-----Original Message-----
From: 	Dasovich, Jeff  
Sent:	Tuesday, October 02, 2001 4:42 PM
To:	Dasovich, Jeff; Kean, Steven J.; Belden, Tim; Sharp, Vicki; Blachman, Jeremy; Comnes, Alan; Tribolet, Michael; Walsh, Kristin; Delainey, David; Leff, Dan; Frazier, Lamar; Keeney, Kevin; Gahn, Scott; Swain, Steve; Lavorato, John; Kaufman, Paul; Steffes, James D.; Calger, Christopher F.; Mara, Susan; Black, Don; Richter, Jeff; Kitchen, Louise; Dietrich, Janet; Mara, Susan; Robertson, Linda; Kingerski, Harry; Denne, Karen; Palmer, Mark A. (PR); Shapiro, Richard; Curry, Wanda; Mellencamp, Lisa; Higgason, Kelly; Whalley, Greg; Mellencamp, Lisa; Comnes, Alan
Subject:	California Update--10.02.01:Part 2:  PUC Approves Edison Bailout

In another surprise move, the PUC approved an Edison bailout today on a 5-0 vote.  This item was not on the Commission's agenda other than as a placeholder regarding "litigation."  We do not have copies of the agreement but we just talked to Edison's SVP of Regulatory Affairs and here's a summary:

The Commission will keep current rates in place through 2003
Any "overcollection" resulting from keeping current rates in place will go to paying off $3.3 B in Edison's past due accounts (the so-called "undercollection")
If Edison collects the $3.3B prior to 2003, then rates can change
If Edison has not collected the $3.3 B by the end of 2003, the PUC will create a dedicated rate component on all bills to collect the remainder.  Half the remainder will be collected in 2004 and the other half in 2005.
Any refunds received from litigation against suppliers will go to reducing the $3.3 B undercollection.
Edison can keep 10% of any refunds received after the $3.3B is paid off.
Edison cannot pay any dividends during the time that it is using rates to pay off the $3.3B.
Edison can apply to the PUC for approval to hedge gas price risk.
Edison will be protected from any increases in DWR contract costs (i.e., if DWR's costs go up, the PUC will raise rates rather than take it out of Edison's rates)
The PUC will not fine Edison during this period if Edison's capital structure varies from the PUC-approved capital structure
Edison must drop its lawsuits against the PUC regarding 1) the "filed rate doctrine" and 2) the so-called "TURN" accounting method, which effectively kept the rate freeze in place.
Edison agrees to "cooperate" with the Attorney General and the PUC in all litigation against suppliers.
The PUC decision could likely nullify the need for the "special" session that the Governor recently announced

We will report back with additional details as soon as we get them.

Best,
Jeff



 -----Original Message-----
From: 	Dasovich, Jeff  
Sent:	Tuesday, October 02, 2001 2:45 PM
To:	Kean, Steven J.; Belden, Tim; Sharp, Vicki; Blachman, Jeremy; Comnes, Alan; Tribolet, Michael; Walsh, Kristin; Delainey, David; Leff, Dan; Frazier, Lamar; Keeney, Kevin; Gahn, Scott; Swain, Steve; Lavorato, John; Kaufman, Paul; Steffes, James D.; Calger, Christopher F.; Mara, Susan; Black, Don; Richter, Jeff; Kitchen, Louise; Dietrich, Janet; Mara, Susan; Robertson, Linda; Kingerski, Harry; Denne, Karen; Palmer, Mark A. (PR); Shapiro, Richard; Curry, Wanda; Mellencamp, Lisa; Higgason, Kelly; Whalley, Greg; Mellencamp, Lisa
Subject:	California Update--10.02.01:  PUC Turns Down Davis' Proposed Rate Agreement with DWR

In what will likely be viewed as a fairly shocking event, the California PUC today voted down Davis' proposed rate agreement between DWR and the CPUC.
The vote was 4-1, with the two Republicans voting with Davis' hand-picked appointees Lynch and Wood.
Davis' proposal was introduced at the meeting by another Davis appointee--Geoff Brown--who made a lengthy speech about why California would experience economic and political destruction if the PUC did not approve Davis' proposed rate agreement.

What is Davis' proposed rate agreement between DWR and the CPUC?
It would remove all PUC authority to review any contracts between DWR with suppliers.
It would require the PUC to pass through to utility rates all DWR power contract costs, no questions asked.

What are the implications of the move by the PUC to reject Davis' proposal?
With the vote, it remains unclear how California/DWR will pay for the DWR power contracts.
The political pressure to re-negotiate--or break--the DWR power contracts is likely to intensify considerably.
It remains unclear how California/DWR will pay for the $12.5 B in bonds the Treasurer has unsuccessfully attempted to issue for past several months.
Under the structure devised by Davis, the revenues flowing from the CPUC/DWR rate agreement would be used to both 1) pay for the DWR power contracts and 2) service the bonds the Treasurer is trying to issue to repay California's General Fund for spot and other short term power purchased by DWR since January.
In short, there is no clear indication of how California will pay for DWR contracts or issue the bonds.
Safe to say that today's PUC vote has seriously embarrassed Davis, and left his approach to "solving" California electricity crisis in shambles.

What Next?
A broad left-right coalition of energy interests supported a bill (18XX) that passed the Legislature with broad bi-partisan support.
The bill would create a "dedicated rate component" on every customers bill to service the $12.5 B in bonds that the Treasurer wants to issue.
Proponents of the bill--and just about everyone else--argue that the "dedicated rate component" is a signficantly more efficient way to raise the debt California needs to plug the hole in its budget.
The bill is silent, however, on how California would pay for the DWR contracts, and the bill's opponents claim that the power suppliers will sue as a result.
All four PUC commissioners who voted against the Davis rate agreement today urged Davis to sign the bill.  The left-right coalition (from Nader types to oil companies) is also working hard to get Davis to sign it.
Davis has said that he will veto the bill on the advice of the Treasurer and bond counsel.
Given today's vote, however, Davis may have no alternative than to sign the bill if he wants to get the bonds issued and the state budget repaid.

Update on Edison Bailout
Still appears that chances are very small that Edison and Davis will succeed in getting the Legislature to vote for an Edison bailout when it returns for another "special" session next Tuesday.

If you have any questions, just let us know.

Best,
Jeff