Executive Summary
Discussions continue today over bill AB1X, focus will be on price and term.
New legislation introduced today whereby the state will try to save the 
utilities from bankruptcy by taking ownership of utilities' hydro assets in 
exchange for rate increases.
Wednesday, state receives bids from auction, rate ranges are expected to be 
between 5.5 and 8.0 cents per kilowatt hour.
Mid week, audit  findings will be released; audit expected to show PG&E's 
utility subsidiary handed over $5B to the holding company. The holding 
company used $4.4B to pay shareholder dividends and buyback stock.
State commissioned study to see who would benefit more in a possible 
bankruptcy scenario.  Bankruptcy still very possible for both 
      companies.
Davis concerned about possible ballot issues and how those may effect futue 
solutions or "bail out".

Legislation
There will be continued discussion regarding bill AB1X in the Senate today.  
The discussion will focus on the rate cap of 5.5 cents per kilowatt hour as 
well as the term.  Assemblyman Keeley, the author, indicated that he believed 
5.5 cents was "a fantasy" and impossible to obtain. 

Today, Assembly Speaker Bob Hertzberg, D-Sherman Oaks and Assemblyman Fred 
Keeley, D-Boulder Creek will introduce legislation whereby the state
would temporary or permanently take both PG&E and Edision's hydroelectric 
facilities or transmission lines (or both) in exchange for keeping the 
utilities out of 
bankruptcy.  The state would allow PG&E and Edison to impose rate increases, 
however, the rates would not rise beyond the hikes approved earlier this 
month by the CPUC as an emergency surcharge.  The money collected from 
consumers would go toward paying off their current debt and the state 
would then enter into long-term contracts with power generators.  Under the 
bill, the state of California would control 10% of all California's 
electricity.  As you 
can imagine, this legislation has not received unanimous praise.  According 
to recent corporate filings, PG&E's hydroelectric plants alone would be 
valued 
between $3 and $5 billion.  This amount just happens to be what Davis 
estimates to be the final amount of money the state will have to guarantee 
once 
the audit of the utility companies is released and the political pressure is 
escalated on the parent companies to absorb some of the $12 billion in debt.  
Davis 
is telling people that he thinks the audit will show the state should help 
with about $4 billion in debt, while the utilities, of course, say the full 
$12 billion should 
be covered. 

On Wednesday, state officials will see the results of sealed bids from energy 
suppliers for long term contracts and see how close to reality their 
effort to keep utility rates unchanged for consumers will come.  Davis 
insists there are already several bids for his 5.5 cents per kilowatt hour 
ceiling, though few 
agree with his opinion.  A handful of smaller, independent electricity 
providers with about a 30% share of California power market, indicated Sunday 
night they would come down to "less than eight cents" or less than half of 
what they currently charge, in return for the stability of long term 
contracts.  Because 
consumers pay about 6.5 cents per kilowatt hour for electricity under current 
PUC rules, any hope California has to "work off" the back debts for these 
utilities lies 
in hitting something very close to Davis' price cap, without falling back on 
higher prices for consumers.  The level of bids will be particularly 
important since bond
rating agencies moved to put the state of California on a Credit watch on 
Friday, worried that there was no obvious long-term repayment plan for the 
billions of 
dollars they are on the hook for spending to keep the lights on in the state.

Utility's Audit
By the middle of this week, California auditors will release their findings 
about how much money PG&E and SoCal Edison actually owe to institutions 
outside their own holding company structure. This will define the limits of 
what the state will guarantee, if they guarantee any of the debt. The truly 
explosive 
part of the audit may be its findings that the two companies used billions of 
dollars from consumers to buy back their own stock in recent years.  A  
source with
knowledge of the audits said the audit is expected to show that in the last 
three years, PG&E's utility subsidiary handed over about $5 billion to the 
holding 
company. Of that total, the holding company used $4.4 billion to pay 
shareholder dividends and buyback shares of its stock. 

Another finding from the audit shows that state helped caused the current 
power crisis when regulators, at the time of deregulation (under the 
direction of 
Former R-Gov. Pete Wilson), forced the two utilities to sell at least half of 
their power-generating plants.  Auditors are expected to say that if the 
utilities 
still owned all these plants, electricity would cost only 7 cents a kilowatt 
hour, compared with over 30 cents an hour on average in December and January.

Bankruptcy
The threat of bankruptcy is still very real for both utilities.  Senior 
advisors said that these utilities were on the path often followed by utility 
companies that 
ended in bankruptcy.  As all the parties involved hunker down for another 
intensely political week, they all remain determined to avoid bankruptcy, but 
to push 
this as close to the brink as possible in the hopes of squeezing out an 
advantage.  Under such conditions, the risks of one or more of the players 
fumbling and
triggering the great unknowable outcome of bankruptcy, is still quite high. 
 
California's political leaders order a series of independent analyses to 
determine who would suffer most in a case of bankruptcy, the state or the two 
utilities.
The short answer was that no one has any idea.  Below are the findings of the 
report and some of the possible scenarios that would face a bankruptcy judge:

1) Would the companies be eligible for Chapter 11 style temporary bankruptcy? 
Some of the advisors thought that PG&E and Edison's finances were so 
bad that Chapter 11 style temporary bankruptcy may not even be an option.  
Advisors said that a bankruptcy judge might take a good look at the corporate 
debt load and decide that reorganization would do no good and order the 
companies into full liquidation.   This would most certainly be guaranteed 
chaos.
2) Could the bankruptcy court actually force the PUC to raise the price of 
electricity to consumers? The legal basis for passing on rate increases to 
consumers is a lot less solid than originally thought, particularly if there 
is widespread public outrage directed at the electricity companies.   And 
there is still the 
question of the unilateral power of a bankruptcy judge.
3) If the bankruptcy judge takes his job of protecting corporate assets 
seriously and finds that PG&E and Edison cannot afford to buy electricity, 
he could order them to stop buying it and thus lead to massive power outages.
4) If the utilities go into bankruptcy, the first creditors in line would be 
the lenders and bondholders with collateral pledges.  The state could become 
almost the last creditor in line as it is just another electricity supplier  
(one of the reasons why suppliers won't sell electricity on credit to these 
companies now).
5) If the two companies went bankrupt, it would be the largest bankruptcies 
in history, straining just about everyone involved in the process.
6) The corporate approval allowing the parent company to segregate assets 
from the utility by the FERC for PG&E and already in place for Edison 
may be far less effective than the utilities or the ratings agencies 
currently think. This is particularly true if this week's audit shows the two 
corporations transferring 
billions of dollars in the last few years into stock buybacks and shareholder 
dividend payments.

Davis
Opinion polls show that Governor Gray Davis is getting high marks for his 
job, and the utilities are increasingly viewed as the culprits.  One of Davis 
concern's is, according to a senior official in the Governor's office, that a 
deal is carved out that triggers a popular ballot initiative which is so 
anti-utility and 
anti-business that it cripples future growth in the state.  According to a 
senior official, "No one thought Howard Jarvis and his property tax 
initiative would 
succeed in destroying our education system, but he did, with one just ballot 
line and a lot of popular revulsion. The threat of direct, popular action
is at least as large now as then."  Consumer advocate Harvey Rosenfield is 
already threatening to draw up a ballot initiative at the first sign that 
individual 
electricity consumers are being asked to help the utility companies repay 
their debt through higher rate-payer bills.  This official goes on to say, 
"The 
anger at utility companies is so high here, that almost anything Rosenfield 
could think of would pass and we couldn't do anything about it."  This threat 
has 
begun to complicate the one escape route on the debt front that had always 
appeared wide open to political leaders -- floating a bond issue or a 
guarantee 
for the money owed to institutions outside the corporate holding structure, 
and then letting the companies work that off with profits over the next 
several years.