Executive Summary:

The likelihood of there being an involuntary bankruptcy filing against the utilities appears to be greater than 60%.  This is not only due to the circumstances surrounding the filed rate doctrine case mentioned below, but also because the 30-day cure period during which the utilities have not been paying their bills will end this week, increasing the likelihood that their IPP creditors will act against them.  If the state loses the filed rate doctrine case today (which it is believed will happen) and there is an involuntary bankruptcy filing (or even the threat of one), this bail-out plan will be enacted quickly. 

1.	Utilities vs. CPUC

Governor Davis' attempt to delay the filed rate doctrine case will not succeed.  The case will come before the judge on Monday, February 12th.  The federal judge is expected to rule a summary judgment in favor of the utilities.  However, the judge will not allow the utilities to collect the injunction release they are requesting ($.01/kwh).  This will be left to an appellate court.  The decision not to allow the utilities to collect this cash could trigger an involuntary bankruptcy filing, by the smaller IPPs (as noted in our reports last week) or by larger out-of-state generators such as Duke, Reliant, and Dynegy (as noted in the press this morning).  This is expected next week or the week after.

2.	Prospects for a Bailout

Bill AB 18X is effectively dead from lack of support.

Senator Burton, despite his public refusals, is moving closer to agreeing to a utility bail-out.  The statements by Burton and the CA State Treasurer are merely a negotiating position.  They are more concerned about the possibility of a bankruptcy than they appear.  For Burton, this is because of his long association with labor unions; the unions oppose the utility bankruptcy.

Burton has been negotiating with consumer advocate Harvey Rosenfield so as not to get attacked by him.  The deal Burton is expected to arrange would be for:

Bonds to be issued by the utilities rather than the state, but with some kind of state support (but less than "full faith and credit of the state of CA," which would not pass).  This would amount to the securitization of an extra charge on power bills (e.g. $.01, though the actual amount is not known).  These bonds would be asset-backed securities, with payment receivable from rate payers.  The term of these bonds is unknown; if the term is made quite long (e.g. 20 years), the associated rate increase could be very small.
The state would purchase the utilities' transmission assets for a very high price.  The amount of the extra charge on power bills will not be known until the price of the transmission assets is settled.

If the state loses the filed rate doctrine case today (which it is believed will happen) and there is an involuntary bankruptcy filing (or even the threat of one), sources believe that this bail-out plan will be enacted quickly.  As noted in an earlier report, the California legislature habitually does not act until things "hit the wall."

It is expected that the Republicans in the legislature will follow Burton's lead and support the bail-out plan.  The Assembly members in particular are not yet supportive of a plan of this nature.  One moderate democratic legislator with whom our source spoke said that the opposition to a bail-out in her Central Valley district is "50 to 1."   However, an involuntary filing (or the threat thereof) may be enough to trigger legislative support.  It would allow the argument of an "imminent threat" to the people of the state of California.

3.	Consumer Opposition

Harvey Rosenfield is too short on cash to fight this plan and the associated rate increase with anything but a referendum.  If the referendum fails, he intends to attack individual legislators (though not John Burton, who reportedly has "immunity" from Rosenfield).

Some legislators are thinking of voting for the bail-out plan, then supporting a referendum from Rosenfield later.  However, if the bail-out plan and rate increase described above is passed through the legislature as a bill (rather than put in place by the PUC, for example), it cannot be reversed by a referendum.  As additional insurance against Rosenfield, by supporting the bonds issued under the plan, the state can argue that its credit would be impaired in the case of a referendum to repeal the plan.  While it is not clear that this is a factual argument, it still might impede any referendum.