Subject: Cal. Update 7/30/01 - Direct Access
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Date: Mon, 30 Jul 2001 09:01:27 -0700 (PDT)

Executive Summary
Direct access could make a rescue of SoCal Edison more difficult
Bond issuances for California may be in jeopardy as direct access becomes more popular with municipalities

Municipal Power is Politically Attractive
There is growing pressure across California for cities to consider forming their own municipal power companies. Community leaders across the state are enviously eyeing the success of Sacramento's SMUD utility and the Los Angeles Municipal Power Utility, where rate hikes and service disruptions have been far less pronounced than the rest of the state. Several leaders in San Francisco are considering setting up their own power company, and another two dozen cities are also contemplating action. Municipal power companies are not subject to regulation by the California Public Utilities Commission, and could therefore sidestep the current proposed structure of rate hikes. 

Trying to stop municipalities from opting out of the state power plans will be extremely difficult, as it runs against some of the most entrenched and long-standing privileges in California politics. Under California law, it is very difficult to stop many cities from doing what they feel is in their best interest. Most older and larger cities are "charter cities" rather than "general law cities" subject to the California Municipal code. Under the California Constitution, charter cities can pretty much do anything or provide any service short of printing money and raising an army.  The League of California cities - a weighty organization representing every one of California's cities - is already swinging into action to support direct access. Most Assembly Democrats started out as City councilors and have some sympathy with local independence. And the resistance within the Assembly is already building against Hertzberg's attempts to stop even large companies getting direct access. 

Some city leaders will not wish to fight the Governor and the state legislature on the issue. But if municipalities do not opt out, they may have to explain to their local business and voters why they are paying far more for electricity than a city next door which chooses to set up its own power company. Cities are beginning to realize they might potentially lose major employers. Politicians are also beginning to realize that local companies stand to gain or lose a fortune on this matter, and this could affect campaign contributions. 

State Power Plans at Risk
If municipalities do move to set up their own power companies, it could undermine at least three key elements of the State of California's power plans: 
First, the rate hike already approved falls mostly on businesses and other large users. But municipal power would unpick this structure, allow large regions of California to ignore the PUC, leaving the rate structure to be determined city by city. Many municipalities may be unable to resist pressure from local businesses to protect them from disproportionate rate hikes. Others might cave into irate voters.
Second, the plans laid out by Governor Davis' and State Treasurer Angelides' for a California State Public Power Authority would also be badly damaged if large regions avoid having anything to do with it.  It is possible that long-term power contracts might also face an additional hurdle if municipalities opt out of higher long-term rates by buying on the open market.  It could mean the state is left with excess power that it would have to sell at a loss.
Third, revenues to back the proposed power bond could be imperiled, if municipalities opt out of the rate structure and revenue stream needed to repay the bond. And if the momentum for direct access develops among the cities and municipalities across the state, it could make it much more difficult to launch the bond in the first place as investors may take fright at potential threats to the viability of repayments. 
The issue is at an early stage -- the PUC had a general workshop on the matter at its offices in San Francisco on Friday.  State legislative leaders are likely to use every political and legal means available to stop municipal secession, or at least smother the issue until the power bond is successfully away. But stopping the municipalities if they choose to follow this path could prove to be difficult.