Executive Summary
? Davis might concede to rate hikes for future power consumption but not for 
past utility debt
? Davis and PG&E negotiations at a standstill, sticking point is net short 
for PG&E this summer 
? As the days go on with no word of a secured deal, involuntary bankruptcy 
chances increase significantly among small generators and QFs
? FERC would probably approve transmission deal but with several conditions 
for California

California Public Utility Commission Rate Increases 
Today may be the turning point as the CA PUC reviews the size of the 
Department of Water Resources  (DWR) rate increase to be passed along to 
consumers on their electricity bills.  Until now, Davis has considered rate 
hikes to be political suicide, but there may be some relief for him from 
consumer groups.   Sources indicate that one of California's main consumer 
advocate leaders may tolerate rate increases for future power consumption, 
but remains adamant about not raising rates to cover past utility debt.  DWR, 
which is currently buying power on behalf of the state, needs more income to 
securitize the planned $10B bond issue that is key part of Davis' plan to 
sign long term power contracts.  As DWR continues to spend $40 to $60 M every 
day on power purchases, a well placed source informed us the DWR is 
essentially bankrupt.  It currently has no money for normal activities such 
as ordering supplies, purchasing new equipment, etc.  The Department of 
Finance is forwarding DWR money from where ever it can (parks, other 
programs) to purchase power, but DWR's hands are tied until revenue bonds are 
issued.  The California State Treasurer Phil Angelides will be submitting a 
recommendation on rate increases in order to secure revenue and cover $10 
billion worth of state bonds. 

Davis & PG&E at Odds 
Sources report that Davis and PG&E negotiations are facing two difficult 
challenges: 1) PG&E wants 2.9 times book, which is far more than consumer 
groups recommend for the sale of its transmission lines (SCE accepted 2.3), 
and 2) PG&E needs relief from Davis for PG&Es legal responsibility to be the 
ultimate power purchaser for the state, and at this point Davis wants to 
limit further state energy power purchases (especially for summer).  The 
utilities refuse to sign a deal which will leave them billions of dollars 
further in the red ($3 to $4 B) and PG&E may declare bankruptcy for their 
utility subsidiary if Davis tries to force the issue.  Additionally, Davis is 
being hounded by the press and Harvey Rosenfield to publish details of the 
states' 40 long-term power contracts; a measure that if accomplished would 
provide Davis with even less negotiating power.

With all this activity, Davis is starting to lose support in the state 
legislature.  Sources report increasing tension between the Governor and 
State Senate President Pro-tem John Burton.  Burton has just announced a 
special Senate Committee will investigate the generators for evidence of 
price manipulation, and the State Auditor is also planning an investigation.  
Davis increasingly realizes he has to protect any deal he signs against being 
picked apart by the legislature and consumer groups later.

QF's Most Likely Source of Involuntary Bankruptcy
Sacramento insiders fear that a group of small generators will lose patience 
and force bankruptcy on the utilities.  SB 47X may have been California's 
Qualified Facilities last hope at avoiding an involuntary bankruptcy filing 
against PG&E, SoCal Ed, and SDG&E.  The bill designed to cut the QF's costs 
and provide them with a better rate structure is being held up in the State's 
senate.  Sources indicate that a filing could come at anytime and further 
investigations are underway to ferret out the most likely candidates.

Out with Hebert, In with Wood
The Bush administration favors replacing Hebert, Jr. with Texas PUC head Pat 
Wood.  There is an intense battle behind the scenes between Senate Republican 
Leader Trent Lott , who favors Hebert, and President Bush, who wants Wood.  
The administration would prefer Wood because they do not want FERC to pick a 
fight with Davis which means Bush might ultimately lose some western states 
in 2004.  In effort to tone down the recent press reports, Hebert has made 
several token concessions to California, including $69 million worth of power 
refunds and streamlining the federal permitting process for pipeline and 
power plant installation.  

It's is expected that FERC would most likely approve any transmission deal 
that Davis could complete but with a list of conditions.  Some conditions 
might include bring the lines formally into the regional grid system as well 
as other elements to pave the way for more dramatic Administrative actions in 
the West next year.  The Bush Administration is opposed to price caps and 
believes in free market solutions.  The Administration is also considering 
whether it might be a good idea to privatize Federally-owned assets such as 
BPA.