Davis is saying he's had discussions with us about taking a loss on our 
debts??  Have we had any such conversations w/ him? ( I told the media 
yesterday we hadn't been contacted by him...)
---------------------- Forwarded by Karen Denne/Corp/Enron on 03/01/2001 
09:08 AM ---------------------------
From: Ann M Schmidt on 03/01/2001 08:54 AM
To: Karen Denne/Corp/Enron@ENRON
cc:  

Subject: Merrill Lynch Report: Governor Davis Comes to Wall Street

Karen,

FYI.  Ann



Governor Davis Comes to Wall Street
3/1/1 9:47 (New York)


                      M E R R I L L  L Y N C H        Research Bulletin
  Fixed Income Research                               Reference Number 
10906001
  United States                                       Mar/01/2001 09:47
  Leo J. Kelser                                       (1) 212 449-7803

Highlights of This Issue

Governor Gray Davis of California met with a group of sell-side and rating
agency analysts in New York yesterday.  The Governor outlined his plan for
restoring the utilities to financial viability so that they can meet their
obligations.  Below we summarize a few highlights from the meeting.

Trying to Fit Solution Within Existing Rate Structure

The Governor talked about the need to find a solution to the utilities'
problems within the context of their existing rate structures. He indicated
that the temporary 9% rate hike from January 2000 would be made permanent and
that a 10% rate reduction that went into effect in January 1998 would be
reversed in March 2002.

Status of Negotiations with PG&E

As we noted in a February 26(**th) comment, the Governor has reached an
agreement in principle with Southern California Edison (EIX: B3/CC) to address
that utility's past under-collections.  He hopes to also have an agreement 
with
PG&E within the next 30 days, suggesting that progress was made in particular
in the last 2-3 days.  However, the Governor acknowledged that reaching an
agreement with PG&E was more difficult due to its larger under-collected
balance and lower rates compared with SCE.

Some Generators Agree to Haircut

The Governor indicated that a couple of unnamed generators have voluntarily
agreed to accept less than 100 cents on the dollar for their past due
receivables. When pressed about which parties they've had constructive
discussions with, he identified Williams (WMB: Baa2/BBB-), Enron (ENE:
Baa1/BBB+) and Dynegy (DYN: Baa2/BBB+).  We note that most of the generators
and marketers with exposure to California have established reserves against
possible losses.  Importantly, the Governor said that he hoped that the banks
and bondholders would not be asked to take a haircut.

Prospects for Legislation and Possibility of Ballot Initiative

The Governor said he is quite confident that he can reach an agreement with 
the
utilities that the legislature can support.  Although he admitted that he
couldn't prevent someone from proposing a ballot initiative, the governor said
that in the end, the acid test with the public is how it affects their pocket
books.  Thus, if there is ultimately a ballot initiative, Governor Davis is
optimistic that the public will be supportive of his plan given the limited
impact on electric rates.

Status of Defaulted Utility Debt

As we have commented in the past, it appears unlikely that the resulting
legislation will pass with the required 2/3majority to go into effect
immediately.  Accordingly, there will be a several month lag before the
utilities receive any cash.  In response to a question, it appears that the
state will not step in to help the utilities pay off any maturing or defaulted
commercial paper.  But the Governor and his advisers hope that legislation 
will
provide enough certainty so that the companies can get bridge financing.
Essentially, it appears the Governor is leaving it up to the utilities to find
the money from their banks.

Governor's Strategy to Keep the Lights On

The Governor stated that a key reason that deregulation failed in California
was that no new power plants were built in the state for over twelve years.  
In
the intervening time, demand caught up with supply.  In response, he has
proposed various conservation initiatives and is trying to expedite the
construction of new power plants.  He set a goal of having 20,000 megawatts
(mws) of new supply on line by 2004.

In addition, the governor highlighted the need for additional investment in 
the
transmission infrastructure.  In particular, he cited the need to expand the
capacity to import more power from Arizona as well to improve the ability to
move power from south to north within the state. He suggested that part of the
rationale for the state taking over the utilities' transmission grids was to
ensure that the additional investment takes place.  He also suggested that the
state would lease the transmission lines back to the utilities to allow them 
to
continue to operate them.

In the meantime, the focus is to move away from California's over-reliance on
the spot market.  In that vein, Calpine (CPN: Ba1/BB+) yesterday announced the
signing of two long-term contracts with the state's Department of Water
Resources (DWR).  One of those contracts was to sell up to 1,000 mws over a 
ten-
year term.  The other was to provide up to 495 mw of peaking capacity under a
20-year contract.  Earlier in February, CPN had reached agreement with the DWR
on a separate 10-year contract for an additional 1,000 mws.


(EIX, WMB)  MLPF&S was a manager of the most recent public offering of
securities of this company within the last three years.
Copyright 2001 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
All rights reserved. Any unauthorized use or disclosure is prohibited. This
report has been prepared and issued by MLPF&S and/or one of its affiliates and
has been approved for publication in the United Kingdom by Merrill Lynch,
Pierce, Fenner & Smith Limited, which is regulated by SFA; has been considered
and distributed in Australia by Merrill Lynch Equities (Australia) Limited 
(ACN
006 276 795), a licensed securities dealer under the Australian Corporations
Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is
regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill
Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte
Ltd, which are regulated by the Monetary Authority of Singapore.  The
information herein was obtained from various sources; we do not guarantee its
accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an
invitation to make an offer, to buy or sell any securities or any options,
futures or other derivatives related to such securities ("related
investments").  MLPF&S and its affiliates may trade for their own accounts as
odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur
in any securities of this issuer(s) or in related investments, and may be on
the opposite side of public orders.  MLPF&S, its affiliates, directors,
officers, employees and employee benefit programs may have a long or short
position in any securities of this issuer(s) or in related investments. MLPF&S
or its affiliates may from time to time perform investment banking or other
services for, or solicit investment banking or other business from, any entity
mentioned in this report.
This research report is prepared for general circulation and is circulated for
general information only.  It does not have regard to the specific investment
objectives, financial situation and the particular needs of any specific 
person
who may receive this report.  Investors should seek financial advice regarding
the appropriateness of investing in any securities or investment strategies
discussed or recommended in this report and should understand that statements
regarding future prospects may not be realized.  Investors should note that
income from such securities, if any, may fluctuate and that each security's
price or value may rise or fall. Accordingly, investors may receive back less
than originally invested.  Past performance is not necessarily a guide to
future performance.
The bonds of the company are traded over-the-counter.  Retail sales and/or
distribution of this report may be made only in states where these securities
are exempt from registration or have been qualified for sale. MLPF&S usually
makes a market in the bonds of this company.
Foreign currency rates of exchange may adversely affect the value, price or
income of any security or related investment mentioned in this report.  In
addition, investors in securities such as ADRs, whose values are influenced by
the currency of the underlying security, effectively assume currency risk.
 Provider ID: 10906001
-0- Mar/01/2001 14:47 GM