---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 01/26/2001 
04:28 PM ---------------------------


Robert Johnston
01/26/2001 03:07 PM
To: John J Lavorato/Corp/Enron, Jeffrey A Shankman/HOU/ECT@ECT
cc: Gary Hickerson/HOU/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT, John L 
Nowlan/HOU/ECT@ECT, Michael W Bradley/HOU/ECT@ECT, John Greene/LON/ECT@ECT, 
Jeff Kinneman/HOU/ECT@ECT, Michelle D Cisneros/HOU/ECT@ECT, Jaime 
Gualy/NA/Enron@Enron, James D Steffes/NA/Enron@Enron, Richard 
Shapiro/NA/Enron@Enron, Phillip K Allen/HOU/ECT@ECT, Mike 
Grigsby/HOU/ECT@ECT, Kristin Walsh/HOU/ECT@ECT, heizenrader@home.com 
Subject: California 1/26/01


Executive Summary:

AB18X is the focal legislative point for the proposed bailout plan, but 
contains several problems.
Per yesterday's morning report, the bill includes a plan in which the 
utilities would issue stock warrants in exchange for financial assistance 
from the state.
The bill will be subject to attacks from consumer groups, which will slow its 
passage. Timing is crucial because of the February 7th deadline for the FERC 
emergency order and the February 13th deadline for debt forbearance.
The bill also contains little detail about costs.  The cost of the bailout 
cannot be determined until the final auction results are known and the 
utilities reach a deal with Davis with respect to the share of outstanding 
debt that must be paid by the parent companies of the utilities.
Sources report that Davis will insist  that at least 43 percent of the 
outstanding PG&E/SoCal debt should be absorbed by the parent corporations.

1. AB18X- The "Bailout" Bill

There are a number of key problems with AB18X. 

The bill is being presented by its drafters as a "work in progress." The 
current bill is likely to be significantly different next week after consumer 
groups blast it in committee hearings and in the press.  Also, the fiscal 
effect of the bill is listed as "unknown", because the costs of the long-term 
contracts being bid upon in the auction are not yet known.  Moreover, the 
audit of the utilities and its recommendation for the share of utility debt 
to be paid by the state versus the parent companies is not yet finalized (see 
below).

The industrial users are unhappy with this bill because they will bear the 
burden of the costs.  Approximately 35% of power customers in CA are 
residential, and another approximately 10% are commercial or users with 
emergency status; this means that half or more of all power customers in CA 
will benefit from price controls on their power.  This, in turn, leaves the 
large industrial customers footing the bill.  They are saying that this may 
result in job losses and may even give them incentive to leave the state.

The State of California is talking about issuing revenue bonds to pay off the 
utilities, debt.  There is an important but subtle difference between these 
and general obligation bonds, which draw from tax revenues and assets to pay 
debt.  Revenue bonds draw from the revenue gained from actually using 
something.  For example, a stadium developer might issue revenue bonds to pay 
for a new stadium, then make revenue from the team that uses the stadium.  
How will that work in the case of the utilities?  There is no guarantee that 
there will be positive revenue to pay back the bonds. 

California,s interruptible power contracts have a 100-hour/year limit.  Most 
of those contracts are at or near that limit and will become firm power 
contracts.  This removes another option for finding power.

2. The Audit:

Many of the details in AB18X are subject to the results of the audit and the 
power auction.  Governor Davis has commissioned a study which shows that 43 
percent of the PG&E and SoCal Edison debt is owed to their parent companies.  
He views this as the minimum acceptable percentage that the parent companies 
should contribute to a bailout.

The companies cannot simply eat the cost of their inter-company debt.  They 
do not have the cash to do so.  The question becomes, if the subsidiaries, 
bills are not paid, will they be forced to go into bankruptcy?

3. The Auction:

As told by us to some of you yesterday afternoon and as reported by the Wall 
Street Journal this morning, the low bids that have been announced from 
Wednesday,s auction are based on off-peak power.  This is why they are so 
low.  It is estimated that if Davis were to include off-peak power, the bids 
would be closer to 9.5 cents per kilowatt hour.  

Governor Davis is not disclosing the "true bid price" because to do so would 
not be "in the public interest."  While they legally can keep the auction 
terms secret, this makes an excellent bluff to try to get other power 
providers to bid lower for peak power.

Since the real cost of power is higher than the auction price is making it 
appear, this means that there may actually be little or no margin between 
where the state buys power and where the utilities sell it.  No margin would 
mean no funds to pay down utility debt.

4. The Rest of the West

The federal order for other states to supply CA with power requires Oregon 
and Washington to draw down their own reservoirs.  The people of OR and WA 
are understandably upset about this.  It is not clear how much longer this 
can continue, as reservoir levels continue to drop.

The problem is the drought impacting the entire Northwest is not getting any 
better even as Washington and Oregon hydroelectric plants dump water through 
their dams to keep the lights on this winter. Officials in these states are 
now bracing for electricity surcharges that could hit 50% by mid-summer and 
increase the casualties on the dot-com laden killing field.  Cities from 
Seattle to Tacoma and beyond are already passing legislation that scales in 
electricity surcharges that high and more. Seattle raised prices by 10% the 
first of January, with a further, emergency 18% increase is set to pass the 
city council on Monday. And city political officials warn that another 25% 
increase would be in effect by mid-summer -- unless the federal government 
agrees to plans by the western governors to request an emergency price cap 
for the summer.

Although the Clinton administration and Bush administration steadfastly 
refused to impose such a price cap when Governor Davis requested it many 
times in the last month, western governors told our sources that they hope 
the political and economic considerations will change by late spring. 
"Although FERC head Hebert is a free-market freak," one government official 
told our sources, "this is very different than the price cap request 
California made. First, you could legitimately say California's problems stem 
from their screwed up de-regulation plan. But the west's problems this summer 
stem from a drought, and that is significantly different. Second, the Bush 
administration may want to punish Davis with thoughts of 2004 presidential 
politics in their head, but that will not apply to all of us across the 
Northwest and Southwest. We have a lot of Republicans on the hook here. 
Third, even if you think damage to the US economy from California's troubles 
won't be that great, the damage of 50% energy surcharges rolling across the 
entire western United States from Arizona to Washington has to get Bush's -- 
or at least Cheney's -- attention."

There is almost no snowpack in most of the northwest, according to these 
officials, so the usual rebuilding of water reserves necessary to generate 
electricity will not occur. Add to that the fact Northwest dams are being run 
harder than usual to keep up with the maxed-out energy demands across the 
west ,and you have the makings of a mid-summer economic disaster. "The 
reservoir behind Grand Coulee dam (the country's largest) is dropping at a 
foot a day since New Year's and there is no sign of that slowing," one 
official told our sources.