Michael:
FYI.
Best,
Jeff
----- Forwarded by Jeff Dasovich/NA/Enron on 03/24/2001 04:26 PM -----

	Jeff Dasovich
	Sent by: Jeff Dasovich
	03/24/2001 12:57 PM
		 
		 To: Karen Denne/Corp/Enron@ENRON, James D Steffes/NA/Enron@Enron, 
skean@enron.com, mpalmer@enron.com, Joe Hartsoe/Corp/Enron@ENRON, Linda 
Robertson/NA/Enron@ENRON, Sarah Novosel/Corp/Enron@ENRON, Alan 
Comnes/PDX/ECT@ECT, Susan J Mara/NA/Enron@ENRON, Sandra 
McCubbin/NA/Enron@Enron, Paul Kaufman/PDX/ECT@ECT, Tom Briggs/NA/Enron@Enron, 
Janel Guerrero/Corp/Enron@Enron
		 cc: 
		 Subject: SIGNIFICANT DEVELOPMENTS; Davis Staff Admit that DWR Costs for 
Purchases Is Staggering and Rates Must Increase Dramatically; PG&E says it 
will sue over QF payment plan; Mike Kahn Takes Pot Shots in Editorial 
Defending Davis/Lynch

Please see the following important stories.  It appears to be quickly 
slipping through Davis' fingers.  May be useful to re-group a bit in light of 
the following events.  In sum:

Most importantly, in today's Chronicle, it's reported that Davis' staff met 
with key Democrats yesterday and lowered the boom.  
DWR purchases likely to be about $25 billion and rates may have to go up by 
100%.  (See attached story.)
Apparently, one of the big reasons that 8X got held up yesterday is because 
Davis' own staff went to D leadership and said, "don't move 8X (a bill that 
Davis was said to support) because the $10 billion cap on bonds won't work; 
they need much more." 
It appears that rate increases will now become part of the mix, whether Davis 
likes it or not.
The staff alleged that they were conveying the information before Davis had 
been informed of the "bombshell." 
Davis was criticized for being at yet another fund-raiser yesterday while the 
situation significantly deteroriated in Sacramento.  (See attached story.)
Meanwhile, PG&E has sued--or may be about to sue--the State, saying they 
won't pay the QFs according to Davis' plan (which the PUC is supposed to 
implement on Tuesday).  (See attached PG&E press release.)
Finally, Mike Kahn has issued an opinion piece in yesterday's Chronicle, in 
which he attempts to lump together into one pile Republicans, market 
proponents, price gougers and Texans, and defending Davis and Lynch.

******************************************************************************
***********************************************************************
Davis' Measured Plan To Fight the Darkness 
Michael Kahn
Friday, March 23, 2001 
,2001 San Francisco Chronicle 
URL: 
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/23/E
D103778.DTL 
COMMENTS on Gov. Gray Davis' energy programs by apologists for former Gov. 
Pete Wilson bring to mind Robert Kennedy's admonition that it is better to 
light a candle than curse the darkness. 
Let's examine the darkness created by Wilson's energy deregulation scheme. 
The 1996 law he signed could not have been more wrong headed. 
-- Why did it hand energy price control over to the Federal Energy Regulatory 
Commission? 
-- Why did it free wholesale prices, while capping the price utilities could 
charge customers? 
-- Why did the former state Public Utilities Commission force utilities to 
sell off their fossil fuel power plants, leaving them vulnerable to predatory 
pricing by out-of-state merchant generators? 
-- Why did the Wilson-era PUC bar utilities from entering into contracts to 
ensure a long-term supply of cheap electricity? 
-- Most pointedly, why did California enter into deregulation without enough 
available generation to ensure a fair market based on balanced supply and 
demand? 
These are tough questions. It is not hard to understand why former proponents 
of the 1996 deregulation scheme would rather not answer them, preferring to 
bemoan the darkness and curse Davis' actions. 
The Wilson apologists jeer at plans for the state to purchase the power grid, 
though they surely know the value of a well-maintained, fully functioning 
electric transmission network. Bottlenecks in the grid impede the sharing of 
power between Northern and Southern California. This was a main reason 
Northern California experienced rolling blackouts in January while Southern 
California had plenty of power. 
The state's purchase of the grid will infuse new cash into the utilities, 
pulling them back from the brink of bankruptcy, while giving the state a 
tangible and valuable asset in exchange. 
And ownership of the grid will allow the state to modernize it, removing 
bottlenecks and upgrading technology - something the utilities have long 
failed at doing. 
The apologists ignore the state's strong record on energy conservation and 
Davis' actions to enhance these efforts. 
California now has the nation's second-best energy conservation record. The 
governor has budgeted $404 million in new conservation measures and added an 
executive order offering 20 percent rebates to those who reduce their 
consumption 20 percent over last year. These measures will reduce commercial 
lighting, encourage residential and industrial efficiency and make state and 
commercial buildings more energy efficient. 
The apologists disregard the fact that the governor has also reversed a trend 
that had seen power plant construction in California drop to insignificance 
in the '80s and '90s. Since April 1999, the California Energy Commission has 
licensed nine major new power plants. Six are under construction. This is 
part of a streamlined, fast-track plant licensing process that aims to put an 
additional 20,000 megawatts on line by the summer of 2004, a nearly 50 
percent increase in generation. 
And the apologists refuse to recognize that California is building the right 
sort of power plants - efficient, clean and environmentally friendly, with a 
strong bent toward renewable power sources. 
In fact, while some would go Texas' route and build plants that meet only the 
bare minimum of environmental requirements, California is continuing the 
effort that has made it the nation's leader in the use of clean, renewable 
power sources. 
Instead, the apologists engage in name calling, such as the charge leveled by 
former Wilson communications director Dan Schnur on this page that Loretta 
Lynch, the Davis appointee as PUC chair, is inexperienced and has failed to 
deal effectively with the energy emergency. 
Forget for a moment that of the 22 people who have served as PUC 
commissioners since 1980, only six had any energy expertise before their 
appointments. 
Forget for a moment that one of the principal architects of deregulation was 
Daniel Fessler, the UC Davis contract law professor with no special expertise 
in energy issues whom Gov. Wilson appointed as PUC president. 
Just consider this: It was the PUC under Lynch that freed the utilities to 
buy electricity on cheaper, forward contracts outside the Power Exchange. 
This corrected a huge Wilson-era PUC blunder that put utilities in an energy 
price straitjacket. The Lynch-led PUC also prohibited utilities from selling 
additional power plants, and it began the successful effort to make 
California's ISO (the Independent System Operator that runs the state's power 
grid) independent of the industry-connected officials who controlled it. 
Meanwhile, what sort of grand solutions have the apologists presented? Drill 
for oil in the Arctic National Wildlife Refuge in Alaska, build nuclear 
plants on closed military bases and encourage the construction of dirty 
Texas- style power plants in California. 
Drilling in the Arctic will not produce a watt of new power for California. 
Californians have long said they do not want the risks presented by new 
nuclear plants. 
And lax Texas pollution rules prompted the Dallas Morning News to charge in a 
Dec. 17 editorial that Texans are choking on the exhaust from power plants. 
Most disingenuously, the apologists would "let the market work," claiming 
that unfettered market forces will soon bring fair and balanced prices. But 
the market doesn't work now, as the Federal Energy Regulatory Commission has 
repeatedly admitted, most recently with its finding that generators 
overcharged the state in January. 
Unfortunately, for the most part the same commission had refused to clamp 
down on sky-high prices charged by generating companies. Look at New York's 
deregulated market, where there are no caps on retail electric prices. Market 
forces have done consumers there little good. New Yorkers pay the highest 
prices for electricity in the country. And the New York Times has reported 
that rates paid by consumers have increased a whopping 40 percent just since 
1999. 
Those who would allow the market to work (let the darkness reign) know well 
that if the market "works" to produce New York-style rate increases in 
California, the consequences to the public would be dire. 
Compare this to Gov. Davis' well-structured plan for effective energy 
conservation and stabilization of the state's electricity market and his 
expedited program to bring clean, efficient new power plants on line quickly. 
Robert Kennedy would understand Gov. Davis' approach and his critics' 
perspective. 
Michael Kahn is a member of the state Independent System Operator's board of 
governors. 
,2001 San Francisco Chronicle ? Page?A - 25 

Bombshell Warning on Power Cost 
Spending may double and rates skyrocket, governor's office tells Legislature 
Greg Lucas, Lynda Gledhill, Robert Salladay, Chronicle Sacramento Bureau
Saturday, March 24, 2001 
,2001 San Francisco Chronicle 
URL: 
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/24/M
N176940.DTL 
Top Davis administration officials told lawmakers yesterday that the state 
may have to spend twice as much as expected on electricity purchases over the 
next two years - requiring rate increases of as much as 100 percent. 
The stunning admission by the Davis administration contradicts his repeated 
promises that his plan to ease California's energy woes could be done without 
a rate increase. 
California will probably need to issue $23 billion in bonds for electricity 
buys, more than double the amount Davis said would be needed by the state to 
keep electricity flowing until California's cash-poor utilities can get back 
on their feet. 
Administration officials told lawmakers to stop action on a bill that would 
have capped the state's energy purchases at $10 billion. 
But a Davis spokesman said the numbers were far from firm. 
"There are a lot of scenarios being run . . . and until we complete the 
negotiations, this can be added up any way you want," said Steve Maviglio, 
press secretary to Davis. 
"Those numbers are not based on any reality right now," he said. "There are 
too many things up in the air." 
Assembly Democrats told a different story. 
They said Tim Gage, director of Davis' Department of Finance, Cabinet 
Secretary Susan Kennedy and John Stevens, Davis' top energy aide, met with 
Assembly Democratic leaders and dropped the bombshell. 
And they did so just as those same leaders were trying to convince fellow 
lawmakers how important the bill was to the Davis administration. 
They also said that Davis, who was in the Palm Springs area for most of the 
day and briefly attended a fund-raiser at a golf club, was unaware of the 
figures. 
PURCHASES IN BILLIONS
The three top aides said that electricity purchases for this year by the 
state would be $16 billion, not the $10 billion initially predicted. An 
additional $7 billion in state power purchases would be needed next year, 
they said. 
The state has been buying power at a clip of $45 million a day since Jan. 17 
because the troubled utilities could no longer afford to make the purchases. 
From the start of the energy crisis, the state has planned to repay its power 
purchases through bond sales. The bonds would be paid off by a portion of the 
amount ratepayers are charged on their monthly bills. 
Davis has so far insisted that enough money could be found to cover the $10 
billion without raising rates. 
But his aides said if the size of the bonds ballooned to $23 billion, a hefty 
rate increase would be necessary. 
INCREASE UPON INCREASE
The Public Utilities Commission is already planning to make permanent a 
temporary 9 percent increase. An additional automatic 10 percent is scheduled 
for no later than March 2002. 
But the aides said, on top of that, an additional 60 percent to 80 percent 
increase would be required to cover the debt service. 
"For some time, I have believed a fundamental part of solving this problem is 
admitting there needs to be a rate increase, and the numbers that have been 
shared today make that inevitable, and we should start dealing with the 
reality as soon as possible," said Assemblyman Fred Keeley, D-Boulder Creek 
(Santa Cruz County). 
One consumer advocate said the revelation means the utilities are closer to 
bankruptcy because the state and ratepayers won't have the cash to bail them 
out. 
And it could mean political trouble for Davis. 
"Unless the governor issues an ultimatum to lower the prices, everybody's 
bill will double, and he will not be able to run for re-election in 2002," 
said Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer 
Rights. 
PG&E THREATENS SUIT
The news came as Pacific Gas and Electric Co. threatened to take the state to 
court over Davis' plan to force the company to pay back certain creditors. 
Davis' proposal would require the utilities to pay alternative power 
generators for all the power that they supply, something PG&E said it cannot 
afford to do. Several of the generators shut down earlier this week as 
rolling blackouts spread across the state. 
The bill stalled yesterday in the Assembly as Republicans objected. Lawmakers 
will resume debate Monday. 
Earlier in the week, Davis announced that action would be taken by the 
Legislature and the Public Utilities Commission that would guarantee payment 
to the alternative energy providers. He also said the state -- which has 
spent $3.7 billion to purchase power -- should be paid back first. 
Without that promise, several of the small biomass, solar and wind producing 
plants -- called qualified facilities -- said they would have taken Southern 
California Edison Co. into bankruptcy court. The alternative generators 
provide enough electricity to power roughly 6 million homes. 
PG&E said it cannot afford to pay the alternative producers and reimburse the 
state for the billions it has spent purchasing power. 
"These actions approach the problem in a piecemeal and uncoordinated fashion 
and would force us to pay out far more than we collect in rates, further 
exacerbating an already precarious financial situation," Gordon Smith, PG&E's 
president and chief executive officer, said in a statement. 
DIFFERING VIEWS ON COSTS
According to PG&E's numbers, the company collects $400 million a month in 
rates. It says the average price to pay all the generation sources exceeds 
$1. 4 billion a month. 
But consumer advocate Nettie Hoge said the utilities are exaggerating their 
own costs in order to try to keep as much money as possible. 
"It's just absurd," said Hoge, the head of The Utility Reform Network. "They 
have a temper tantrum every time something doesn't go their way." 
The bill PG&E objected to is necessary to allow the PUC to order utilities to 
pay small power generators who agree to sign lower-priced contracts to 
provide energy. 
The proposal offers generators a choice of agreeing to a five-year contract 
at $79 per megawatt or a 10-year deal at $69 per megawatt, Davis said. The 
going rate now is about $150 a megawatt. The PUC wants to act as early as 
Tuesday to bring some financial relief to the generators, who have been paid 
pennies on the dollar. 
Assembly Republicans objected to the bill in part because it would allow the 
PUC to change the formula for setting the price paid alternative producers so 
that it no longer considered the price of natural gas. 
Co-generators -- some of the largest of which are operated by oil refineries 
-- say without the price of natural gas as a consideration, it would cost 
them more to produce energy than what they would be paid for it. 
E-mail Lynda Gledhill at lgledhill@sfchronicle.com. 
,2001 San Francisco Chronicle ? Page?A - 1 

Davis at Fund-Raiser as His Bill Languishes 
Critics say he should have been at Capitol 
Greg Lucas, Robert Salladay, Chronicle Sacramento Bureau
Saturday, March 24, 2001 
,2001 San Francisco Chronicle 
URL: 
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/24/M
N171337.DTL 
While the Assembly struggled -- and failed -- to pass a bill aimed at keeping 
hundreds of small energy generators from bankruptcy, Gov. Gray Davis attended 
a $10,000-a-head golf fund-raiser yesterday in Palm Desert. 
Organized by Duane Dauner, president of the California Healthcare 
Association, the event was held at Bighorn Golf Club, a luxurious private 
country club of which Dauner is a member. 
Davis' top political adviser said the governor didn't play golf, just stopped 
by a luncheon before the round began so he could return to Sacramento. 
But during Davis' absence, a bill he backed -- critical to bailing out small 
power generators -- languished in the Assembly. 
On Thursday, lawmakers canceled next week's long-planned annual trip to 
Washington, D.C., to focus on energy issues. 
"There is not a lot of electricity to be found on the golf course," said 
Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights, a chief 
critic of Davis and the state's utilities. "He ought to be in Sacramento to 
try and solve the crisis and not prospecting for contributions in the grass 
in Palm Springs." 
The Democratic governor has been frequently criticized for the time he spends 
raising money for his campaign fund, money that comes from well-heeled 
interests with dozens of issues pending before his administration. 
Since becoming governor, Davis amassed $25 million by the end of 2000 -- 
averaging more than $1 million a month in contributions, often from fund- 
raisers directed at specific industries. 
Garry South, Davis' political adviser, said Davis was in Palm Springs to 
dedicate a University of California building and "dropped by a lunch" 
preceding the golf. 
South said the fund-raiser "was a diverse group of people that paid varying 
amounts of money." 
Lawmakers canceled their yearly visit to federal officials on issues 
important to the Golden State because they didn't want to give the impression 
that "there was somewhere else more important than California," said state 
Sen. 
Don Perata, D-Oakland. 
Raising money at a tony golf resort during the crisis simply looks bad, 
Perata said. 
"We have to be really careful because the public's patience and their 
confidence in what we're asking them to do depends on how they see us 
reacting to the problem," he said. "This will be negatively interpreted." 
Other lawmakers said the governor's top-level staff was working on the 
problem but acknowledged the golfing fund-raiser looked bad. 
"It's not the best symbolic message, but I feel we have to give him the 
benefit of the doubt," said Assemblywoman Carole Migden, D-San Francisco. 
Davis did appear briefly yesterday on nationally broadcast CNBC to talk about 
the energy crisis and blast power generators for allegedly overcharging the 
state. He appeared live from Palm Springs. 
The California Healthcare Association represents nearly 500 hospitals and 
boasts on its Web site that it "influences public policy development through 
both legislative and regulatory advocacy efforts." 
Last month, the group introduced a legislative package to expand nursing 
education and streamline college requirements for nurses. 
One of the bills calls for spending $120 million a year on nursing classes. 
The group also is lobbying the new Department of Managed Health Care, which 
is staffed by Davis appointees, to speed up payment of $1 billion in late 
bills owed to hospitals. 
Davis signed a bill last year that gave the HMO czar the power to sanction 
health care plans for failing to pay Dauner's clients, the hospitals, on 
time. 
In his first six months in office, Davis attended a fund-raising dinner at 
Dauner's house that brought in an estimated $100,000. It was part of a spree 
that netted the governor a record-breaking $6.1 million in half a year. 
At the time, Dauner told the Los Angeles Times: "We don't talk policy at 
those kinds of things, or legislation. This was really more of a social 
event. He talked about his goals and probably spent more time discussing 
education than anything else." 
Dauner could not be reached for comment yesterday. 
E-mail the reporters at glucas@sfchronicle.com and bsalladay@sfchronicle.com. 
,2001 San Francisco Chronicle ? Page?A - 13 


	
	
	

	
	FOR IMMEDIATE RELEASE March 23, 2001
CONTACT: PG&E News Department (415) 973-5930

PG&E Responds to Energy Proposals in Sacramento 
	San Francisco -- Pacific Gas and Electric Company today announced that it 
will be forced to challenge actions now being contemplated by the State of 
California to impose new demands on its frozen rate structure. The proposed 
actions will destabilize its current situation with creditors and put the 
entire possibility of reaching a balanced solution to California's energy 
crisis at risk. 
	This week, the State has made clear its intention to use Pacific Gas and 
Electric Company's existing rate structure to begin fully paying Qualifying 
Facilities (QFs) in advance, for future power purchases, starting April 1, 
and to reimburse the Department of Water Resources (DWR) in advance of any 
other generating source, including utility-retained generation, bilateral 
contracts, QFs or the Independent System Operator (ISO). 
	"These actions approach the problem in a piecemeal and uncoordinated fashion 
and would force us to pay out far more than we collect in rates, further 
exacerbating an already precarious financial situation," said Gordon R. 
Smith, president and chief executive officer of Pacific Gas and Electric 
Company. "The numbers just don't work." 
	Currently, under frozen rates, Pacific Gas and Electric Company has been 
collecting approximately $400 million per month for the purchase of electric 
power. This revenue has been used in payments to power suppliers, including 
power purchases from irrigation districts and bilaterals, to cover costs of 
operating our retained generation, and is insufficient to cover payments to 
the ISO and QFs. The average combined energy bill from all of these sources 
exceeds $1.4 billion a month, and may go even higher in the coming months. 
Moreover, the utility's financial condition has been further jeopardized by 
the failure of the DWR to acknowledge responsibility for the full "net open 
position," i.e. the power that must be purchased on the spot market. This 
dispute over the net open position is threatening to accrue additional 
liabilities for Pacific Gas and Electric Company.
	"We continue to work with State officials to develop a constructive, 
comprehensive solution that assures that California has a reliable and fairly 
priced supply of power. Nevertheless, we have a duty to our suppliers, 
lenders and shareholders to protect the assets of the utility, and we must 
challenge any action by the State to force us to pay out more than is 
collected in rates," Mr. Smith concluded. 
	?