---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 01/26/2001 
04:33 PM ---------------------------


Kristin Walsh
01/25/2001 11:23 AM
To: John J Lavorato/Corp/Enron
cc: Jeffrey A Shankman/HOU/ECT@ECT, Gary Hickerson/HOU/ECT@ECT, Richard 
Shapiro/NA/Enron@Enron, Vince J Kaminski/HOU/ECT@ECT, James D 
Steffes/NA/Enron@Enron, Michelle D Cisneros/HOU/ECT@ECT, Jeff 
Kinneman/HOU/ECT@ECT, John Greene/LON/ECT@ECT, Jaime Gualy/NA/Enron@Enron, 
Phillip K Allen/HOU/ECT@ECT, Mike Grigsby/HOU/ECT@ECT, Scott 
Tholan/Corp/Enron@Enron, Robert Johnston/HOU/ECT@ECT 
Subject: California Update 1/25/01


California Timeline: 
February 2nd: 
The state legislature has to pass the enabling laws to let the state pay for 
the electricity from auction before the current emergency money runs out on 
February 2.   Republican leaders have vowed to block any additional emergency 
funds. 
The California courts gave Edison a two-week grace period (until February 2) 
on demands by the California Power Exchange that Edison forfeit $215 million 
in long-term low cost power contracts to the CPX for repayment of its debt.   
Governor Davis told the Court that he may absorb that contract in favor of 
taxpayers using his emergency "taking" powers.
February 7th:
President Bush, who had to intervene personally against his energy secretary 
to extend the Energy Department order mandating electricity sales to 
California by power generators, made it abundantly clear to all sides that 
the two week deadline was hard and would not be extended.
February 13th:
Edison worked out a three-week grace period -- through February 13 -- with 
all of its 32 banks and QFS to prevent from asking for accelerated repayment 
during that period, but if the state has not figured out a way to bridge that 
debt by then, this deadline could be a real trigger for bankruptcy.

Legislation
As mentioned in Tuesday's update, legislators are close to a long-term power 
buying deal with the so-called "green" producers (wind, solar, hydro, cows) 
of energy, accounting for 30% of California's total energy production.   This 
would allow the Department of Water Resources to buy power from them at 8 
cents per kilowatt hour.  

Bill AB1X--the key piece of legislation for setting long-term power 
contracts--is still being mulled over in the Senate, but is expected to pass 
this week.  The keys issues is still the price, which will probably be 
revised in accordance to the results of the auction.  Other legislation has 
been introduced, including three bills by Boxer that would increase federal 
support and impose "windfall profits tax" for wholesalers that sell power at 
"unfair and unreasonable" rates.  The hydro legislation is still being 
bantered about, however with going opposition from both Democrats and 
Republicans.  

Bail out scenarios
A new scenario is a market-oriented solution that would give the state of 
California "warrants" on the PG&E and Edison stock in return for lending them 
the money to get out of this current mess (still the problem of financing the 
$6B vs. $12B).   As the stock prices recovered, the state could cash in the 
warrants and rebate to electricity users some of the emergency surcharge 
needed to pay back the debt.  This is exactly the plan used to bail out 
Chrysler in the late 1970s and it worked wonders for taxpayers then.  This 
senario would also provide Davis with some political cover, as the idea of 
rebates are far more appealing than price increases.  Lots of details remain 
to be worked out, but even the consumer activist groups threatening to create 
propositions on fall ballots appeared to like this deal.  

Bankruptcy
Socal is close to an agreement with 32 bank creditors and QFs to allow a 
forbearance on debt payments through February 13th.  However, it is not 
expected that the bondholders would agree to this type of deal.  The 
bondholders could try to force the utilities into involuntary bankruptcy, but 
would probably be unsuccessful.  As long as Socal continues working with 
their creditors and show "good faith" any bankruptcy at this time would have 
to be voluntary.  As this date (Feb. 13th) fast approaches, the state will 
have to take quick action and draft and approve legislation between the 
governor, the generators and the utilities to prevent Socal and PG&E from 
bankruptcy.    As part of the forbearance agreement, Edison has contracted 
with around 400 QFs and negotiations have been directed toward separating the 
rate schedules of generation facilities fuelled between renewables and gas 
fired generation.  Socal is attempting to shift gas fired QFs to longer term 
schedules in light of the recent higher gas prices. 

Auction
After a nervous night when only one bid had come to the state's Internet site 
by midnight on Tuesday, California officials were happy to announce that they 
had almost 40 bids at an average of 6.9 cents per kilowatt-hour, below the 
7.4 cent real cap state officials had set internally as the threshold between 
doable and impossible.  This was well above the 5.5 cent ceiling the governor 
had publicly stated as the preferred level.  Davis will now turn the 
negotiating process over to David Freeman, who heads the Los Angeles electric 
agency and is generally considered the dean of public-private utilities in 
the west.   One thing to note, the State of California has no intention of 
any credit guarantees for the bids with the Department of Water Resources.  
Several California legislators have made it very clear that they do not want 
the state to be ultimately responsible for these power purchases.