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Executive Summary:
SB-7X gives Dept. of Water and Resources given legislative authority to undertake short-term power purchases with no price cap through Feb.2nd New legislation (AB-1X and SB-6X) would seek (1) long-term contracts with 5.5 cent cap and (2) creation of California Power and Conservation Financing Authority The long-term contracts proposed in AB-1X are likely to be subject to significant amendment and renegotiation prior to the Feb.2nd expiration of SB-7X. The authority proposed in SB-6X would have bond issuance powers to finance new generation capacity and conservation measures Negotiations under way on using bond authority for a utility bailout--utilities and state government split over debt obligations of utility parents State borrowing plans and power purchases create credit risks for state treasury; SoCal Edison misses more payments Bush Administration opposes price caps, but is supporting state efforts to split PG&E into separate gas and electricity companies in order to assure continued gas supply Absent urgent passage of a bailout plan or an agreement on longer-term contracts, utility bankruptcy is still the most likely scenario. For further information, contact Robert Johnston (x39934) or Kristin Walsh (x39510). 1. Legislation Passes- Short-Term Measures SB-7X passed the California State Senate easily. As we said yesterday, the bill gives the state the immediate authority to purchase power via the Department of Water and Resources until February 2nd. The Department will have $400 million available to finance power purchases, but there expectations that these costs could easily rise to $1 billion by next week. AB-1X has evolved into a longer-term solution and in its current form, would authorize the Department of Water and Resources to enter into long-term contracts (as opposed to the 15 day contracts in SB-7X) to buy power at a price cap of 5.5 cents per kw/h. This legislation is not expected to pass today and will likely be changed considerably during the upcoming two week period covered by SB-7X, when negotiations between generators, the utilities, and the state are likely to resume. 2. SB-6X- What Will the State Do With the Bond Authority? A second piece of legislation currently under consideration --SB 6X--has created uncertainty in the markets. This legislation will create a California Power and Conservation Financing Authority with bond issuance authority. The uncertainty concerns whether the new authority will address the problem of the $12 billion in outstanding debt owed by the utilities. The current text of the legislation focuses only on longer term measures such as expanding generation capacity and improving efficiency. Yet the legislation also says "the authority may issue bonds, exercise power of eminent domain, and enter into joint power agreements and buy, own, and sell land and facilities necessary for the financing of a project." The general nature of this language leaves open the possibility of either issuing bonds to finance past debts, or using eminent domain or the bond authority to finance the utilities as they enter into a Ch.11 proceeding. While neither Davis nor Senate leader Burton are talking about a full $12 billion bailout at this point, the idea of using bond money to pay past debts continues to circulate in the legislature. One of the reasons none of the utility creditors have moved to demand repayment is that they are being quietly reassured by the Governor's office that there will be a government-supported debt workout in the near future. 3. Bailout Could Depend on Parents of Utilities Absorbing Losses The big problem -- and one which have kept the Governor nor the utility companies from opting for this solution -- is a massive battle over how much of the outstanding $12 billion in back debt the holding companies of the two utilities will absorb in any restructuring deal. As we have reported, something like half of that debt is owed by the utilities to their own sister power-generating companies within their holding company structure (the partial de-regulation allowed the utilities to split into power-generating and power-distributing companies so one side of the holding company buys power from the other side) -- and public opinion polls show overwhelming majorities understand this quite well. Davis wants the utility companies to acknowledge the nature of this debt, and to absorb some substantial part of the internal debt within their corporate structures; we believe he then could be willing to guarantee or issue bonds to deal with the rest. As one very senior California political leader explained, getting the utility holding companies to eat a substantial part of the debt they owe themselves is the key to solving the back debt problem without provoking widespread public outrage about a "bailout" of private price-gouging companies with taxpayer money. Since 75% of Californians currently blame the utilities and the PUC for this crisis (and only 10% blame Davis), this is a crucial political stance for the Governor. But, of course, absorbing anything like $6 billion in debt would be quite a shock to the seemingly healthy holding company and power-generating branches of the two utilities, and they began spreading the word that they were quite willing to accept bankruptcy. Thus by mid-week, both sides had pushed themselves toward a resolution in federal bankruptcy court that would be a worst case solution for all sides: The country's economy would suffer from the resulting credit shock, the Governor's political future would suffer from the electricity rate increases almost certain to be mandated by a bankruptcy judge, while most private sector legal authorities believe the utilities corporate holding structure would ultimately be breached during bankruptcy procedures and they would end up having to absorb some significant amount of the debt in the end. In addition, they would most likely face a state government determined to use state powers of condemnation to enter the power business in a major way. Senator Burton's SB6X legislation will strengthen those powers dramatically to make this point quite explicit. It would set up a "California Power and Conservation Financing Authority," with the power to issue bonds and invoke eminent domain. It would finance new power plants, and "consider the feasibility and public interest of the state acquiring, operating, and maintaining transmission facilities currently owned by investor-owned and municipal utilities." As we write this, all sides are trying to construct a path back down from the bankruptcy ledge to safe ground, and there is no question the tone has shifted in the last 24 hours from macho confrontation to "maybe we've run this thing out as far as we can." But as we have noted, the chance for miscalculation is still quite high. There is no solution agreed to at this time, the stand-off over how much debt the state government will absorb versus the utilities' holding company is continuing, and the technical fact of default still makes it possible for some bank to trigger bankruptcy by demanding immediate accelerated payment. 5. Default Update- Thursday SoCal Edison- $215 million default to California Power Exchange. After Edison failed to make a $215M electricity payment yesterday, the California Power Authority began seizing long-term contacts and reselling them to recoup some of the money owed to generators. PG&E said it expects its trading privileges at the Cal. Power Authority to be suspended today, leaving them with only its generation from nuclear and hydroelectric sources. While the ongoing wave of defaults has severely restricted PG&E's and SoCal's ability to buy power, the Department of Water and Resources will be able to pick up some of the slack, at least in the very short-term. The state itself may be getting into risky credit territory. The proposed California Public Power Authority would borrow in the neighborhood of $1.3 billion from the state General Fund in advance of this year's expected fiscal surplus, with the loan to be repaid by the authority from expected future revenues. With near-bankrupt utilities and a freeze on rate hikes, it is unclear where the revenues would come from. The amount borrowed and terms of repayment will be no doubt examined very carefully by the bond rating agencies. 5. Bush Policies As we reported on Wednesday, the Bush Administration continues to demonstrate little interest in getting involved in the California crisis. President-Elect Bush surprised state leaders yesterday with his comments, which essentially said that excessive environmental regulation was the root of the current supply shortage. Bush and his top officials appear to be unanimously opposed to long-term price caps. However, there is one issue of considerable importance to the administration, according to a source close to a top Bush economic advisor. There is significant concern that PG&E's credit problems could cause gas suppliers to stop shipments of gas through PG&E's pipeline. The risk would be that the pipeline could "go dry", causing significant and possibly dangerous disruptions in California residences and businesses. To prevent this problem, Bush is working with Davis on a proposal to split PG&E into separate gas and electric companies. The gas company would be solvent, but the electric company would go immediately into Ch.11 following significant defaults.
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