Message-ID: <28670923.1075853433447.JavaMail.evans@thyme> Date: Tue, 8 May 2001 13:07:00 -0700 (PDT) From: steve.hall@enron.com To: elizabeth.sager@enron.com, christi.nicolay@enron.com, christian.yoder@enron.com, richard.sanders@enron.com, james.steffes@enron.com, alan.comnes@enron.com, robert.badeer@enron.com, susan.mara@enron.com, tim.belden@enron.com, greg.wolfe@enron.com, stephen.douglas@enron.com, jeff.blumenthal@enron.com Subject: The real reason for the windfall profits tax comes out: Davis wants leverage with the generators/marketers at Wednesday's meeting Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Steve C Hall X-To: Elizabeth Sager, Christi L Nicolay, Christian Yoder, Richard B Sanders, James D Steffes, Alan Comnes, Robert Badeer, Susan J Mara, Tim Belden, Greg Wolfe, Stephen H Douglas, Jeff Blumenthal X-cc: X-bcc: X-Folder: \Elizabeth_Sager_Nov2001\Notes Folders\Notes inbox X-Origin: Sager-E X-FileName: esager.nsf An excerpt from a recent article: "Davis - who told reporters Monday that the state "is at war" with Houston-based generators - is expected to meet with representatives from a dozen energy companies Wednesday to discuss "unpaid debts, credit issues and the supply of power." Those generators include Mirant, Williams and Duke Energy. At the meeting Wednesday, Davis will attempt to get the generators to take a haircut on hundreds of millions of dollars of power bills owed by PG&E Corp. unit Pacific Gas & Electric and Edison International unit Southern California Edison. In exchange, a person close to Davis said, the governor may promise to veto the windfall profits tax bill if it reaches his desk." Generators Warn Of Blackouts If Calif OKs Windfall Tax Updated: Tuesday, May 8, 2001 07:19 PM ET By Jason Leopold Of DOW JONES NEWSWIRES LOS ANGELES (Dow Jones)--Legislation to place a windfall profits tax on sales of electricity into California will deter investments in new generation and drive power out of the state, raising the risk of blackouts, wholesale-market power suppliers said Tuesday. "It would be totally counterproductive and prolong California's misery for years to come," said Gary Ackerman, executive director of the Western Power Trading Forum, an industry group. "New plants in California wouldn't get built, and existing plants would cease operating. There would be blackouts all day long" On Monday, the Senate passed, by a vote of 25-12, a bill to tax at 100% sales of electricity into California above $80 a megawatt-hour. A separate windfall profits tax bill with a three-tiered rate system is moving through the Assembly's committees and could come up for a vote in the full house later this week. Electricity priced at $60/MWh would be taxed at 50%, sales of power over $90/MWh would be taxed at 70% and electricity sales over $120/MWh would be taxed at 90%. Gov. Gray Davis has said he is "open" to the concept of windfall profits tax on electricity sold into California, but hasn't said whether he supports the bills moving through the Legislature. Generators said they would seriously consider scrapping plans to build much-needed new generation in California if the measure is signed into law. "We do have some concerns on how (the bill) would affect new generation," said Mirant Corp. spokesman Chuck Griffin, whose company is investing about $500 million in new power plants in Northern California. "We have said all along that before we are able to build this generation we need to make a good assessment of the business environment in the state, and the (windfall profits tax) is certainly a factor." Tim Thuston, managing director of government relations for Williams Cos., said a windfall profits tax is "confiscatory" and the state is trying to circumvent the Federal Energy Regulatory Commission. "I can tell you we think its a very poor idea," Thuston said. "I'm speculating, but I think any time a state starts seizing profits it would deter investment in that state." Duke Energy, a power supplier investing more than $600 million in new power plants in California, wouldn't comment on how the tax would affect its plans. Mirant - following Williams' lead - supports short-term regional price controls if they would bring stability to the state's wholesale power market, Griffin said. "We have expressed that we may be comfortable with some form of temporary price mitigation in order to get through this crisis," Griffin said. But the base prices for electricity written into the windfall-tax bills are much lower than generators' actual costs, Ackerman said. "Today's gas prices are much higher than that," he said. "Everybody would automatically sell out of state." Lawmakers Unmoved Lawmakers aren't overly concerned with negative implications if the measure becomes law. "If the price for rolling out the welcome for generators is 10 to 30 times more than Californians paid for power last year, then we ought to build our own plants," said state Sen. Debra Bowen, D-Redondo Beach, and chairwoman of the Senate energy committee. "The state's motto is 'Eureka,' not 'Welcome to California, please come gouge us.'" Paul Van Dyke, press secretary to state Sen. Nell Soto, D-Ontario, who is sponsoring the windfall profits tax bill in the Senate, said "there's no evidence that leaving things the way they are now will be better." "California has a limited policy chest, and federal energy regulators are not moving fast enough to solve the problems," Van Dyke said. "California needs to build up its tool chest. So at the end of the day, whether we solve this problem through windfall profits or a negotiated agreement with the generators, the bottom line is consumers cannot be gouged." Davis - who told reporters Monday that the state "is at war" with Houston-based generators - is expected to meet with representatives from a dozen energy companies Wednesday to discuss "unpaid debts, credit issues and the supply of power." Those generators include Mirant, Williams and Duke Energy. At the meeting Wednesday, Davis will attempt to get the generators to take a haircut on hundreds of millions of dollars of power bills owed by PG&E Corp. unit Southern California Edison. In exchange, a person close to Davis said, the governor may promise to veto the windfall profits tax bill if it reaches his desk. The governor's office wouldn't comment on the substance of the meeting Wednesday. Wall Street analysts said the measure could have severe effects on California's economy if it passes and will pressure generators' shares as the bills move through the Legislature. "We expect weakness in (generators) shares with California exposure," Dan Ford, an analyst with Lehman Brothers, said in a research note Tuesday. "A windfall profits tax bill will motivate generation developers to remove existing and new capital to other states and potentially destroy California's already softening economy." Ultimately, however, Ford expects the bill to be used as a bargaining chip rather than passed. The tax also raises regulatory questions, several lawmakers said. In essence, California is attempting to set wholesale power rates, which are governed by the Federal Energy Regulatory Commission. A FERC commissioner wouldn't comment directly on the issue, but told Dow Jones Newswires that the state has "no jurisdiction on wholesale power rates and does not have the legal authority to adjust rates set by FERC." -By Jason Leopold, Dow Jones Newswires; 323-658-3874; jason.leopold@dowjones.com