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Subject: California Update 9-14-2001
Date: Fri, 14 Sep 2001 15:23:40 -0500
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From: "Whitman, Britt" <Britt.Whitman@ENRON.com>
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For questions or comments regarding this report please contact G. Britt Whitman at ex:5-4014 or Kristin Walsh at ex:3-9510.

EXECUTIVE SUMMARY
????	Senate May Seal SoCal's Fate
????	SoCal Edison Eyeing Bankruptcy


California Senate & SoCal's Fate 
With the California Assembly's passage of SB 78XX last week, Senator John Burton (President Pro Tem) is positioned as perhaps the most legislatively powerful man in California.  Maintaining his hard line against the Assembly's amendments to SB78XX, Burton has completely rejected SB78 XX and has instead revived a previously introduced Assembly bill (AB 67XX), which had not faced a Senate floor vote.  The majority of AB 67XX's original language has been gutted by Burton and discretely replaced with the following points:

????	Financing of the dedicated rate component has been modified to incorporate a smaller rate base consisting of consumers using only 70 kv or more (formerly users as low as 20 kv were included).  The 70 kv value is rumored closer to 120 kv.
????	The state will have a 5-year option to purchase SoCal's transmission assets at twice book value and SoCal will be allowed to transfer profits from the sale to their parent company.
????	A renewables portfolio equal to 20% of total generation must be in place by 2010.  
????	There is an 11.6% return on generation in the bill.
????	The amount authorized for SoCal's bond issuance has been lowered from $2.9B to $2.5B.  
????	Direct access language has been included in the bailout bill.  The exact language, which was developed by Senator Bowen's office, is not yet known, however, earlier versions suggest that all parties will be forced to pay exit fees, switch providers no earlier than 2003, and there will be no cost shifting away from the DWR. (Note: Senator Burton is reportedly listening carefully to Treasurer Angelides' arguments about the revenue bonds not selling if direct access is included.)

It is doubtful that Burton will insist on the loyalty of fellow Democrats and will preferably discourage the bill's support.  The arrival of AB67 XX on the Senate floor may be little more than Burton's civil compliance with Gov. Davis' request.  All Republicans and at least 5 Democrats are expected to vote against the bill; an additional two dissenting Democrat votes would effectively block AB67 XX.  Consumer advocates that adamantly oppose this bill (because it lacks the state's ownership of hard transmission assets and burdens residential consumers with excessive rates) are "optimistic" about the bill's defeat in the Senate.  Despite these circumstances, it is highly conceivable that the Senate could pass along a virtually ineffective & inadequate bailout package for the Assembly's approval.

Burton is reportedly avoiding discourse with Davis over AB67 XX and as the hours pass ever closer to the midnight deadline, Burton will likely introduce the bill for floor vote and then hurriedly adjourn the Senate.  If the bill passes, the Assembly will bare the difficult task of either accepting the bill as is, or reject the bill and risk SoCal's bankruptcy.  We believe that if the bill makes it into the Assembly, AB67 XX will pass despite strong opposition from both the CTMA and consumer advocates.  There is no current vote count available in the Assembly, but we expect the Assembly to debate the bill into the early hours of Saturday morning. 

Inside Edison 
There are still strong indications that even if a bailout plan is passed, SoCal will voluntarily file for bankruptcy or a creditor, most likely a generator, will take them into bankruptcy.  SoCal remains concerned due to the number of contingent claims on their cash (by the DWR, etc.) and appear likely to try to protect these cash flows.  From the generators' perspective, if a plan is passed, the bank creditors will get paid but they will not.  Also, the DWR and ISO have not resolved even what amount is owed to generators for power they have provided this year, let alone when they will be paid.  The total amount owed through the ISO is approximately $2B.  Nonetheless, the generators remain under a federal order to provide power to the state.  Once a deal is passed leaving too little money for SoCal to pay the generators, this will leave them with little means of satisfaction other than filing against SoCal.

SoCal has privately indicated to Senators that if the AB 67XX fails to include any consumer using 100 kv or more as the base for the dedicated rate component, SoCal will be forced to file for bankruptcy because of their inability to effectively securitize the bailout bonds.  SoCal feels that this rate base is too small and the risk of these businesses fleeing the state is too high.  The CTMA also has indicated that some of its members may leave the state to avoid having to pay the extra surcharge on power.  

SoCal has not communicated a position on whether the $400 million trim (from the original $2.9B) puts them into bankruptcy. We estimate that an additional $400 million hit is indeed too much to bear and would prompt a voluntary bankruptcy petition.