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Enron Mail |
Executive Summary
? Davis struggles to find Senate support for SoCal transmission deal ? Only chance of deal going through is a one-time quick vote; if deal has t= o=20 go to hearings - it will probably die ? If not transmission deal, legislators will seize assets and seek price ca= ps ? Asset seizure would target power contracts, then power plants; as a resul= t=20 the endless court battles will ensue, but this gives Davis opportunity to= =20 continue to blame generators and marketers ? Bankruptcy for SoCal is still the most likely scenario, with the QFs or= =20 SoCal itself likely to file if the transmission deal dies or gets amended ? Congressional democrats rally around Davis and seize opportunity to blame= =20 the Administration =20 Transmission Deal and Democratic Support As Governor Gray Davis scrambles to build support for his SoCal Ed.=20 transmission proposal, one thing is evident; the longer the deal is exposed= =20 to public debate, the less likely it is to pass. In fact, politicians have= =20 been so leery of the deal that Davis has been unable to locate even one=20 sponsor to introduce the bill in the Senate. In the eyes of many Democrati= c=20 legislators (and all Republicans) forcing SoCal Edison into bankruptcy is= =20 looking like a better option than buying the transmission lines; that is wh= y=20 the Governor's senior strategists have quietly been trying to schedule a=20 quick "up or down" vote on the transmission line purchase as early as next= =20 week. The bill is currently not scheduled to be voted on in effort to avoi= d=20 debate, however, if there is an opening within the next two weeks and Davis= =20 feels he has enough support, it will be pushed through. Because the SoCal= =20 deal needs every piece in place as "negotiated" by Davis' team, the team=20 wants no amendments allowed on the Assembly floor and a quick vote. If thi= s=20 unlikely fast track strategy fails for Davis, the prospects for the=20 transmission lines purchase will deteriorate steadily (keep in mind that th= at=20 it cannot even be resubmitted to the Assembly until it has been vetted by= =20 SoCal Edison attorneys). According to sources, the legislature is going to= =20 try to modify the Memorandum of Understanding between Gov. Davis and SCE. = =20 However, the Senate leadership does not believe there will be sufficient=20 support to pass even a modified MOU. Burton reportedly believes that at lea= st=20 6 Democrats will vote against it along with the Republicans. The more that= =20 bill gets picked apart in public, the uglier it looks and the more Democrat= s=20 will realize that they are all alone in supporting it.=20 =20 Another problem faced by the legislatures is the deal is in favor of SoCal= =20 and not the state. Among other things, the state is overpaying by about $1= .5=20 billion for the transmission lines. Additionally, the MOU Davis has with= =20 SoCal. Ed nearly matches, point for point, the deal Davis condemned with PG= &E. Asset Seizures Since before the PG&E bankruptcy filing, we have maintained that asset=20 seizures through eminent domain would become a major pursuit for increasing= ly=20 frustrated Democrats. Davis' legal office has thoroughly scrubbed the law = on=20 eminent domain seizures of everything from power generating assets across= =20 California to existing power contracts negotiated by, whom Davis's calls,= =20 "profiteering power brokers". Of course, everyone in the Governor's office= =20 understands that any seizing would immediately end up in state and federal= =20 courts, and would be a legal nightmare (there are a few minor Constitutiona= l,=20 legal and interstate commerce problems). The main thing is that the seizing= =20 would continue Davis's main approach to this problem -- management by press= =20 conference -- and it would put the Governor and Democrats on the right side= =20 of the issue -- punishing the capitalist leeches. According to one senior= =20 Democratic legislator, there is movement within Democratic members of the= =20 state Assembly to demand that Davis agree to seize the power contracts in= =20 return for their vote in favor of the power transmission purchase. Of cours= e,=20 taking the contracts would only be setting a precedent for taking the power= =20 plants. The appeal of seizing the contracts is that it would allegedly put= =20 California state officials in charge of where the power is sold and reduce= =20 mark-ups substantially as they used the contract power authority to provide= =20 spot-market power purchases before peak emergency conditions drive the pric= e=20 through the roof.=20 Price Caps One strong indication as to whether or not summer price caps will occur=20 depends powerfully on decisions made by the three Republican Governors from= =20 Colorado, Alaska and Wyoming. These three were the key players during the= =20 Portland Western Governor's Conference last January and, according to senio= r=20 White House officials, it took the personal and prolonged intervention of= =20 President Bush himself to peel these three away from an otherwise unanimous= =20 call for price caps from the governors. "If they had signed that price cap= =20 appeal," the administration source said, "we would already have price caps.= =20 So if they start to make it clear something has changed, we will have to=20 listen." Sources indicate that if these Republican leaders begin to rethin= k=20 their opposition to price caps, the Bush administration will be forced to= =20 reconsider price caps as a remedy for the West.=20 Cost Plus Caps -- Think of these as Republican price caps in that their fir= st=20 duty is to make sure private companies make money and have incentives to=20 provide power into the affected grid. Just to give some idea of magnitudes = in=20 a cost plus deal, current discussions would put a cap on power costs at=20 something like $250 per kilowatt hour. That is a long way down from the=20 August futures contract that is pricing in $750 per kilowatt hour, but a lo= ng=20 way above last August's $150/kwhr price and a particularly long way above t= he=20 cost of generating this power, which is something like $25-30/kwh.=20 Market-Price Exceptions -- The option allows the Bush administration to hav= e=20 political credit for imposing price caps. As we write, FERC is currently ,i= n=20 the process of considering permit renewals for five companies generating=20 power in California (Duke, Dynegy, AES, Reliant and Williams). The permit= =20 grants a further three-year waiver that allows them to sell power into=20 California in the existing "whatever price the market will bear". In other= =20 words, FERC could simply not grant these companies the right to sell energy= =20 at the market price, perhaps by changing a definition of controlling market= =20 share, and then power to control prices would revert back to FERC.=20 Technically, in granting the extension of these permits, FERC has to=20 establish a formal finding that the five power companies do not wield "mark= et=20 power" -- that means they cannot affect the price of energy by withholding= =20 power at crucial times. Of course, FERC has just found on three different= =20 rulings in the last four months that the companies wield exactly that kind = of=20 ability over market prices and has ordered minor rebates to adjust for the= =20 subsequent price spikes. But that would mean FERC would have to want to wie= ld=20 effective power over price capping in California and they have shown no=20 desire on that front. The escape clause for FERC simply to renew the waiver= s=20 is that they are routinely renewed unless the company applying for waivers= =20 controls more than 20% of an electricity market and none of these companies= =20 come close. In other words, the waivers option lets FERC escape if the Bush=20 administration and FERC commissioners really want to escape. Once again, th= at=20 decision may be more in the hands of the three Republican Governors than=20 anywhere else in the country. But you can be certain that in the past few= =20 days Administration officials have become fully aware of the potential=20 political liabilities of doing nothing except advocating more nuclear and= =20 coal power plants.=20 Democrats Seize Opportunity to blame Bush Senior political leaders now think the total energy bill for the year could= =20 come in as high as $60 billion, which would destroy state finances for a=20 decade. Add to that the constant drumbeat of numbers that voters hear=20 everyday about their own direct out-of-pocket electricity costs (they paid = $7=20 billion for electricity in 1999, $27 billion in 2000 and are expected to pa= y=20 $70 billion this year -- ten times the rate two years ago. Then, of course,= =20 they open bills with massive rate increases that bring all those incredible= =20 numbers home in a very direct way, and, well, who can blame the Democrats f= or=20 saying there is a simple solution, but the White House won't allow it. National level Democrats realize California=01,s power crisis is a prime=20 opportunity to chastise the Bush administration and its free-market advocat= e,=20 FERC Chairman Hebert, over their resistance to summer price caps. As=20 California=01,s leaders calculate this year's taxpayer energy bill at=20 potentially $60 billion, a rogue's gallery of Democratic congressional=20 leaders are currently meeting with Governor Davis and coordinating efforts = to=20 fan out across the eight western states of the power grid with a singular= =20 message: "the solution to all western voters electricity problems lies righ= t=20 in Washington DC, at FERC headquarters controlled by Bush Administration=20 appointees." And as the political dialogue takes on a more aggressive=20 national tone and its possible impact on control over the US Congress comes= =20 more into focus, the solutions articulated by California's Democrats who=20 sense they have Republicans on the run in the West become less and less "fr= ee=20 market" focused. The two strains of the Democratic solution that are=20 becoming an unavoidable part of the energy picture are asset seizures and= =20 price caps. =20
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