From: robert.johnston@enron.com
To: greg.whalley@enron.com, gary.hickerson@enron.com
Cc: markus.fiala@enron.com, bryan.seyfried@enron.com, jeff.kinneman@enron.com, paul.pizzolato@enron.com, michael.bradley@enron.com, michelle.cisneros@enron.com, jaime.gualy@enron.com, danielle.romain@enron.com, scott.tholan@enron.com, kristin.walsh@enron.com
Date: 2001-05-25 11:39:00+00:00
Subject: Please Read- California 5/25

Things are definitely getting interesting.  As we reported on Wednesday, the 
first glimmers of hope for a deal in the Assembly are starting to appear on 
the horizon.  The market may react positively to this news as it filters out 
over the next week.  Of course, a bailout deal for SoCal could be rejected by 
SoCal or the generators could refuse to participate and bankruptcy could 
still happen.  Nonetheless, we felt it was important to alert you to the 
changing dynamics in the legislature.

RJ

Executive Summary:

? Legislators in both parties are scared about a fiscal meltdown and looking 
for a realistic Plan B
? The Keeley plan is the most likely vehicle and would include the 30% 
generator haircuts and revenue bonds backed by a dedicated rate component
? Despite uncertainty over dealing with transmission lines and continued 
oppostion from Burton and his consumer group allies, the Keeley plan will 
probably pass the legislature
? The generators will not support the plan until they get clearer guarantees 
from the state that investigations and lawsuits will end
? PG&E could get the same offer as SoCal through the bankruptcy court.

1. Budget Binge Could Scare Legislators into a Deal

According to sources, the Assembly is "terrified"  of the current holes in 
the budget due to buying power.  The impact of the  energy crisis is 
reportedly causing panic among some legislators.  This  panic appears to be 
moving a SoCal bailout plan forward.
 
 Sources report that a modified Plan B deal is  "not that far off"; it will 
likely take one to two weeks (more likely closer to  two) to move a deal 
through the Assembly and the Senate and to the governor's  desk once it is 
introduced.
 
2. What Would the New Plan B Look Like?

- This modified Plan B deal, which  will originate in the Assembly, will 
almost certainly include a dedicated  rate component to pay SoCal's 
undercollect.  Revenue bonds will be issued  securitized by this dedicated 
rate component.  It is also very likely that  the generators would be offered 
70 cents on the dollar for what they are owed  immediately, with the 
possibility of more if they win litigation.  (Sources  report that the state 
is "fairly confident" that at least most generators  would not be successful 
in winning this additional money.)  Assembly Speaker Keeley  reportedly 
remains the driving force behind this plan, and it is being drawn up  from 
within his office.
 
3. Transmission Lines

- It remains unclear at this time whether a  transmission line purchase or 
option to purchase will be put into the deal,  since this is a major point of 
contention between the Democrats and  Republicans.  According to sources, the 
Assembly is "working on  this."

4. Plan Looks Good to Pass Both Assembly and Senate 

- According to sources, the vote count for passing  a deal containing the 
above components (except the transmission line purchase,  which is not yet 
settled) "looks very good."  The vote in the Senate would  be "very close."  
Senator Burton still opposes a bail-out deal, but he  reportedly might not 
stand in the way of others from voting for the  plan, making its passage more 
likely.  Even opponents of the plan  (including Burton and the consumer 
advocates) say that the odds of a modified  Plan B passing the Senate are 
better than 50-50.  These opponents are  reportedly "pessimistic" about their 
chances of stopping a Plan B from passing  at this point.

5. Caveat: Generators Are Waiting For Guarantees That the Witch Hunt Will End
 
- As reported previously, sources continue to  believe that generators would 
be reluctant to take a 70 cent-on-the-dollar  haircut without the state 
offering them relief from further prosecution.   (Without this relief, the 
state could give them 70 cents, then try to take away  even more.)  Sources 
report that even opponents of the plan accept that the  generators should be 
offered this relief from prosecution.  Thus, it  appears likely at this time 
that most generators would accept a 30 percent  haircut if they were paid 
immediately.  Also, sources believe that the  securitization on the dedicated 
rate component offered in the modified Plan B  would be sufficient to pay 
back those generators who successfully litigated to  win more than 70 cents 
on the dollar.
 
- Sources believe that SoCal Edison's creditors are  likely to forebear from 
filing an involuntary bankruptcy long enough for this  plan to go through, 
since it would pay back most of what they are  owed.
 
6. PG & E Could Also Be Dealt In
 
- If this plan succeeds, it will almost certainly  be taken to the bankruptcy 
court and offered to PG&E as part of a  reorganization plan.  This plan can 
be offered at any time within  PG&E's "period of exclusivity."  This is a 
90-day period (though it is  often extended) following the filing of a 
bankruptcy petition.
 
- However, sources report that the state is  concerned about how to approach 
the bankruptcy court.  Based on Supreme  Court precedent (which legal sources 
within the state have been reviewing), the  state would likely lose its 
sovereign immunity if it entered as a party into the  bankrutpcy court.  This 
is a problem because the stakes in this case are so  high.
 
7. Bailout Bill Would Require Follow Legislation For A New Rate Structure

- Even if the state passes and signs a SoCal  bailout, it would still need to 
pass a rate structure that would allow SoCal and  PG&E to flow through cost 
increases to prevent them from once again facing  bankrtupcy.  Therefore, 
this plan does not make the crisis go  away.