Jeff,
I will start copying you on the California updates.  The information comes 
from a variety of sources and some of the information contained in these 
emails are very sensitive and confidential and should not be disseminated to 
anybody outside of Enron.  Please feel free to contact me should you have any 
questions (713) 853-9510.

Thanks,
Kristin Walsh

 -----Original Message-----
From:  Walsh, Kristin  
Sent: Monday, March  26, 2001 10:54 AM
To: Lavorato, John; Kitchen, Louise
Cc: Allen, Phillip; Belden, Tim; Grigsby, Mike; Heizenrader, Tim; Kaminski, 
Vince; Milnthorp, Rob; Presto, Kevin; Ribeiro, Claudio; Shapiro, Richard; 
Steffes, James; Tawney, Mark; Tholan, Scott; Whitman, Britt
Subject: California Update 3/26/01
Importance: High


Executive Summary:

-CPUC likely to pass rate hikes tomorrow, politicians bowing to the inevitable
-Many questions still unanswered, most notably size/structure of rate 
increase and past utility debts
-Past undercollect major sticking point, with little help available from 
transmission deal or long-term contracts
-Reliant seeking relief in circuit court from emergency orders; large 
generators increasingly angry with Davis' "blame game"
-QFs waiting for details of rate hike; new price formula crucial to SoCal's 
ability to make payments
-Bankruptcy outlook increasingly complex, but debt rescheduling remains 
subject to failure

In our late Friday report, we wrote "Davis could order rate hikes as a last 
ditch effort, but this action would not address the undercollection  issue.  
There is still a high chance of bankruptcy by either the larger generators, 
commercial paper holders, and (less now but still very possible) the QFs as 
time is running out."  Events are unfolding exactly along these lines.

1. Why Rate Hikes Now?
CPUC President Lorretta Lynch came out this weekend in favor of rate hikes.  
Davis and many legislators recognize that rate hikes are the quickest 
solution, but that there is a potentially painful political price attached.   
Davis will probably come out in support of a structured rate system, passing 
on most of the hikes to business and industrial users.

Other California politicians are starting to face reality of rate hikes.  The 
CalEnergy ruling massively reduced their leverage over the creditors, who are 
now able to sell outside the state, if they can get similar relief from the 
courts.  And it's not just the QFs--the giant Reliant Energy is appealing to 
the Ninth Circuit Court in San Francisco against Federal Judge Frank 
Damrell's series of rulings forcing large generators to continue to sell to 
California.

2. What Impact Will the Rate Hikes Have?
Rate rises will stabilize the situation going forward, but there will be a 
messy scramble to assign blame and liability for past debts.  Some form of 
rescheduling is a possibility, but there are any number of accidents that 
could happen and yet result in bankruptcy for the utilities -- if they don't 
seek protection from creditors themselves.

3. Undercollection/Net Short Still Unaddressed
All of these developments fail to address the past undercollection or the 
bond revenue plan.  Still, the passage of rate hikes could speed up the 
legislature on these fronts as well.  The bulk of the rate hikes will go 
first to repay the DWR, then to the commercial creditors.  Absent the 
transmission line deal, the bond revenue plan would have to be restructured 
to repay the past undercollect.  Long-term power contracts are still 
relatively meaningless until 2003, when the majority of the contracts kick 
in.

4. Large Power Suppliers Losing Patience
Relations are also deteriorating between Davis and the large power 
suppliers.  Davis for the most part has been very careful to cultivate them 
during the drawn out negotiations, talking to several of the main CEOs almost 
daily.  But state legislators and officials are rapidly trying to initiate 
investigations of alleged market manipulation and overcharging to deflect the 
growing political heat from themselves.  This is only agitating the larger 
generators more as every day passes.  If Reliant loses their case, it may 
also tempt some of the larger generators to force the issue to bankruptcy.  
What's more, financial creditors are also waiting with growing impatience, 
and the utilities themselves are contemplating voluntary bankruptcy.  PG&E in 
particular simply will not agree to Davis' transmission lines deal as it 
stands, and a bankruptcy workout may offer the best, albeit uncertain, chance 
of a return to eventual health someday.

5. QFs Listening and Waiting
But the largest threat, as we have been saying, is not from the major energy 
companies.  It is the small companies -- known as QFs -- that will be the 
triggers if bankruptcy occurs.  Remember these two facts: (1) The QFs are a 
diverse group of 600 companies, and it only takes three of them to force 
bankruptcy; and (2) many of them have to move in court quickly or lose any 
possible standing for future court action.  It is in the interests of a 
number of creditors to wait and hope that a negotiated settlement can be 
reached, but others have a large incentive to game the situation and threaten 
to force bankruptcy.

Other bullish news: PG&E gets extended forbearance until April 13th from its 
banks, and SoCal announces that it will pay some QFs.  The actual amount of 
payments to the QFs is still subject to the CPUC  approving a revised pricing 
formula that is satisfactory to the QFs.  That decision should come tomorrow.

6. Outlook
Last week we wrote that "the QFs felt there was no point in filing today 
because they want to see what they can get from the legislature this week and 
in all likelihood, what they can get from the CPUC hearing next week."  The 
next 48 hours will be crucial.  Only massive rate hikes (40% or higher 
roughly) would address the undercollect issue and Davis is unlikely to 
authorize those.

As one source told us, "the age of denial is (mostly) coming to an end, and 
that is the main source of hope that California can begin to move forward 
from this."  But the situation is so complex, and there are so many players 
and angles involved, that a negotiated solution to the past debt problem will 
still be complicated and vulnerable to failure.