This is a long one....

EXECUTIVE SUMMARY 
? California Senate's MOU Debated in State Assembly
? Coordinating the California Legislature 
? CPUC's Rate Setting Authority In Question
? Highlights from the SoCal Investor Conference Call

MOU
As reported earlier, SB 78XX (the leading SoCal rescue adopted by the CA 
Senate) has undergone minor amendments by the California Assembly.  Three 
important revisions on the bill are:
? In regard to commercial rates, the assembly has now left open the 
definition of large or "industrial users" by eliminating the previous 500 
kWh+ usage requirement.  This change could enable the Assembly to categorize 
either smaller or larger consumers into the industrial/commercial user status 
? The bill would not become effective unless SB 39XX is signed into law.  SB 
39XX  (authored by Sen. Speier) is regarding the CPUC,s authority over 
utilities and generators in California; it places certain generation that was 
purchased by Reliant, Dynegy, etc. from the utilities after deregulation 
under PUC authority.
? The State,s purchase of the SoCal Ed. transmission lines has been removed.

AB 82XX was also revised by the Assembly with many of the deleted provisions 
duplicate in SB 78XX, such as the conservation lands and the option to buy 
the transmission lines.  Additionally, AB 82XX can not be enacted unless SB 
1XX (the windfall profits bill) is signed.  The joining of 78XX to SB 39XX 
and of 82XX to 1XX is very likely a method by which the Assembly is 
pressuring the governor to sign these other bills, which otherwise might not 
have been enrolled.  However, the joining of these bills makes their passage 
more difficult.  The remaining provisions of AB 82XX are as follows:
? Renewables Portfolio
? Direct Access
? Ratepayer Refund Account (changed the name to Ratepayer Benefit Account)
? Balancing Account for SCE procurement of power
? DRC replaced with non-bypassable charge option for MOU.  This includes 
reference to balancing account, recovery of reasonable procurement costs, and 
the prohibition of reasonableness review on contracts by PUC.

Putting the MOU to a Vote
The Speaker feels that everything in these bills has been discussed already, 
so nothing is really new. Hertzberg met with advisors Wednesday night (10:00 
pm) to decide if the Assembly will convene on Friday. It probably has a lot 
to do with the ability to get enough members' support of these measures and 
willingness to go back to Sacramento. Many are vacationing; some in other 
countries. If there is an Assembly session on Friday, he plans to have an 
informational hearing on the measure today.  If the Assembly,s session fails 
to convene Friday, it is unclear what he intends to do.  On the other side of 
the equation, it is unlikely that Senator Burton will bring the Senate back 
into session to approve this bill.  The Senate won't even consider it until 
it comes back from recess, but the Assembly feels it is their responsibility, 
thereby putting the onus back on the Senate. Apparently there is really no 
coordination between the leadership of the different houses.
While SB 78XX and AB 82XX are the most publicized bills, neither bill will be 
the actual legislative vehicle for these provisions.  The proposed content of 
these bills will be amended into other bills which are further along in the 
process, thereby eliminating the need to waive a number of rules and hold 
numerous hearings.  This will speed up the process. Apparently the Speaker's 
office has not yet identified the actual bills that will be used. But they 
hope to find bills that are so far along in the legislative process that if 
the Assembly passes the bills they will not be able to be amended in the 
Senate.  It does appear that the Assembly does intend to send these through 
as two separate bills, though, with the SB 78XX provisions in one bill and 
the AB 82XX provisions in another.

CPUC, Rate Setting Authority or Rate Setting Minority
Recently, the California Assembly has pursued a legislative provision that 
would enable lawmakers to abrogate the CPUC,s rate-setting authority and hand 
over that power to the California legislature.  Politically, this gives the 
Governor the ability to say, if rates increase automatically, that he did not 
approve of the rate increase, and there is nothing he can do about it.  But 
it also gives Wall Street buyers of California,s revenue bonds assurances 
that no matter what the need, there will always be enough revenue to back 
revenue bonds payments; thus deniability to ratepayers and certainty for 
bondholders.  

Were this provision to pass, the CPUC would still retain oversight of rates 
for the investor owned utilities.  As for DWR, under the draft rate agreement 
proposed by the CPUC, it contains a mechanism for the Commission to use in 
setting electricity rates that satisfy DWR,s &revenue requirement.8 DWR,s 
revenue requirements include bond-related costs, operating costs (such as 
power purchase costs), and administrative costs.  AB1X provided for 
energy-related bonds to be sold by the state to support DWR,s power 
purchases.  Because power contracts require DWR to pay for power before it 
makes bond payments, and DWR must sell power to obtain revenues, the 
rate-setting mechanism in the rate agreement also applies to DWR,s power 
purchases not just its bond payments. Note that if the Commission adopts a 
rate agreement, it becomes irrevocable. 
? -The draft agreement also includes a provision stating that the CPUC will 
take the DWR at its word as to its retail revenue requirements.
? The agreement would require that the CPUC set rates meeting DWR,s 
requirements in either 30 or 90 days. The 90-day mechanism applies whenever 
DWR submits a revenue requirement. The 30-day mechanism applies when DWR 
anticipates or actually draws on its reserves. 
? The rate agreement includes an enforceable covenant by the CPUC specifying 
how the Commission will set rates to meet DWR,s revenue requirements (which 
includes both bond costs and operating costs).  

If the CPUC,s draft rate agreement is approved, there will be no legislative 
or PUC oversight of any of those costs, and no opportunity for public comment 
for as long as bonds are outstanding.  If a rate agreement can be avoided, 
there will be opportunities to review and alter the agreement,s demand 
management and administrative costs.  Either way, power contract costs remain 
an obligation of DWR and cannot be altered except by mutual consent of DWR 
and the contractor.

SoCal Edison Investor Conference Call
The following are notes from the SoCal Edison conference call with holders of 
defaulted debt, 24 July 2001, 1:30 PDT:

? In order for California to sell their revenue-bonds with an investment 
grade rating, two criterion must be met; 1) there must be a rate-supported, 
dedicated revenue stream in place and 2) the legislature must have the power 
to override of the CPUC's rate setting authority and raise rates if 
necessary.  The second criterion, however,  faces significant opposition from 
the California State Constitution.
? Regarding the DWR rate requirement, Craver, the spokesperson for SoCal,  
stated that SoCal is evaluating the numbers, particularly on the DWR side.  
He stated that if you accept their output of models and numbers, it appears 
this requirement would fit within the existing rate structure.  However, "we 
need to remember that deregulation started with forecasts that proved to be 
wrong".  Therefore, this is "risky" in that SoCal is faced with "fixed 
revenues and floating costs."  Unlike DWR, SoCal has no ability to adjust 
rates based on costs, making floating natural gas prices a risk.
? Prudential asked, if based on the Hertzberg legislation, the sale of the 
transmission assets is now off the table.  SoCal responded that this is 
correct.  Prudential asked if SoCal could then anticipate more 
securitization, i.e., be securitized for all but $500 million with an option 
to buy the transmission assets at book for 5 years.  SoCal responded that it 
was "unclear what the pricing [of the transmission assets] would be, but 
there would be an option" for the state to purchase the transmission assets.
? Prudential asked about the status of the remaining (non-legislative) 
implementing decisions on the MOU and if the legislation (78XX and 82XX) 
contains them.  SoCal responded that there are 3 outstanding issues remaining 
for implementing the MOU:
 1) Ratemaking for the utilities' retained generation:  The PUC is holding 
hearings on this issue this week.  These hearings have slowed the process. A 
decision is expected by the end of August.
 2) A procurement plan for the utility: This plan is before the PUC.  SoCal 
suggested the PUC may be waiting to see what passes the legislature before 
acting on this point.  Regardless, the company needs an "adequate balancing 
account with an automatic rate trigger."
 3) Clarification on the utility holding company's position regarding 1st 
priority:  On this front, the PUC asserted its jurisdiction over all three 
utilities and their holding companies.  The three holding companies have 
challenged this decision.  Commissioner Bilas has written a draft decision in 
favor of the challenge; a final decision is expected as soon as Thursday. 
This would clarify that the utilities have first call on investment from the 
holding companies, but that the holding companies are not obligated to pay 
the debts of the utilities.
? Deutsche Bank asked if, in SoCal's numbers reported to date, it was 
assuming the charges for ancillary services.  SoCal responded that DWR had 
confirmed as of 18 January that it would pick up these charges.  These 
charges would otherwise amount to $800 million - $1 billion in additional 
revenue requirement for the utility.  Based on FERC rulings, SoCal had not 
been counting on paying these charges, so they are not reflected in the 
company's numbers.  However, SoCal will be paying grid management and uplift 
charges.  They anticipate paying "some portion" of these charges.  This could 
potentially require an amended URG filing.
? Citigroup asked where Edison stands on the Edison Mission Energy issues.  
Edison responded that they are "working on new facilities on the bank side." 
The current facilities expire on October 10th or 11th.  Edison indicated it 
is in the process of finalizing sales of approximately 1,000MW of 
non-strategic assets.  They are in negotiations with the final bidders except 
for Hopewell, which is done.  There is no specific timeline on when the deals 
will be announced, but it is a matter of days to a week.
? Appalucia Management asked if, on SoCal's generation, DWR is assuming a 
cost-plus or retail rate.  SoCal responded that it uses cost-of-service based 
rates.  The return on the 12/31/00 rate basis is approximately 4 1/2 cents.  
The $72.77 stipulated covers SoCal's generation, its contracted generation, 
QF costs (which were quoted as the most significant portion) and 
uncollectables.  This is driven by gas costs for the QFs.  Revenue is fixed 
at $73.00.