bonds that would be used to pay for this bail-out was 15  years, which would nearly double the actual cost of the bail-out.  This  plan would be put forward as a emergency legislative bill.
 
- At this point, consumer advocate Harvey  Rosenfield entered into negotiations with the state treasurer's office.  Rosenfield threatened that if the governor managed to pass this plan, he would start a  referendum to counter it.  Rosenfield would have up to 90 days after the  emergency bill was passed to put his referendum in place.  Knowledgeable  sources advise that it would be "very difficult" for the bonds in the plan to be  issued in less than 90 days; therefore, Rosenfield poses a credible  threat.
 
- In subsequent negotiations, Governor Davis has  offered to purchase the transmission assets for a price of at least $6 billion,  but possibly as high as $12 billion.
 
- Senator President Pro Tem John Burton is 'very  upset' with the governor for giving in on his negotiations so  easily.
 
- Mike Florio, another consumer advocate, contacted  Gov. Davis and said that the idea of negotiating a bail-out, as it  appeared Davis intended to do, was "ridiculous."  Florio and the other  consumer advocates threatened to ally themselves with Rosenfield and support the  referendum if Davis pursued such a course of action.  The consumer  advocates strongly feel that the generators have to "take a hair cut" as part of  the solution, as well.
 
- The governor will announce later this afternoon a  "framework" solution identical to that we have reported previously - a  state purchase of transmission assets and an issuance of bonds by the utilities,  but with state support through the DWR.  However, the state government has  yet to reach consensus on the numbers in this framework, and it remains unclear  whether the framework will be acceptable to all parties.
 
- With this announcement, the bondholders  may refrain from an involuntary filing in order to see what the terms of the  final agreement will be.  The generators, while more inclined to file  themselves, may feel that they have put enough pressure on the governor that it  may be worthwhile to wait and see, as well.  They are interested not only  in the terms of the agreement (and particularly the amount paid for the  undercollect), but also in the terms of the long-term power contracts that the  state must negotiate.  For example, if the state is willing to purchase  power at high prices in order to placate the generators, they would be very  likely to go along with the plan.
 
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