Subject: 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 lx ) 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 dynegy has threaten to take take edison into
bankruptcy court if they default
pg & e
current available : $ 500 m in cash and reserves
due feb : lst - $ 580 m to iso
15 th - $ 431 m 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 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 .