----- Forwarded by Sheila Tweed/HOU/ECT on 01/01/2001 01:10 PM -----

	KMcspadden@milbank.com
	12/30/2000 04:18 PM
		 
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		 cc: EFeo@milbank.com, KWong@milbank.com, AMarks@milbank.com
		 Subject: Commission Hearings on Rate Stabilization Plans




You are undoubtedly aware of the critical energy situation in California.? 
Among other things, the FERC has issued an order for the restructuring of the 
wholesale market and the California PUC is continuing hearings on rate relief 
for the investor owned utilities and other issues.? We are monitoring the 
hearings in both Washington and California and advising our friends and 
clients as developments occur.? The following is our most recent report.

Hearings on PG&E's and SCE's rate stabilization plans continued on Friday 
with testimony by Walter Campbell, Director of Business and Financial 
Planning at PG&E, who presented PG&E's prima facie case, and James Asseltine, 
Managing Director at Lehman Brothers, who testified as to PG&E's financial 
condition. President Lynch attended the hearings in the morning (I understand 
that the 3 Republican appointed Commissioners are on vacation and have been 
noticeably absent from the hearings).? Hearings will continue on Tuesday, 
January 2 with testimony from Edison.? Also on Tuesday, an all party meeting 
will be held with Commissioner Wood, presumably for the purpose of 
facilitating settlement negotiations (on Thursday, December 28, Governor 
Davis facilitated a similar meeting between the utilities and consumer groups 
with little progress).? The Commission meeting is scheduled for Thursday, 
January 4, at which time the Commission is expected to issue a final order (a 
copy of the final order may be posted on the Commission's website at 
www.cpuc.ca.gov 15 minutes prior to the meeting).

PG&E is requesting: 

1.? An end to the rate freeze. 
2.? An explicit statement that procurement costs are recoverable in rates 
from retail customers.? Surprisingly, Mr. Campbell indicated that rate 
recovery on a going forward basis from the October or November billing 
periods may be a survivable outcome for PG&E (this was later downplayed on 
redirect examination).

3.? A meaningful rate increase.? Mr. Campbell indicated that PG&E would be 
satisfied with a 26% increase in rates. 
4.? Follow up means of subsequent rate increases.? Mr. Campbell indicated 
that customers could expect rate increases totaling up to 40% over the next 
two years depending on market conditions.

SCE, who will be cross-examined on Tuesday, is asking for a larger rate 
increase--an average of 30% immediately, to be followed by an undetermined 
number of 5% rate hikes over the next two years.

The following facts came out in the cross-examination of PG&E: 

1.? PG&E recovered $9.6 billion in its transition cost recovery account 
during the transition period. 
2.? PG&E transferred $7.75 billion during the transition period to its 
parent. 
3.? PG&E paid dividends of $1,471,000,000 during the transition period. 
4.? PG&E paid a dividend of $116 million in October when it knew as soon as 
June that it was amassing a huge underrecovery of its procurement costs.

5.? For the 4th quarter, PG&E's parent has declared a dividend (a legal 
obligation of the parent).? PG&E has not determined whether to declare a 
dividend.

6.? PG&E's parent has approximately $200 million in cash which it could use 
to pay its declared dividend. 
7.? 75% of the parent company's revenues came from PG&E in 2000. 
8.? PG&E projects a borrowing need of $3.5 billion in the first quarter of 
2001. 
9.? PG&E will not have sufficient cash to purchase gas or electricity within 
3 to 7 weeks. 
10.? PG&E has not attempted to borrow from its parent and its parent has 
little or no borrowing power. 
11.? There is not enough time for its parent to consider selling assets of 
other subsidiaries. 
12.? PG&E is fully borrowed under its commercial paper programs and bank 
lines. 
13.? PG&E has not considered cutting back executive salaries. 
14.? Parent company subsidiaries made $10 million on power trading in Western 
markets. 
15.? On Tuesday, PG&E will report on its generation revenues.? Mr. Campbell 
indicated that approximately 40-50% of the undercollections could be netted 
out by the generation revenues.

13.? By the end of the year, PG&E estimated that its undercollections will 
total more than $7 billion. 

Based on the last several days, I believe that the Commission is very 
reluctant to declare an end to the rate freeze, particularly if this means 
that the Commission will lose rate control over the hydro assets.? 
Alternatively, I believe that President Lynch feels that she has? the 
necessary statutory authority to order interim emergency rate relief, subject 
to refund.? In this regard, in the last day of hearings I believe that PG&E 
met its burden of establishing an emergency condition, which will allow the 
Commission to act on an emergency basis.

Several months ago at an industry conference where Commissioner Wood spoke, 
he indicated that he felt his only responsibility under the law was to 
consumers.? Thus, I would expect Commissioner Wood to be on the low end on 
the percentage of rate increase allowed (he does not seem to concerned about 
the utility entering bankruptcy).? Loretta Lynch takes her cue from Governor 
Davis and Governor Davis has publicly stated that a 20% rate increase may be 
reasonable.? Commissioner Neeper's term ends Sunday and he will not vote on 
the order.? As mentioned above, Commissioners' Duque and Bilas have been 
noticeably absent from these proceedings.? In any event, given the way 
President Lynch controls the Commission, you can expect her view to prevail 
and rate increases to be more in the range of 18-22%.

I also believe that Commissioner Wood and President Lynch are inclined to 
find that the utilities' undercollections to date are a risk they assumed 
under AB1890.? It is possible that the Commission will allow the recovery of 
past undercollections, but would net out the undercollections with its 
generation revenues.

As far as subsequent rate increases on a going forward basis, President Lynch 
has indicated that she is only willing to consider the issues which must be 
decided on an emergency basis.? She will likely reject any attempt by the 
utilities to obtain rate relief on an emergency basis for periods which could 
be the subject of a full rate hearing.

Please feel free to contact me at 213-892-4563 or Ed Feo at 213-892-4417 with 
any questions or requests for documents.? Milbank will plan to cover and 
issue a report on Tuesday's hearing and the all party meeting and on 
Wednesday's Commission meeting.





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