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To:greg.whalley@enron.com, gary.hickerson@enron.com
Subject:Please Read- California 5/25
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, kristin.walsh@enron
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, kristin.walsh@enron
Date:Fri, 25 May 2001 04:39:00 -0700 (PDT)

Things are definitely getting interesting. As we reported on Wednesday, the
first glimmers of hope for a deal in the Assembly are starting to appear on
the horizon. The market may react positively to this news as it filters out
over the next week. Of course, a bailout deal for SoCal could be rejected by
SoCal or the generators could refuse to participate and bankruptcy could
still happen. Nonetheless, we felt it was important to alert you to the
changing dynamics in the legislature.


Executive Summary:

? Legislators in both parties are scared about a fiscal meltdown and looking
for a realistic Plan B
? The Keeley plan is the most likely vehicle and would include the 30%
generator haircuts and revenue bonds backed by a dedicated rate component
? Despite uncertainty over dealing with transmission lines and continued
oppostion from Burton and his consumer group allies, the Keeley plan will
probably pass the legislature
? The generators will not support the plan until they get clearer guarantees
from the state that investigations and lawsuits will end
? PG&E could get the same offer as SoCal through the bankruptcy court.

1. Budget Binge Could Scare Legislators into a Deal

According to sources, the Assembly is "terrified" of the current holes in
the budget due to buying power. The impact of the energy crisis is
reportedly causing panic among some legislators. This panic appears to be
moving a SoCal bailout plan forward.

Sources report that a modified Plan B deal is "not that far off"; it will
likely take one to two weeks (more likely closer to two) to move a deal
through the Assembly and the Senate and to the governor's desk once it is

2. What Would the New Plan B Look Like?

- This modified Plan B deal, which will originate in the Assembly, will
almost certainly include a dedicated rate component to pay SoCal's
undercollect. Revenue bonds will be issued securitized by this dedicated
rate component. It is also very likely that the generators would be offered
70 cents on the dollar for what they are owed immediately, with the
possibility of more if they win litigation. (Sources report that the state
is "fairly confident" that at least most generators would not be successful
in winning this additional money.) Assembly Speaker Keeley reportedly
remains the driving force behind this plan, and it is being drawn up from
within his office.

3. Transmission Lines

- It remains unclear at this time whether a transmission line purchase or
option to purchase will be put into the deal, since this is a major point of
contention between the Democrats and Republicans. According to sources, the
Assembly is "working on this."

4. Plan Looks Good to Pass Both Assembly and Senate

- According to sources, the vote count for passing a deal containing the
above components (except the transmission line purchase, which is not yet
settled) "looks very good." The vote in the Senate would be "very close."
Senator Burton still opposes a bail-out deal, but he reportedly might not
stand in the way of others from voting for the plan, making its passage more
likely. Even opponents of the plan (including Burton and the consumer
advocates) say that the odds of a modified Plan B passing the Senate are
better than 50-50. These opponents are reportedly "pessimistic" about their
chances of stopping a Plan B from passing at this point.

5. Caveat: Generators Are Waiting For Guarantees That the Witch Hunt Will End

- As reported previously, sources continue to believe that generators would
be reluctant to take a 70 cent-on-the-dollar haircut without the state
offering them relief from further prosecution. (Without this relief, the
state could give them 70 cents, then try to take away even more.) Sources
report that even opponents of the plan accept that the generators should be
offered this relief from prosecution. Thus, it appears likely at this time
that most generators would accept a 30 percent haircut if they were paid
immediately. Also, sources believe that the securitization on the dedicated
rate component offered in the modified Plan B would be sufficient to pay
back those generators who successfully litigated to win more than 70 cents
on the dollar.

- Sources believe that SoCal Edison's creditors are likely to forebear from
filing an involuntary bankruptcy long enough for this plan to go through,
since it would pay back most of what they are owed.

6. PG & E Could Also Be Dealt In

- If this plan succeeds, it will almost certainly be taken to the bankruptcy
court and offered to PG&E as part of a reorganization plan. This plan can
be offered at any time within PG&E's "period of exclusivity." This is a
90-day period (though it is often extended) following the filing of a
bankruptcy petition.

- However, sources report that the state is concerned about how to approach
the bankruptcy court. Based on Supreme Court precedent (which legal sources
within the state have been reviewing), the state would likely lose its
sovereign immunity if it entered as a party into the bankrutpcy court. This
is a problem because the stakes in this case are so high.

7. Bailout Bill Would Require Follow Legislation For A New Rate Structure

- Even if the state passes and signs a SoCal bailout, it would still need to
pass a rate structure that would allow SoCal and PG&E to flow through cost
increases to prevent them from once again facing bankrtupcy. Therefore,
this plan does not make the crisis go away.