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Enron Mail |
---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 01/26/2001=
=20 04:28 PM --------------------------- Robert Johnston 01/26/2001 03:07 PM To: John J Lavorato/Corp/Enron, Jeffrey A Shankman/HOU/ECT@ECT cc: Gary Hickerson/HOU/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT, John L=20 Nowlan/HOU/ECT@ECT, Michael W Bradley/HOU/ECT@ECT, John Greene/LON/ECT@ECT,= =20 Jeff Kinneman/HOU/ECT@ECT, Michelle D Cisneros/HOU/ECT@ECT, Jaime=20 Gualy/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Richard=20 Shapiro/NA/Enron@Enron, Phillip K Allen/HOU/ECT@ECT, Mike=20 Grigsby/HOU/ECT@ECT, Kristin Walsh/HOU/ECT@ECT, heizenrader@home.com=20 Subject: California 1/26/01 Executive Summary: AB18X is the focal legislative point for the proposed bailout plan, but=20 contains several problems. Per yesterday's morning report, the bill includes a plan in which the=20 utilities would issue stock warrants in exchange for financial assistance= =20 from the state. The bill will be subject to attacks from consumer groups, which will slow i= ts=20 passage. Timing is crucial because of the February 7th deadline for the FER= C=20 emergency order and the February 13th deadline for debt forbearance. The bill also contains little detail about costs. The cost of the bailout= =20 cannot be determined until the final auction results are known and the=20 utilities reach a deal with Davis with respect to the share of outstanding= =20 debt that must be paid by the parent companies of the utilities. Sources report that Davis will insist that at least 43 percent of the=20 outstanding PG&E/SoCal debt should be absorbed by the parent corporations. 1. AB18X- The "Bailout" Bill There are a number of key problems with AB18X.=20 The bill is being presented by its drafters as a "work in progress." The=20 current bill is likely to be significantly different next week after consum= er=20 groups blast it in committee hearings and in the press. Also, the fiscal= =20 effect of the bill is listed as "unknown", because the costs of the long-te= rm=20 contracts being bid upon in the auction are not yet known. Moreover, the= =20 audit of the utilities and its recommendation for the share of utility debt= =20 to be paid by the state versus the parent companies is not yet finalized (s= ee=20 below). The industrial users are unhappy with this bill because they will bear the= =20 burden of the costs. Approximately 35% of power customers in CA are=20 residential, and another approximately 10% are commercial or users with=20 emergency status; this means that half or more of all power customers in CA= =20 will benefit from price controls on their power. This, in turn, leaves the= =20 large industrial customers footing the bill. They are saying that this may= =20 result in job losses and may even give them incentive to leave the state. The State of California is talking about issuing revenue bonds to pay off t= he=20 utilities=01, debt. There is an important but subtle difference between th= ese=20 and general obligation bonds, which draw from tax revenues and assets to pa= y=20 debt. Revenue bonds draw from the revenue gained from actually using=20 something. For example, a stadium developer might issue revenue bonds to p= ay=20 for a new stadium, then make revenue from the team that uses the stadium. = =20 How will that work in the case of the utilities? There is no guarantee tha= t=20 there will be positive revenue to pay back the bonds.=20 California=01,s interruptible power contracts have a 100-hour/year limit. = Most=20 of those contracts are at or near that limit and will become firm power=20 contracts. This removes another option for finding power. 2. The Audit: Many of the details in AB18X are subject to the results of the audit and th= e=20 power auction. Governor Davis has commissioned a study which shows that 43= =20 percent of the PG&E and SoCal Edison debt is owed to their parent companies= . =20 He views this as the minimum acceptable percentage that the parent companie= s=20 should contribute to a bailout. The companies cannot simply eat the cost of their inter-company debt. They= =20 do not have the cash to do so. The question becomes, if the subsidiaries= =01,=20 bills are not paid, will they be forced to go into bankruptcy? 3. The Auction: As told by us to some of you yesterday afternoon and as reported by the Wal= l=20 Street Journal this morning, the low bids that have been announced from=20 Wednesday=01,s auction are based on off-peak power. This is why they are s= o=20 low. It is estimated that if Davis were to include off-peak power, the bid= s=20 would be closer to 9.5 cents per kilowatt hour. =20 Governor Davis is not disclosing the "true bid price" because to do so woul= d=20 not be "in the public interest." While they legally can keep the auction= =20 terms secret, this makes an excellent bluff to try to get other power=20 providers to bid lower for peak power. Since the real cost of power is higher than the auction price is making it= =20 appear, this means that there may actually be little or no margin between= =20 where the state buys power and where the utilities sell it. No margin woul= d=20 mean no funds to pay down utility debt. 4. The Rest of the West The federal order for other states to supply CA with power requires Oregon= =20 and Washington to draw down their own reservoirs. The people of OR and WA= =20 are understandably upset about this. It is not clear how much longer this= =20 can continue, as reservoir levels continue to drop. The problem is the drought impacting the entire Northwest is not getting an= y=20 better even as Washington and Oregon hydroelectric plants dump water throug= h=20 their dams to keep the lights on this winter. Officials in these states are= =20 now bracing for electricity surcharges that could hit 50% by mid-summer and= =20 increase the casualties on the dot-com laden killing field. Cities from=20 Seattle to Tacoma and beyond are already passing legislation that scales in= =20 electricity surcharges that high and more. Seattle raised prices by 10% the= =20 first of January, with a further, emergency 18% increase is set to pass the= =20 city council on Monday. And city political officials warn that another 25%= =20 increase would be in effect by mid-summer -- unless the federal government= =20 agrees to plans by the western governors to request an emergency price cap= =20 for the summer. Although the Clinton administration and Bush administration steadfastly=20 refused to impose such a price cap when Governor Davis requested it many=20 times in the last month, western governors told our sources that they hope= =20 the political and economic considerations will change by late spring.=20 "Although FERC head Hebert is a free-market freak," one government official= =20 told our sources, "this is very different than the price cap request=20 California made. First, you could legitimately say California's problems st= em=20 from their screwed up de-regulation plan. But the west's problems this summ= er=20 stem from a drought, and that is significantly different. Second, the Bush= =20 administration may want to punish Davis with thoughts of 2004 presidential= =20 politics in their head, but that will not apply to all of us across the=20 Northwest and Southwest. We have a lot of Republicans on the hook here.=20 Third, even if you think damage to the US economy from California's trouble= s=20 won't be that great, the damage of 50% energy surcharges rolling across the= =20 entire western United States from Arizona to Washington has to get Bush's -= -=20 or at least Cheney's -- attention." There is almost no snowpack in most of the northwest, according to these=20 officials, so the usual rebuilding of water reserves necessary to generate= =20 electricity will not occur. Add to that the fact Northwest dams are being r= un=20 harder than usual to keep up with the maxed-out energy demands across the= =20 west ,and you have the makings of a mid-summer economic disaster. "The=20 reservoir behind Grand Coulee dam (the country's largest) is dropping at a= =20 foot a day since New Year's and there is no sign of that slowing," one=20 official told our sources.
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