California 1/17/01 ,
 Summary:  

Late night efforts by the California assembly to craft a legislative solution 
are falling short of market and creditor expectations.  Bankruptcy appears 
increasingly likely, but the dynamics of a Ch.11 proceeding remain unclear. 
SoCal Edison is likely to be the first in Ch.11 following its suspended 
payments to creditors yesterday and is now in a 30 day cure period.  Attempts 
to bring in the assets of the parent companies are unlikely to succeed.  
Bankruptcy would provide Davis with some political cover to implement the 
tough decisions that he has so far avoided on the questions of rate hikes and 
other costs to taxpayers connected to the proposed operations of the 
California Power Authority.

1. Legislation Passes Assembly, But Generators and Consumers Remain Unhappy

The first legislation (AB 1X)  passed the California general assembly last 
night, but both generators and consumers are unhappy with the terms.  
Generators object to the 5.5 cent per KW/H price in the proposed long-term 
contract, while consumer groups such as the Foundation for Taxpayer and 
Consumer Rights object to the state acting as a purchaser of power.  The 
legislation is expected to pass the Senate today and to be signed by Governor 
Davis as early as tonight.

Press and source reporting this morning confirms that the principal financial 
creditors and utility analysts are also unimpressed with the bill, which is 
viewed as insubstantial and falling short of creating a solution to the 
financial pressures on the utilities.

2. Financial Institutions Exposure to California Utilities

Bank of America: $215 million
J.P. Morgan: $202 million

There is a total of $12 billion in outstanding loans, but much of this 
(arranged by Societe General) is to the parents National Energy Group and 
Edison International.  The $417 million mentioned above is the most immediate 
concern.  The Southern California Edison loans are subject to immediate 
repayment in the aftermath of yesterday's rating downgrade to junk status.

The Fed will not be involved, except in a routine way as a bank regulator 
making sure that the appropriate risk reserves are made against the 
utilities' loans and securities. There is no moral hazard here, because the 
Fed is not going to guarantee any of the utilities' credits, which, by the 
way, they do not have the authority to do. 

3. PG&E/National Energy Group- Shielding Assets

Despite considerable anger at  PG&E for reorganizing to shield its profitable 
assets from its debt-plagued utility business, it would seem that Davis has 
little authority to intervene. The question of "fraudulent conveyance", which 
is a term in bankruptcy law for transferring assets to favored parties not 
long before a filing (which transfer can then be reversed by the court) would 
not seem to apply here, since PG&E went through a regulatory process before 
FERC to seek approval for the reorganization on Friday.  While courts are 
reluctant to overturn regulatory agencies, impaired creditors in a bankruptcy 
proceeding could attempt an appeal.

4. Involuntary Bankruptcy- Which Creditor Moves First?

As for who is likely to move first, it is typically the smaller creditors or 
those who won't receive a good price on post-petition business. In this 
situation our source does not know who that would be, but believes it is more 
likely that the utilities will file a voluntary petition before one of their 
major creditors files an involuntary petition.

If Dynergy files a petition with a federal bankruptcy court today, the debtor 
utilities can delay the process for weeks if they choose to, particularly 
since there is no allegation of fraud or criminal misappropriation of 
assets.  In bankruptcy proceedings (which is what is going on here), this 
sort of talk by a creditor such as Dynegy is just the usual "polite 
conversational opener," akin to comments about the weather or inquiries about 
one's family's health. 

5. Edison Teetering on the Brink- Moves Into 30 Day Cure Period

Yesterday, Southern California Edison temporarily suspended a $230 million 
bond principal and interest payments as well as $151 million to suppliers of 
renewable power and $215 million due to the California PX.  Both utilities 
are under severe short-term debt pressure, but Edison is in the worst 
position.

Edison
Due Thursday: Dynegy note; Dynegy has threaten to take take Edison into 
bankruptcy court if they default 

PG&E
Current available: $500M in cash and reserves
Due Feb:
 1st - $580M to ISO
 15th - $431M to California Power Exchange


Contrary to press reports and leaks from the Governor's office yesterday 
about political brinksmanship, Edison is clearly not playing negotiating 
games and is really short of cash. In this situation, it is unlikely that its 
executives will be making fraudulent statements. The bonds on which they 
failed to pay would have a 30-day cure period. After that the trustees will 
move on Edison, if Edison has not already filed.  They have three ways of 
financing power purchases going forward: 1) the state continues to buy power 
and sell Edison (and PG&E) power on a short-term basis under existing 
authority; or 2) pending the passage of today's legislation, the state 
legislature authorizes the purchase of power through long-term contracts 
under the proposed borrowing authority; or 3) Edison files for reorganization 
under Chapter 11 and obtains almost immediately superpriority post-petition 
lines of credit secured against its unmortgaged assets, which it uses to pay 
for power until the PUC and the rest of the state government recognize that 
rates have to increase.

6. New Hampshire Experience A Guide for Davis?

Following the bankruptcy of the Public Service Company of New Hampshire, the 
bankruptcy judge was authorized by a higher court to mandate rate hikes.  The 
prospect of imposed rate hikes from the bankruptcy court caused the state 
government to subsequently determine that rate hikes to consumers were 
unavoidable, passing a seven year rate hike of 7.5 percent.

For Davis, a similar scenario would provide him with some political cover, if 
he were forced by the bankruptcy court to pass through rate hikes as part of 
a settlement.
michelle.cisneros@enron.com