Subject: FW: University of California/California State University Litigation
From: [email-masked]
To: [email-masked], [email-masked]
Date: Thu, 19 Apr 2001 13:21:00 -0700 (PDT)

fyi

 -----Original Message-----
From:  Williams, Robert C.  
Sent: Thursday, April 19, 2001 8:19 PM
To: Rogers, Rex
Cc: Sharp, Vicki; Derrick Jr., James
Subject: University of California/California State University Litigation

Attorney-Client Privileged Communication

Rex,

Vicki asked me to provide you with a description of this litigation.

The University of California and California State University are Direct 
Access customers of EES.  Many of their campuses are in the PG&E and So Cal 
Edison service territories.  Last fall, due to their deteriorating financial 
condition these two utilities began defaulting on their obligation to remit 
to EES the "negative CTCs" attributable to EES's customers.  "Negative CTCs" 
reimburse EES for the cost of procuring power for its customers.  It is EES's 
position that these amounts are owed to it under a 1998 settlement agreement 
with the utilities, as well as under the utilities' tariffs.  EES has filed a 
complaint with the California Public Utilities Commission against both 
utilities to collect the amounts owed.  PG&E owes approximately $380 
million.  So Cal Edison owes approximately $120 million.  The complaint 
against PG&E is stayed due to the bankruptcy filing.  The MOU and Advice 
Letter between So Cal Edison and the State appear to provide for the payment 
of Negative CTCs to ESPs, but that agreement has not been approved yet.

In early 2001, there was a growing concern that because of their worsening 
financial condition PG&E and So Cal Edison might not be able to pay the 
future Negative CTCs.  EES therefore decided to cap or end its exposure to 
the cost of procuring power on behalf of its customers.  It effectively did 
so by "re-sourcing" its customers back to the utilities. This occurred on 
February 1, 2001.  Thenceforth, (until the Department of Water Resources 
stepped in), the utilities bought power for EES's customers.

The only customer to object to EES's action (to the point of filing suit) has 
been UC/CSU.  Almost all of the other customers have been indifferent, 
largely owing to the fact that EES has kept the customers financially whole 
on their contracts with EES (i.e., the customer continues to pay 5% less than 
the frozen rate for its power, just as it always did).  UC/CSU may have 
viewed the situation differently because, once the DWR began purchasing the 
power instead of the utilities, the State had the supply risk.  The UC/CSU 
contact is one of the few contracts that permits a court challenge to a 
party's actions; almost all of the other contracts provide for mandatory 
arbitration.

The suit was filed in March in federal district court in San Francisco.  
UC/CSU moved immediately for a preliminary injunction (i.e.an order to 
preserve the status quo pending a full trial on the merits) to be restored to 
Direct Access service.  The State Attorney General filed an amicus curiae 
brief supporting the Universities' application.  On April 20, the court 
granted UC/CSU's request for a preliminary njunction.  The court ruled that 
there was a strong likelihood that UC/CSU would prevail on the merits, and 
that they would suffer immediate and irreparable harm if the injunction were 
not granted.  The "immediate and irreparable harms" cited were loss of 
specialized metering services, uncertainty about being eligible for Direct 
Access in the future, loss of scheduling coordination services, and general 
uncertainty caused by the bankruptcy of PG&E.  We think the Judge erred, and 
have filed an appeal to the Ninth Circuit and have requested a stay of the 
court's order.  Because of the standard of appellate review, we are not 
highly confident of having the decision overturned.  We expect a ruling early 
next week.     

If the decision stands, it is estimated that EES will incur $144 million 
procuring power for UC/CSU until the contract expires in March 2002.  This 
will increase the Negative CTC amounts already owed by PG&E and So Cal Edison 
(this may not be dollar-for-dollar, depending on how the Negative CTC will be 
calculated in the wake of the bankruptcy of the PX).  Obviously, to the 
extent we are able to recover the Negative CTC from PG&E and So Cal Edison, 
this exposure is mitigated.

It is difficult to predict whether other customers will follow suit.  Since 
they are not affliated with the State, they do not have the same incentive as 
UC/CSU to challenge EES's action.  Moreover, their contracts do not contain 
the number or sophistication of services as the UC/CSU contract, so it will 
be more difficult for them to obtain an injunction ordering specific 
performance.  Arbitration may also be a bar to suing in court. 

Please let me know if you need any additional information.  My cell phone 
number is 281-414-0364.