-----Original Message-----
From: 	Walsh, Kristin  
Sent:	Friday, August 10, 2001 4:44 PM
To:	Lavorato, John; Kitchen, Louise; Delainey, David
Cc:	Calger, Christopher F.; Yoder, Christian; Hall, Steve C.; Swerzbin, Mike; Allen, Phillip K.; Dasovich, Jeff; Gaskill, Chris; Grigsby, Mike; Heizenrader, Tim; Kaminski, Vince J; Kean, Steven J.; Milnthorp, Rob; Presto, Kevin M.; Ribeiro, Claudio; Shapiro, Richard; Steffes, James D.; Tawney, Mark; Tholan, Scott; Whitman, Britt; Will, Lloyd; Comnes, Alan; Herndon, Rogers; Lewis, James; Black, Don; Holman, Kelly; Davis, Mark Dana; Sturm, Fletcher J.; Gilbert-smith, Doug; Sanders, Richard B.; Edison, Andrew; Holman, Kelly; Turner, Nancy; Belden, Tim; Brindle, John; Cromley, David; Johnston, Robert; Golden, Kevin
Subject:	Direct Access 8/10/01

Below is a brief summary of the main issues regarding Direct Access.  We will continue to the follow the progress and keep you updated. 

Summary:
Direct access was designed to break utility monopolies and was a key component of California's 1996 deregulation law.  Under this concept, all customers could directly access an energy provider other than their regulated utility.  The debate over direct access is at the heart of a complicated attempt to solve California's costly power crisis.  It will determine whether businesses, with residential customers, pay for the bulk of the state's future energy purchases. It also could determine whether Southern California Edison, the state's cash-strapped No. 2 utility, will avoid bankruptcy, and whether deregulation will survive in any form.

Big businesses, free-market advocates and alternative energy providers have lobbied state legislators to find a way to keep so-called "direct access".  Now, as the state prepares to sell $13.4 billion in bonds to begin paying off its debt, legislators and energy officials say they must prevent big businesses from wiggling out of that obligation by closing off their direct-access escape route.  Regulators are concerned that if businesses flee the system, the state will be stuck with too much electricity under long-term electricity contracts through 2021.  That would mean residential ratepayers would be stuck paying the bulk of the $43 billion in future power costs, a point that has enraged consumer groups.  Currently, only about 88,000 customers buy their energy through direct access (per CEC statistics), including about 10,000 large commercial/industrial customers, and about 78,000 residences.  Alternative service providers shifted most of their customers back to California's primary utility suppliers (SoCal Ed., PG&E, SDG&E) earlier this year when prices skyrocketed and they could no longer compete with utility rates capped by the Legislature.  

California legislators argue that direct access is the keystone of the latest Edison bailout plan, sponsored by Assembly Speaker Pro Tem Fred Keeley. Under the plan, the 3,600 largest businesses would agree to pay $3.1 billion of Edison's debts over 15 years.  In exchange, businesses would be allowed to secure their own power contracts by 2003, but not without first paying an "exit fee."  The fees and which parties would be exempt remain undetermined, however, they would include a surcharge or a complicated calculation in which businesses would pay a percentage of future energy purchases.  It is likely that whatever compromise legislators are able to reach regarding direct access, California's business community will have extreme difficulty accepting the terms.

To ensure their efforts at resolving the direct access dilemma and abate fears of a collapsing state budget, lawmakers have gone so far as to introduce two bills, (one sponsored by Sen. Bowen and defeated in July, and a second by Assemblyman Dave Kelley,) that would rescind language in previous legislation that authorized the Public Utilities Commission to block direct access.  The California PUC has thus far stayed a decision on the matter, but is expected to rule by August 23rd.

Complicating the issue is Wall Street.  The state's bankers, led by J.P Morgan, are nervous about selling as much as $13.4 billion in planned state bonds if businesses (currently the largest ratepayers in the state, after governments) find a way out of the system.  The bonds are meant to repay the state for $8.2 billion in power-buying costs so far this year and to cover some future costs.  Business and residential electricity customers would repay the bonds through a surcharge on their utility bills.  If businesses were allowed to sign on with outside energy providers, that revenue stream would be in jeopardy.