For questions contact Robert Johnston at x39934.

Court Case Denies Rate Hikes

As forecast in our report yesterday, the Federal Court in Los Angeles refused to allow the two California utilities to raise rates to recoup undercollections of their power costs since last August.  We had expected that the court would rule in favor of the utilities, but push the rate hike question to an appeals court.  Instead, Judge Ronald Lew refused to rule on the case because of technical considerations and postponed a hearing until March 5th.  The utilities now face an imminent end to creditor forbearance without the prospect of short-term rate hikes.  Edison reaches the end of its grace period for a $200 million payment today and a $600 million payment on Thursday.  Absent the political cover of the court to impose rate hikes, the Governor and the state legislature are in an equally tenuous position.

Bankruptcy Grows More Likely

Regardless of the legal technicalities, the bottom line is the same.  As we have cautioned since last Wednesday, there is a serious risk that a creditor or
group of creditors could push for bankruptcy, perhapsas soon as tomorrow when the period of forbearance agreed to by financial creditors runs out.
Before this ruling, there was reasonable assurance that the utilities would be restored to health by their court victory. Now there is real fear a coherent deal is 
unravelling, and that it will not take much for a small group of financial creditors to break ranks. And the prospects for supplier creditors now look
much bleaker and more dangerous. And there is an increased temptation for the utilities to declare bankruptcy and take their chances with a judge rather 
than the California assembly. The politicians will try to find a way to prevent bankruptcy, but it will now be difficult.

Disarray in the Legislature

For now, the only card still being played is the "I give you a dollar, you give me a hot dog" plan, as State Senator Burton accurately summed it up. The state
 pumps money into the utilities in return for some kind of asset -- warrants, transmission lines, whatever, anything that can be brandished in front of the voters as
proof that the utilities suffered and paid. But "there is little or no energy among legislators for either of the proposed solutions," one senior figure in Sacramento
 told our source yesterday afternoon. "Legislators are running scared. And I don't know of a single legislator in either house, on either side, who has the slightest
sympathy for the utiltiies now. They think the utiltiies have either been incompetent or shrewd or both." The ruling will in all likelihood send officials back to the
 drawing board. "Davis will propose a kind of shadow plan by Friday, but there will be no real substance in it. What are we supposed to do in just four
days? There will not be a real substantive plan for three weeks, I think, at the earliest." That period of uncertainty and lack of energy in the legislature could 
panic the creditors now.

Bankruptcy Court

If Davis fails to cobble together a last-minute deal for rate hikes and some kind of purchase of transmission assets, then all parties will have to do a workout
 in federal bankruptcy court.  The most likely scenario (which we flagged last week) is that the small IPPs file an involuntary bankruptcy against Edison, followed
possibly by PG&E.  Involuntary bankruptcy would shield the utilities from creditor lawsuits and temporarily relieve them from debt payments.  There is also
speculation in the press this morning that some creditors are talking about a Ch.7 or liquidation proceeding, but that cannot yet be confirmed by sources.