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Robert Johnston 01/16/2001 08:35 AM To: Jeffrey A Shankman/HOU/ECT@ECT cc: Scott Tholan/Corp/Enron@Enron Subject: California Power 1/15/01 Jeff- I imagine you are following events in California with some degree of closeness. Do you want to be included on these daily updates? RJ ---------------------- Forwarded by Robert Johnston/HOU/ECT on 01/16/2001 08:42 AM --------------------------- Robert Johnston 01/15/2001 09:10 PM To: Michelle D Cisneros/HOU/ECT@ECT cc: Gary Hickerson/HOU/ECT@ECT, James D Steffes/NA/Enron@Enron, Richard Shapiro/NA/Enron@Enron, Jaime Gualy/NA/Enron@Enron, John Greene/LON/ECT@ECT, Jeff Kinneman/HOU/ECT@ECT, Kristin Walsh/HOU/ECT@ECT, Scott Tholan/Corp/Enron@Enron Subject: California Power 1/15/01 As talks continued toward the Tuesday deadline markets have been focused on for the California electricity crisis, state officials around Governor Gray Davis have toughened up their rhetoric on a couple of fronts even as they confirmed they would be in the market as early as Tuesday taking bids for energy to be paid by the State of California. One problem on that front is still how much producers want to charge the state for electricity. As we reported last week, Davis and his aides want to pay around $50 to $55 dollars per megawatt hour and suppliers want about $75. Treasury Secretary Summers has suggested an auction as the best way to determine the price, but California officials are taking a less free market approach and still hope to set the price through negotiation over long-term contracts. Our sources in Washington, Sacramento, and California are increasingly of the view that Governor Davis is positioning his government to establish long-term power contracts with the generators that could be passed through to the utilities following a bankruptcy in the near term. This week's legislative activities in Sacramento will create the vehicle to do so. State credit backing purchases of power would obviate the need for super-priority borrowing to finance power purchases after utility bankruptcy. 1. Audit- Untangling Utility Relationships California officials have also toughened their rhetoric on the debt repayment front as they say results from a preliminary audit show that half of the $9 to $12 billion the utilities say they owe is actually owed to themselves for power they bought from their corporate relations This strange situation is due to the fact that one holding company owns both the power-generating and power-distributing companies under a holding company umbrella. Of course, that means that some of the power PG&E and Southern California Edison bought at highly inflated prices was bought from themselves. But it was not all bad news in the tense negotiations. Sources confirm that Davis increasingly understood that the state finance role was a crucial part of any potential solution. He told our sources this afternoon that he is willing to use state credit to eliminate the "risky debt" premium that PG&E and SCE are being charged by suppliers because of their shaky finances and that he is willing to extend the current 10% rate increase utility customers are paying far beyond the initial 90-day deadline. In return he is demanding that the companies prepare to "share the burden of debt reduction in return for state help and credit extension." 2. Debt Restructuring- Guarantees, but No Direct State Money Davis also told the videoconference that he believes the $12 billion in back debt owed by the utility companies can be cleared up during a 90-day forbearance period (whether that period has been agreed to by all creditors is not something we are clear about right now). Davis' idea, as he laid it out in the meeting, is to use the forbearance period to securitize the debts and sell them against the utilities' forward rate base or by establishing a medium-term repayment plan backed by continued state guarantees. In both cases the restructured debt would be resolved over a decade without direct use of taxpayer money as the utilities use their positive margins to paydown their debt. One of the reasons Davis wants to stay close to the $50-$55 megawatt charge is that it maximizes the rate at which utilities can pay down this debt. There is a strong chance that Davis will agree to use state guarantees to sweeten the pot at the end of these negotiations, but he remains opposed to using direct state money. This frustrates both Clinton administration and utility creditors, but Davis has not yet shown much flexibility. 3. Eminent Domain/Reregulation Perhaps most frustrating to the Washington DC free market crowd at Treasury and the White House was the continued comfort Davis and his group of political advisers have with "non-market" solutions to the energy crisis. Although the Governor's aides actually believe the weapon is more a "way to force eventual agreement, than an actual solution," the talk returns frequently to these non-market mechanisms. "We have the ultimate weapon to enforce compliance by the Tuesday deadline. If we make no progress. If this thing looks like it will turn into a genuine crisis, then we will use our powers of condemnation and we will re-take the plants and equipment and run them ourselves," a close political aide to Davis said. "We will absorb the plants, the transmission lines and the reserved parking places of the executives. The legislature would agree in a second."
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