Subject: FW: California Update 7/26/01
From: [email-masked]
To: [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]
Date: Fri, 27 Jul 2001 04:22:43 -0700 (PDT)

This is a long one... Let me know if you have specific follow-up.

RJ   

EXECUTIVE SUMMARY 
California Senate's MOU Debated in State Assembly
Coordinating the California Legislature 
CPUC's Rate Setting Authority In Question
Highlights from the SoCal Investor Conference Call

MOU
As reported earlier, SB 78XX (the leading SoCal rescue adopted by the CA Senate) has undergone minor amendments by the California Assembly.  Three important revisions on the bill are:
In regard to commercial rates, the assembly has now left open the definition of large or "industrial users" by eliminating the previous 500 kWh+ usage requirement.  This change could enable the Assembly to categorize either smaller or larger consumers into the industrial/commercial user status 
The bill would not become effective unless SB 39XX is signed into law.  SB 39XX  (authored by Sen. Speier) is regarding the CPUC's authority over utilities and generators in California; it places certain generation that was purchased by Reliant, Dynegy, etc. from the utilities after deregulation under PUC authority.
The State's purchase of the SoCal Ed. transmission lines has been removed.

AB 82XX was also revised by the Assembly with many of the deleted provisions duplicate in SB 78XX, such as the conservation lands and the option to buy the transmission lines.  Additionally, AB 82XX can not be enacted unless SB 1XX (the windfall profits bill) is signed.  The joining of 78XX to SB 39XX and of 82XX to 1XX is very likely a method by which the Assembly is pressuring the governor to sign these other bills, which otherwise might not have been enrolled.  However, the joining of these bills makes their passage more difficult.  The remaining provisions of AB 82XX are as follows:
Renewables Portfolio
Direct Access
Ratepayer Refund Account (changed the name to Ratepayer Benefit Account)
Balancing Account for SCE procurement of power
DRC replaced with non-bypassable charge option for MOU.  This includes reference to balancing account, recovery of reasonable procurement costs, and the prohibition of reasonableness review on contracts by PUC.

Putting the MOU to a Vote
The Speaker feels that everything in these bills has been discussed already, so nothing is really new. Hertzberg met with advisors Wednesday night (10:00 pm) to decide if the Assembly will convene on Friday. It probably has a lot to do with the ability to get enough members' support of these measures and willingness to go back to Sacramento. Many are vacationing; some in other countries. If there is an Assembly session on Friday, he plans to have an informational hearing on the measure today.  If the Assembly's session fails to convene Friday, it is unclear what he intends to do.  On the other side of the equation, it is unlikely that Senator Burton will bring the Senate back into session to approve this bill.  The Senate won't even consider it until it comes back from recess, but the Assembly feels it is their responsibility, thereby putting the onus back on the Senate. Apparently there is really no coordination between the leadership of the different houses.
While SB 78XX and AB 82XX are the most publicized bills, neither bill will be the actual legislative vehicle for these provisions.  The proposed content of these bills will be amended into other bills which are further along in the process, thereby eliminating the need to waive a number of rules and hold numerous hearings.  This will speed up the process. Apparently the Speaker's office has not yet identified the actual bills that will be used. But they hope to find bills that are so far along in the legislative process that if the Assembly passes the bills they will not be able to be amended in the Senate.  It does appear that the Assembly does intend to send these through as two separate bills, though, with the SB 78XX provisions in one bill and the AB 82XX provisions in another.

CPUC, Rate Setting Authority or Rate Setting Minority
Recently, the California Assembly has pursued a legislative provision that would enable lawmakers to abrogate the CPUC's rate-setting authority and hand over that power to the California legislature.  Politically, this gives the Governor the ability to say, if rates increase automatically, that he did not approve of the rate increase, and there is nothing he can do about it.  But it also gives Wall Street buyers of California's revenue bonds assurances that no matter what the need, there will always be enough revenue to back revenue bonds payments; thus deniability to ratepayers and certainty for bondholders.  

Were this provision to pass, the CPUC would still retain oversight of rates for the investor owned utilities.  As for DWR, under the draft rate agreement proposed by the CPUC, it contains a mechanism for the Commission to use in setting electricity rates that satisfy DWR's "revenue requirement." DWR's revenue requirements include bond-related costs, operating costs (such as power purchase costs), and administrative costs.  AB1X provided for energy-related bonds to be sold by the state to support DWR's power purchases.  Because power contracts require DWR to pay for power before it makes bond payments, and DWR must sell power to obtain revenues, the rate-setting mechanism in the rate agreement also applies to DWR's power purchases not just its bond payments. Note that if the Commission adopts a rate agreement, it becomes irrevocable. 
-The draft agreement also includes a provision stating that the CPUC will take the DWR at its word as to its retail revenue requirements.
The agreement would require that the CPUC set rates meeting DWR's requirements in either 30 or 90 days. The 90-day mechanism applies whenever DWR submits a revenue requirement. The 30-day mechanism applies when DWR anticipates or actually draws on its reserves. 
The rate agreement includes an enforceable covenant by the CPUC specifying how the Commission will set rates to meet DWR's revenue requirements (which includes both bond costs and operating costs).  

If the CPUC's draft rate agreement is approved, there will be no legislative or PUC oversight of any of those costs, and no opportunity for public comment for as long as bonds are outstanding.  If a rate agreement can be avoided, there will be opportunities to review and alter the agreement's demand management and administrative costs.  Either way, power contract costs remain an obligation of DWR and cannot be altered except by mutual consent of DWR and the contractor.

SoCal Edison Investor Conference Call
The following are notes from the SoCal Edison conference call with holders of defaulted debt, 24 July 2001, 1:30 PDT:

In order for California to sell their revenue-bonds with an investment grade rating, two criterion must be met; 1) there must be a rate-supported, dedicated revenue stream in place and 2) the legislature must have the power to override of the CPUC's rate setting authority and raise rates if necessary.  The second criterion, however,  faces significant opposition from the California State Constitution.
Regarding the DWR rate requirement, Craver, the spokesperson for SoCal,  stated that SoCal is evaluating the numbers, particularly on the DWR side.  He stated that if you accept their output of models and numbers, it appears this requirement would fit within the existing rate structure.  However, "we need to remember that deregulation started with forecasts that proved to be wrong".  Therefore, this is "risky" in that SoCal is faced with "fixed revenues and floating costs."  Unlike DWR, SoCal has no ability to adjust rates based on costs, making floating natural gas prices a risk.
Prudential asked, if based on the Hertzberg legislation, the sale of the transmission assets is now off the table.  SoCal responded that this is correct.  Prudential asked if SoCal could then anticipate more securitization, i.e., be securitized for all but $500 million with an option to buy the transmission assets at book for 5 years.  SoCal responded that it was "unclear what the pricing [of the transmission assets] would be, but there would be an option" for the state to purchase the transmission assets.
Prudential asked about the status of the remaining (non-legislative) implementing decisions on the MOU and if the legislation (78XX and 82XX) contains them.  SoCal responded that there are 3 outstanding issues remaining for implementing the MOU:
	1) Ratemaking for the utilities' retained generation:  The PUC is holding hearings on this issue this week.  These hearings have slowed the process. A decision is expected by the end of August.
	2) A procurement plan for the utility: This plan is before the PUC.  SoCal suggested the PUC may be waiting to see what passes the legislature before acting on this point.  Regardless, the company needs an "adequate balancing account with an automatic rate trigger."
	3) Clarification on the utility holding company's position regarding 1st priority:  On this front, the PUC asserted its jurisdiction over all three utilities and their holding companies.  The three holding companies have challenged this decision.  Commissioner Bilas has written a draft decision in favor of the challenge; a final decision is expected as soon as Thursday. This would clarify that the utilities have first call on investment from the holding companies, but that the holding companies are not obligated to pay the debts of the utilities.
Deutsche Bank asked if, in SoCal's numbers reported to date, it was assuming the charges for ancillary services.  SoCal responded that DWR had confirmed as of 18 January that it would pick up these charges.  These charges would otherwise amount to $800 million - $1 billion in additional revenue requirement for the utility.  Based on FERC rulings, SoCal had not been counting on paying these charges, so they are not reflected in the company's numbers.  However, SoCal will be paying grid management and uplift charges.  They anticipate paying "some portion" of these charges.  This could potentially require an amended URG filing.
Citigroup asked where Edison stands on the Edison Mission Energy issues.  Edison responded that they are "working on new facilities on the bank side." The current facilities expire on October 10th or 11th.  Edison indicated it is in the process of finalizing sales of approximately 1,000MW of non-strategic assets.  They are in negotiations with the final bidders except for Hopewell, which is done.  There is no specific timeline on when the deals will be announced, but it is a matter of days to a week.
Appalucia Management asked if, on SoCal's generation, DWR is assuming a cost-plus or retail rate.  SoCal responded that it uses cost-of-service based rates.  The return on the 12/31/00 rate basis is approximately 4 1/2 cents.  The $72.77 stipulated covers SoCal's generation, its contracted generation, QF costs (which were quoted as the most significant portion) and uncollectables.  This is driven by gas costs for the QFs.  Revenue is fixed at $73.00.