Subject: Meeting with Governor Davis, need for additional  comments/suggestions


We met with Gov Davis on Thursday evening in LA.
In attendance were Ken Lay,  the Governor, the Governor's staff director (Kari Dohn) and myself.
The gov.
spent over an hour and a half with us covering our suggestions and his  ideas.
He would like some additional thoughts from us by Tuesday of next  week as he prepares his state of the state address for the following Monday.
Attached to the end of this memo is a list of solutions we proposed (based on  my discussions with several of you) as well as some background materials Jeff  Dasovich and I prepared.
Below are my notes from the meeting regarding our  proposals, the governor's ideas, as well as my overview of the situation  based on the governor's comments:  Overview:   We made great progress in both ensuring that he understands that  we are different from the generators and in opening a channel for ongoing  communication with his administration.
The gov does not want the utilities to  go bankrupt and seems predisposed to both rate relief (more modest than what  the utilities are looking for) and credit guarantees.
His staff has more  work to do on the latter, but he was clearly intrigued with the idea.
He  talked mainly in terms of raising rates but not uncapping them at the retail  level.
He also wants to use what generation he has control over for the  benefit of California consumers, including utility-owned generation (which he  would dedicate to consumers on a cost-plus basis) and excess muni power  (which he estimates at 3000MW).
He foresees a mix of market oriented  solutions as well as interventionist solutions which will allow him to fix  the problem by '02 and provide some political cover.
Our proposals:  I have attached the outline we put in front of him (it also  included the forward price information several of you provided).
He seemed  interested in 1) the buy down of significant demand, 2) the state setting a  goal of x000 MW of new generation by a date certain, 3) getting the utilities  to gradually buy more power forward and 4) setting up a group of rate  analysts and other "nonadvocates" to develop solutions to a number of issues  including designing the portfolio and forward purchase terms for utilities.
He was also quite interested in examining the incentives surrounding LDC gas  purchases.
As already mentioned, he was also favorably disposed to finding  some state sponsored credit support for the utilities.
His ideas:  The gov read from a list of ideas some of which were obviously  under serious consideration and some of which were mere "brainstorming".
Some of these ideas would require legislative action.
State may build (or make build/transfer arrangements) a "couple" of  generation plants.
The gov feels strongly that he has to show consumers that  they are getting something in return for bearing some rate increases.
This  was a frequently recurring theme.
Utilities would sell the output from generation they still own on a cost-plus  basis to consumers.
Municipal utilties would be required to sell their excess generation in  California.
State universities (including UC/CSU and the community colleges) would more  widely deploy distributed generation.
Expand in-state gas production.
Take state lands gas royalties in kind.
negotiate directly with tribes and state governments in the west for  addtional gas supplies.
Empower an existing state agency to approve/coordinate power plant  maintenance schedules to avoid having too much generation out of service at  any one time.
Condition emissions offsets on commitments to sell power longer term in state.
Either eliminate the ISO or sharply curtail its function -- he wants to hear