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----- Forwarded by Sheila Tweed/HOU/ECT on 01/01/2001 01:10 PM -----
KMcspadden@milbank.com 12/30/2000 04:18 PM To: mcutbirth@aquantis.com, jcpaulin@aol.com, sthompson@seawestwindpower.com, john.lamb@enron.com, eric.newell@enron.com, David.Lloyd@nrgenergy.com, drro@dynegy.com, b.buchynsky@dgc-us.com, BBuchynsky@aol.com, m.saito@dgc-us.com, jonathan_berman@westlb.com, jared_brenner@westlb.com, Lou.Stoler@enron.com, Sheila.Tweed@enron.com, grant.ahearn@uboc.com, kenneth.bowman@uboc.com, lhart@btmna.com, gnofsinger@cobank.com, j_manson@republic-financial.com, rkeefe@macquarie.com.au, kbarkaus@macquarie.com.au, meckleyj@us.cibc.com, drevers@jhancock.com, jtisdale@jhancock.com, mpittman@jhancock.com, adgpgh@aol.com, hemmito@texaco.com, mike@babcockbrown.com, wgarnett@jajones.com, bgarnett@jajones.com, peter.gaw@abnamro.com, steven.bissonnette@abnamro.com, ed.tomeo@uaecorp.com, jonathan.bram@csfb.com, james.bartlett@csfb.com, michael_l_jines@reliantenergy.com, sangorgon@aol.com, bredderr@us.socgen.com, eric.mccartney@kb.be, winbee@pacbell.net, icarter@electric.com, jbarthrop@electric.com cc: EFeo@milbank.com, KWong@milbank.com, AMarks@milbank.com Subject: Commission Hearings on Rate Stabilization Plans You are undoubtedly aware of the critical energy situation in California.? Among other things, the FERC has issued an order for the restructuring of the wholesale market and the California PUC is continuing hearings on rate relief for the investor owned utilities and other issues.? We are monitoring the hearings in both Washington and California and advising our friends and clients as developments occur.? The following is our most recent report. Hearings on PG&E's and SCE's rate stabilization plans continued on Friday with testimony by Walter Campbell, Director of Business and Financial Planning at PG&E, who presented PG&E's prima facie case, and James Asseltine, Managing Director at Lehman Brothers, who testified as to PG&E's financial condition. President Lynch attended the hearings in the morning (I understand that the 3 Republican appointed Commissioners are on vacation and have been noticeably absent from the hearings).? Hearings will continue on Tuesday, January 2 with testimony from Edison.? Also on Tuesday, an all party meeting will be held with Commissioner Wood, presumably for the purpose of facilitating settlement negotiations (on Thursday, December 28, Governor Davis facilitated a similar meeting between the utilities and consumer groups with little progress).? The Commission meeting is scheduled for Thursday, January 4, at which time the Commission is expected to issue a final order (a copy of the final order may be posted on the Commission's website at www.cpuc.ca.gov 15 minutes prior to the meeting). PG&E is requesting: 1.? An end to the rate freeze. 2.? An explicit statement that procurement costs are recoverable in rates from retail customers.? Surprisingly, Mr. Campbell indicated that rate recovery on a going forward basis from the October or November billing periods may be a survivable outcome for PG&E (this was later downplayed on redirect examination). 3.? A meaningful rate increase.? Mr. Campbell indicated that PG&E would be satisfied with a 26% increase in rates. 4.? Follow up means of subsequent rate increases.? Mr. Campbell indicated that customers could expect rate increases totaling up to 40% over the next two years depending on market conditions. SCE, who will be cross-examined on Tuesday, is asking for a larger rate increase--an average of 30% immediately, to be followed by an undetermined number of 5% rate hikes over the next two years. The following facts came out in the cross-examination of PG&E: 1.? PG&E recovered $9.6 billion in its transition cost recovery account during the transition period. 2.? PG&E transferred $7.75 billion during the transition period to its parent. 3.? PG&E paid dividends of $1,471,000,000 during the transition period. 4.? PG&E paid a dividend of $116 million in October when it knew as soon as June that it was amassing a huge underrecovery of its procurement costs. 5.? For the 4th quarter, PG&E's parent has declared a dividend (a legal obligation of the parent).? PG&E has not determined whether to declare a dividend. 6.? PG&E's parent has approximately $200 million in cash which it could use to pay its declared dividend. 7.? 75% of the parent company's revenues came from PG&E in 2000. 8.? PG&E projects a borrowing need of $3.5 billion in the first quarter of 2001. 9.? PG&E will not have sufficient cash to purchase gas or electricity within 3 to 7 weeks. 10.? PG&E has not attempted to borrow from its parent and its parent has little or no borrowing power. 11.? There is not enough time for its parent to consider selling assets of other subsidiaries. 12.? PG&E is fully borrowed under its commercial paper programs and bank lines. 13.? PG&E has not considered cutting back executive salaries. 14.? Parent company subsidiaries made $10 million on power trading in Western markets. 15.? On Tuesday, PG&E will report on its generation revenues.? Mr. Campbell indicated that approximately 40-50% of the undercollections could be netted out by the generation revenues. 13.? By the end of the year, PG&E estimated that its undercollections will total more than $7 billion. Based on the last several days, I believe that the Commission is very reluctant to declare an end to the rate freeze, particularly if this means that the Commission will lose rate control over the hydro assets.? Alternatively, I believe that President Lynch feels that she has? the necessary statutory authority to order interim emergency rate relief, subject to refund.? In this regard, in the last day of hearings I believe that PG&E met its burden of establishing an emergency condition, which will allow the Commission to act on an emergency basis. Several months ago at an industry conference where Commissioner Wood spoke, he indicated that he felt his only responsibility under the law was to consumers.? Thus, I would expect Commissioner Wood to be on the low end on the percentage of rate increase allowed (he does not seem to concerned about the utility entering bankruptcy).? Loretta Lynch takes her cue from Governor Davis and Governor Davis has publicly stated that a 20% rate increase may be reasonable.? Commissioner Neeper's term ends Sunday and he will not vote on the order.? As mentioned above, Commissioners' Duque and Bilas have been noticeably absent from these proceedings.? In any event, given the way President Lynch controls the Commission, you can expect her view to prevail and rate increases to be more in the range of 18-22%. I also believe that Commissioner Wood and President Lynch are inclined to find that the utilities' undercollections to date are a risk they assumed under AB1890.? It is possible that the Commission will allow the recovery of past undercollections, but would net out the undercollections with its generation revenues. As far as subsequent rate increases on a going forward basis, President Lynch has indicated that she is only willing to consider the issues which must be decided on an emergency basis.? She will likely reject any attempt by the utilities to obtain rate relief on an emergency basis for periods which could be the subject of a full rate hearing. Please feel free to contact me at 213-892-4563 or Ed Feo at 213-892-4417 with any questions or requests for documents.? Milbank will plan to cover and issue a report on Tuesday's hearing and the all party meeting and on Wednesday's Commission meeting. This e-mail message may contain legally privileged and/or confidential information. If you are not the intended recipient(s), or the employee or agent responsible for delivery of this message to the intended recipient(s), you are hereby notified that any dissemination, distribution or copying of this e-mail message is strictly prohibited. If you have received this message in error, please immediately notify the sender and delete this e-mail message from your computer.
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