FW: University of California/California State University Litigation

fyi

-----Original Message-----
From: Williams, Robert C.
Sent: Thursday, April 19, 2001 8:19 PM
To: Rogers, Rex
Cc: Sharp, Vicki; Derrick Jr., James
Subject: University of California/California State University Litigation

Attorney-Client Privileged Communication

Rex,

Vicki asked me to provide you with a description of this litigation.

The University of California and California State University are Direct
Access customers of EES. Many of their campuses are in the PG&E and So Cal
Edison service territories. Last fall, due to their deteriorating financial
condition these two utilities began defaulting on their obligation to remit
to EES the "negative CTCs" attributable to EES's customers. "Negative CTCs"
reimburse EES for the cost of procuring power for its customers. It is EES's
position that these amounts are owed to it under a 1998 settlement agreement
with the utilities, as well as under the utilities' tariffs. EES has filed a
complaint with the California Public Utilities Commission against both
utilities to collect the amounts owed. PG&E owes approximately $380
million. So Cal Edison owes approximately $120 million. The complaint
against PG&E is stayed due to the bankruptcy filing. The MOU and Advice
Letter between So Cal Edison and the State appear to provide for the payment
of Negative CTCs to ESPs, but that agreement has not been approved yet.

In early 2001, there was a growing concern that because of their worsening
financial condition PG&E and So Cal Edison might not be able to pay the
future Negative CTCs. EES therefore decided to cap or end its exposure to
the cost of procuring power on behalf of its customers. It effectively did
so by "re-sourcing" its customers back to the utilities. This occurred on
February 1, 2001. Thenceforth, (until the Department of Water Resources
stepped in), the utilities bought power for EES's customers.

The only customer to object to EES's action (to the point of filing suit) has
been UC/CSU. Almost all of the other customers have been indifferent,
largely owing to the fact that EES has kept the customers financially whole
on their contracts with EES (i.e., the customer continues to pay 5% less than
the frozen rate for its power, just as it always did). UC/CSU may have
viewed the situation differently because, once the DWR began purchasing the
power instead of the utilities, the State had the supply risk. The UC/CSU
contact is one of the few contracts that permits a court challenge to a
party's actions; almost all of the other contracts provide for mandatory
arbitration.

The suit was filed in March in federal district court in San Francisco.
UC/CSU moved immediately for a preliminary injunction (i.e.an order to
preserve the status quo pending a full trial on the merits) to be restored to
Direct Access service. The State Attorney General filed an amicus curiae
brief supporting the Universities' application. On April 20, the court
granted UC/CSU's request for a preliminary njunction. The court ruled that
there was a strong likelihood that UC/CSU would prevail on the merits, and
that they would suffer immediate and irreparable harm if the injunction were
not granted. The "immediate and irreparable harms" cited were loss of
specialized metering services, uncertainty about being eligible for Direct
Access in the future, loss of scheduling coordination services, and general
uncertainty caused by the bankruptcy of PG&E. We think the Judge erred, and
have filed an appeal to the Ninth Circuit and have requested a stay of the
court's order. Because of the standard of appellate review, we are not
highly confident of having the decision overturned. We expect a ruling early
next week.

If the decision stands, it is estimated that EES will incur $144 million
procuring power for UC/CSU until the contract expires in March 2002. This
will increase the Negative CTC amounts already owed by PG&E and So Cal Edison
(this may not be dollar-for-dollar, depending on how the Negative CTC will be
calculated in the wake of the bankruptcy of the PX). Obviously, to the
extent we are able to recover the Negative CTC from PG&E and So Cal Edison,
this exposure is mitigated.

It is difficult to predict whether other customers will follow suit. Since
they are not affliated with the State, they do not have the same incentive as
UC/CSU to challenge EES's action. Moreover, their contracts do not contain
the number or sophistication of services as the UC/CSU contract, so it will
be more difficult for them to obtain an injunction ordering specific
performance. Arbitration may also be a bar to suing in court.

Please let me know if you need any additional information. My cell phone
number is 281-414-0364.