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Date: Mon, 13 Aug 2001 15:48:35 -0700 (PDT)
From: robert.johnston@enron.com
To: greg.whalley@enron.com, gary.hickerson@enron.com
Subject: California- Direct Access Update
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Below is a brief summary of the main issues regarding Direct Access.  We wi=
ll continue to follow the progress on these issues and keep you updated.=20

Summary:
Direct access was designed to break utility monopolies and was a key compon=
ent of California's 1996 deregulation law.  Under this concept, all custome=
rs could directly access an energy provider other than their regulated util=
ity.  The debate over direct access is at the heart of a complicated attemp=
t to solve California's costly power crisis.  It will determine whether bus=
inesses, with residential customers, pay for the bulk of the state's future=
 energy purchases. It also could determine whether Southern California Edis=
on, the state's cash-strapped No. 2 utility, will avoid bankruptcy, and whe=
ther deregulation will survive in any form.

Report:

Big businesses, free-market advocates and alternative energy providers have=
 lobbied state legislators to find a way to keep so-called "direct access".=
  Now, as the state prepares to sell $13.4 billion in bonds to begin paying=
 off its debt, legislators and energy officials say they must prevent big b=
usinesses from wiggling out of that obligation by closing off their direct-=
access escape route.  Regulators are concerned that if businesses flee the =
system, the state will be stuck with too much electricity under long-term e=
lectricity contracts through 2021.  That would mean residential ratepayers =
would be stuck paying the bulk of the $43 billion in future power costs, a =
point that has enraged consumer groups.  Currently, only about 88,000 custo=
mers buy their energy through direct access (per CEC statistics), including=
 about 10,000 large commercial/industrial customers, and about 78,000 resid=
ences.  Alternative service providers shifted most of their customers back =
to California's primary utility suppliers (SoCal Ed., PG&E, SDG&E) earlier =
this year when prices skyrocketed and they could no longer compete with uti=
lity rates capped by the Legislature. =20

California legislators argue that direct access is the keystone of the late=
st Edison bailout plan, sponsored by Assembly Speaker Pro Tem Keeley. Under=
 the plan, the 3,600 largest businesses would agree to pay $3.1 billion of =
Edison's debts over 15 years.  In exchange, businesses would be allowed to =
secure their own power contracts by 2003, but not without first paying an "=
exit fee."  The fees and which parties would be exempt remain undetermined,=
 however, they would include a surcharge or a complicated calculation in wh=
ich businesses would pay a percentage of future energy purchases.  It is li=
kely that whatever compromise legislators are able to reach regarding direc=
t access, California's business community will have extreme difficulty acce=
pting the terms.

To ensure their efforts at resolving the direct access dilemma and abate fe=
ars of a collapsing state budget, lawmakers have gone so far as to introduc=
e two bills, (one sponsored by Sen. Bowen and defeated in July, and a secon=
d by Assemblyman Dave Kelley,) that would rescind language in previous legi=
slation that authorized the Public Utilities Commission to block direct acc=
ess.  The California PUC has thus far stayed a decision on the matter, but =
is expected to rule by August 23rd.

Complicating the issue is Wall Street.  The state's bankers, led by J.P Mor=
gan, are nervous about selling as much as $13.4 billion in planned state bo=
nds if businesses (currently the largest ratepayers in the state, after gov=
ernments) find a way out of the system.  The bonds are meant to repay the s=
tate for $8.2 billion in power-buying costs so far this year and to cover s=
ome future costs.  Business and residential electricity customers would rep=
ay the bonds through a surcharge on their utility bills.  If businesses wer=
e allowed to sign on with outside energy providers, that revenue stream wou=
ld be in jeopardy.