California Update 5/17/01 ,
 California's Finances
The State of California will be walking a fiscal tightrope for a while until 
wholesale energy costs come down.  At first look, it seems California's 
financial position seems OK in the short term; however, the picture remains 
troublesome in the medium term.  For one thing, instead of the bridge loans, 
the state can and probably will resort to Revenue Anticipation Notes, and has 
also scheduled a billion dollar G.O. offering for June, which will help with 
the cash situation.   There are also still substantial borrowable resources 
available to the state within its own accounts.  However, they would prefer 
not to resort to that, as doing so could have further implications for their 
bond ratings, but the option is there.   Another reason California might be 
OK in the short term, is that, everyone except Moody's, had conflated the 
money allocated for power purchases, $7.2 billion, with the money actually 
spent for power purchases, $4.3 billion. This indicates that even the pure 
cash component of the state's general fund has a longer shelf life.   So now 
the question shifts from a near term liquidity issue to asking how much of an 
economic effect will the combination of blackouts and much higher retail 
energy prices have on California's already flagging economy, and what will 
the knock-on effect of this be on the state budget.

The state is completely assured that the proceeds of the bond offers, and the 
use of the rate hikes to service those bonds, are "bankruptcy remote" 
vehicles.   Second, California legislatures are not concerned by the 
possibility of a ballot initiative.  Other areas of concern are about the tax 
revenues in light of an economic slowdown, as well as the medium-term risk of 
high electricity costs for debt service for the next 15 years.  This will 
exert a sizable drag on California's growth which could itself have budgetary 
consequences. This is actually a best case scenario, and it is clear that the 
ratepayer has more pain to come, especially if California bails out Edison 
and PG&E creditors with a "Plan B."  
Legislative Matters
Nine key Democratic members are preparing legislation that would authorize a 
buyer's cartel along with Washington state and Oregon state to set a firm 
upper limit on what each state will pay for electricity during peak demand 
periods.  Under this legislation, the state would simply refuse to pay more 
than a predetermined price for electricity, no matter what happened.  The 
Senate is having a hearing on this issues next Tuesday.  Davis commented 
yesterday that he is in support of this legislation.  
As mentioned in Wednesday's report, of the two viable Plan B's, success will 
be determined by the following questions: (1) will it trigger a rate-payer 
rebellion among California voters?; and (2) will it pass in time for SoCal 
Edison to be rescued before bankruptcy?  One problem is that even if the Plan 
Bs worked out for both SoCal Edison and PG&E, what happens with the other 64% 
of their power needs?   One legislator notes, "even the good Plan B from 
SoCal's perspective makes them essentially a vessel of the state and if we 
are still talking about eminent domain with the other plants in California 
how do you add new capacity -- which is the ultimate solution -- when 
everybody who has come in has their assets seized?"   The real issue still 
remains for any Plan B is: who pays for it and how much more does it cost 
taxpayers.   Rate payers in California are already looking forward to a 
future where their electricity rates will be paying not only for the 
colossally high cost of the power itself, but also the coupons and ultimately 
the principal on the $13 billion in bonds just authorized, on the "rate 
reduction" bonds already outstanding and -- if the Plan B advocates get their 
way -- on bailout debt issues for SoCal Edison and PG&E.
john.lavorato@enron.com, louise.kitchen@enron.com