Executive Summary
? Direct access could make a rescue of SoCal Edison more difficult
? Bond issuances for California may be in jeopardy as direct access becomes 
more popular with municipalities

Municipal Power is Politically Attractive
There is growing pressure across California for cities to consider forming 
their own municipal power companies. Community leaders across the state are 
enviously eyeing the success of Sacramento's SMUD utility and the Los Angeles 
Municipal Power Utility, where rate hikes and service disruptions have been 
far less pronounced than the rest of the state. Several leaders in San 
Francisco are considering setting up their own power company, and another two 
dozen cities are also contemplating action. Municipal power companies are not 
subject to regulation by the California Public Utilities Commission, and 
could therefore sidestep the current proposed structure of rate hikes. 

Trying to stop municipalities from opting out of the state power plans will 
be extremely difficult, as it runs against some of the most entrenched and 
long-standing privileges in California politics. Under California law, it is 
very difficult to stop many cities from doing what they feel is in their best 
interest. Most older and larger cities are "charter cities" rather than 
"general law cities" subject to the California Municipal code. Under the 
California Constitution, charter cities can pretty much do anything or 
provide any service short of printing money and raising an army.  The League 
of California cities - a weighty organization representing every one of 
California's cities - is already swinging into action to support direct 
access. Most Assembly Democrats started out as City councilors and have some 
sympathy with local independence. And the resistance within the Assembly is 
already building against Hertzberg's attempts to stop even large companies 
getting direct access. 

Some city leaders will not wish to fight the Governor and the state 
legislature on the issue. But if municipalities do not opt out, they may have 
to explain to their local business and voters why they are paying far more 
for electricity than a city next door which chooses to set up its own power 
company. Cities are beginning to realize they might potentially lose major 
employers. Politicians are also beginning to realize that local companies 
stand to gain or lose a fortune on this matter, and this could affect 
campaign contributions. 

State Power Plans at Risk
If municipalities do move to set up their own power companies, it could 
undermine at least three key elements of the State of California's power 
plans: 
? First, the rate hike already approved falls mostly on businesses and other 
large users. But municipal power would unpick this structure, allow large 
regions of California to ignore the PUC, leaving the rate structure to be 
determined city by city. Many municipalities may be unable to resist pressure 
from local businesses to protect them from disproportionate rate hikes. 
Others might cave into irate voters.
? Second, the plans laid out by Governor Davis' and State Treasurer 
Angelides' for a California State Public Power Authority would also be badly 
damaged if large regions avoid having anything to do with it.  It is possible 
that long-term power contracts might also face an additional hurdle if 
municipalities opt out of higher long-term rates by buying on the open 
market.  It could mean the state is left with excess power that it would have 
to sell at a loss.
? Third, revenues to back the proposed power bond could be imperiled, if 
municipalities opt out of the rate structure and revenue stream needed to 
repay the bond. And if the momentum for direct access develops among the 
cities and municipalities across the state, it could make it much more 
difficult to launch the bond in the first place as investors may take fright 
at potential threats to the viability of repayments. 
The issue is at an early stage -- the PUC had a general workshop on the 
matter at its offices in San Francisco on Friday.  State legislative leaders 
are likely to use every political and legal means available to stop municipal 
secession, or at least smother the issue until the power bond is successfully 
away. But stopping the municipalities if they choose to follow this path 
could prove to be difficult.