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To:greg.whalley@enron.com, gary.hickerson@enron.com
Subject:California Update 6/5/01
Cc:markus.fiala@enron.com, bryan.seyfried@enron.com, jeff.kinneman@enron.com,paul.pizzolato@enron.com, michael.bradley@enron.com, michelle.cisneros@enron.com, jaime.gualy@enron.com, danielle.romain@enron.com, scott.tholan@enron.com, robert.johnston@enr
Bcc:markus.fiala@enron.com, bryan.seyfried@enron.com, jeff.kinneman@enron.com,paul.pizzolato@enron.com, michael.bradley@enron.com, michelle.cisneros@enron.com, jaime.gualy@enron.com, danielle.romain@enron.com, scott.tholan@enron.com, robert.johnston@enr
Date:Tue, 5 Jun 2001 09:24:00 -0700 (PDT)

Executive Summary
? Edison's MOU Condemned at this Friday's CPUC Meeting
? The Idle Plan Z
? Angelides Hides State Budget Concerns
? House Committee to Vote on Energy Relief

Edison's MOU Doubtful
The unusually calm settling over the California legislature about SoCal
Edison's potential bankruptcy has finally affected the relentlessly
optimistic investment bank analysts and other company shareholders. We have
reported that through all plans from B-Z, there is not a solid plan to save
this company and now executives are even more fearful that this predictions
may come to fruition.

Over the last few days, Edison executives have begun pointing hard at the
CPUC meeting this Friday as a make-or-break event for the company. The is
because after the meeting, Davis's MOU plan to buy SoCal's grid will have no
chance of preventing a potential bankruptcy. This plan is essentially dead
although Governor Daivs has yet to say this in a press releases. The final
nail will happen after the CPUC adjourns its Friday meeting without voting on
several necessary MOU provisions. Unless the CPUC makes a last minute,
emergency - amendment to their agenda, the deal will be dead (despite
SoCal's support for letting the deal stand past its deadline). Sources
indicate that CPUC President Loretta Lynch holds reservations on the MOU and
continues to distance herself from Davis.

Attempting to influence policy making, Edison executives have spent the last
few investor phone conferences warning that June 8 would see substantially
increased risks for a creditor-induced bankruptcy if the Davis plan dies at
CPUC. This is interesting, since no one else seems to have been focused on
the date until Edison began mentioning it late last week. However, there is
no more or less threat of bankruptcy than there is now or will be in two
weeks. As reported several times earlier, most everyone had given up on the
MOU long before this Friday's CPUC meeting.

Plan Z Shows Little Progress
Meanwhile, the unhurried pace toward a Plan Z that we reported last Friday,
has gained little progress. Legislators continue to pin-point a plan that
will secure re-election votes and at the same time, weigh the need for rate
hikes for California's corporate and home electricity users. As they hash it
out, the state is spending even more on electricity purchases. In spite of
better than expected levels of conservation, the state's electricity
expenditures over the last month rose to an average of $79M/day. The recent
rate increases mean more spending by the state and that calls into question
the reassuring Angelides scenario for California's budget prospects later
this year.

The California Budget Crunch
Even more worrisome than a idle Plan Z is increasing evidence that last
month's conference call with State Treasurer Angelides was a little
misleading. During that conference call Angelides claimed that State
Comptroller Connell and many in the financial committee had the numbers
wrong. Angelides argued that $7.2B already spent to buy power since January
was really the total amount of authorized spending through late August. In
fact, he said only $4.3B of that had been "spent." Sources now indicate that
Angelides was technically correct if you use "spent" to mean only the amount
of money for which checks had been written. This is different than the
amount of money California had already promised to energy suppliers who had
already supplied energy to the state. In fact, when Angelides was speaking
the state had in fact already promised to pay $7B for energy it had already
consumed (the total committed has topped $8B.) By the time the state gets
its "power bonds" auctioned in August, they will have already spent all $12B
and be back to dipping into the General Fund. The idea of RANs being
auctioned before the power bonds get issued is still an option if the general
fund doesn't make it to August.

The nearest answer to both of these cash flow deficits lies in part in the
painful process that the legislature is undertaking now - another round of
huge electricity rate hikes to securitize debt issuance. Then the hope is
that those hikes bridge the gap between now and when new capacity brings
wholesale rates down and the debts can be repaid. The only near term path
to bringing generating assets on line immediately is the 3,500 MW from QF
plants which are off line because of cash flow problems. Settling their
needs is wrapped up in settling the PG&E and Edison trade creditor issues,
which makes the legislature's leisurely approach to the rate hike/haircut
situation all the more troublesome.

Energy Relief
The House Energy & Commerce Committee is scheduled to vote on H.R. 1647 (the
Emergency Electricity Relief Act) tomorrow at 10:00 am. The bill which was
twice postponed and does not include any provisions on price caps, but during
the course of the mark-up, sources indicate that it is possible, even likely,
that a Democrat could offer a price cap amendment. Rep. Waxman (D-CA)
offered a price cap amendment at an earlier mark-up of the bill at the
subcommittee level. The Waxman amendment was rejected along party lines (all
Republicans and 2 Democrats voted nay). Sources inside Joe Barton's office
report that staff and members have been meeting to work out a compromise on
the price cap issue, but nothing has been resolved. As of this afternoon,
those discussions have been terminated in favor of an open discourse in the
Committee tomorrow. Since an agreement was not reached, compromise language
is not expected to be offered as an amendment tomorrow. If it is, it would
not be something that leaders on the Republican and Democrat sides have
crafted together and therefore would not likely pass. Sources indicate that
the committee does expect Waxman, and possibly others to offer price cap
language, but it is not expected to pass.