Please see the following articles:

Sac Bee, Tues, 7/31: Davis spokesman under fire for stock
Sac Bee, Tues, 7/31: Davis energy aide leaves -- without pay
Sac Bee, Tues, 7/31: Power delivery efficiency questioned: Output at low-cost
generating plants has been cut while costlier ones continue to operate
Sac Bee, Tues, 7/31: Davis: FERC excluding $5 billion of owed refunds
Sac Bee, Tues, 7/31: Bill would streamline the path to local power: More
cities, including Davis, are taking a look at creating municipal utility
districts
SD Union, Tues, 7/31: SDG&E denies it deceived ratepayers about debt
SD Union, Tues, 7/31: Sempra set to unveil plans for new plant, business park
SD Union, Tues, 7/31: Davis press secretary confirms buying energy company
stock
LA Times, Tues, 7/31: Davis' Energy Advisors Draw SEC Attention
SF Chron, Tues, 7/31: California governor's press secretary confirms buying
energy company stock
SF Chron, Tues, 7/31: PG&E's $500,000,000 second-quarter surprise
SF Chron, Tues, 7/31: Power and 'juice'
SF Chron, Tues, 7/31: S.F. to vote on electric power to the people
Measures would start public utility districts
Mercury News, Tues, 7/31: Davis' advisers probed by SEC
OC Register, Tues, 7/31: Ethics issue in stock buy?
OC Register, Tues, 7/31: Aide denies stock deal was improper
OC Register, Tues, 7/31: Power firms amp up lobbying
OC Register, Tues, 7/31: Gouger Gray Davis  (Commentary)
Energy Insight, Tues, 7/31: Turning coal into a tradable commodity
WSJ, Tues, 7/31: Debt Pitch: California's Next Test In Electricity Crisis:
Selling Power Bonds
LA Times, Tues, 7/31: California ; Op Ed Desk
Commentary The State Will Pay for Davis' Panic
WSJ, Tues, 7/31: Electrical Switch: Now, Cheaper Power
Is Causing Hefty Losses for California
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Davis spokesman under fire for stock
By Amy Chance and Dale Kasler
Bee Staff Writers
(Published July 31, 2001)
Davis administration spokesman Steve Maviglio acknowledged Monday that he
bought stock in Calpine Corp. in June, at a time when the company was
announcing a breakthrough in its bid to build a controversial San Jose power
plant.
His disclosure came several days after Gov. Gray Davis dismissed five state
power purchasers for owning stock in the company and drew new complaints that
Davis administration officials may have improperly mixed their private
finances and their public roles.
Maviglio, now acting as interim communications director for the
administration, said he put in an "open" order for Calpine stock May 31,
agreeing to buy 300 shares once the stock hit a certain price.
He said that threshold was met June 20, the day after an action by the
Federal Energy Regulatory Commission brought down "all energy stock prices
across the board."
Maviglio said he bought the stock for his individual retirement account, and
it has since declined in value. Under terms of the open order, he said, he
had no control over the exact date of purchase.
Maviglio touted the company in his role as spokesman to the governor in a
story published June 27 in The Bee. He said Monday that he was simply
responding to a reporter's question about the company's positive reputation.
"They have made a clear commitment to invest in California's future,"
Maviglio said at the time. "Their pricing has been far more reasonable than
any other generator."
In the interview, Maviglio also contrasted Calpine and Texas-based
generators. He said Calpine "took a different tack from the Joe Bobs of the
world," an apparent reference to Joe Bob Perkins, a senior executive with
Reliant Energy Inc. of Houston.
Maviglio acknowledged the stock ownership several days after the
administration ended its relationship with several energy consultants who
held stock in energy companies, including Calpine.
Under pressure from Secretary of State Bill Jones, a Republican who hopes to
challenge Davis for governor next year, the Davis administration has spent
several weeks scrambling to answer questions about the stock holdings and
potential conflicts of its consultants and energy traders.
Jones said Monday that Maviglio should be fired.
"These actions are unethical, unconscionable, unacceptable, and heads should
roll," he said in a statement. He said the Democratic governor should direct
all of his staff to immediately file updated conflict-of-interest statements
to reflect current holdings.
Jones, who last week asked the Securities and Exchange Commission to
investigate administration consultants for insider trading, also said the
probe should be expanded "to include all of the governor's staff."
Federal law and SEC regulations forbid anyone from trading stocks while
possessing "insider information" -- relevant facts not available to the
public, according to the SEC. Violations can bring lawsuits and criminal
prosecution.
Michael Prozan, a Menlo Park lawyer and expert on insider trading, said the
prohibition against it originally focused on halting company executives from
profiting from news before it was disclosed publicly.
But the laws have been broadened to include others besides company employees.
Investment bankers, lawyers and journalists have been snared by
insider-trading crackdowns.
Davis' office was instrumental earlier this year in paving the way for
removing barriers to construction of a Calpine plant in San Jose. On May 30,
after opposing the project for years, San Jose Mayor Ron Gonzales announced
he had negotiated an agreement addressing his concerns and agreed to support
construction.
His action came after Davis in April endorsed the plant's construction and as
the state Energy Commission threatened to approve it over local objections.
On June 20, the company announced it had won tentative state approval to
build the plant.
Maviglio said he buys many stocks and that Enron Corp. and Calpine are the
only energy generators among them. He owns 100 shares of Enron stock, which
he purchased in 1996.
"I deal with hundreds of California companies just about every day, and this
was one that I saw that looked like a good investment based on public
knowledge," he said. "I read six newspapers a day or more, and I know what's
going on in the world. If there's a standard that I can't invest in something
that I have general public knowledge of, then I wouldn't have any stocks at
all."
Maviglio said that the "open" order he placed meant that he could not have
used inside information to make his stock purchase.
"Had I had specific knowledge about a contract being signed or what actually
happened in the office of the mayor of San Jose ... that would have been
unrelated," Maviglio said. "There was no timing-based sequence to it."
Calpine stock, despite the company's considerable success, has slipped in
recent weeks because of general investor anxiety about the California energy
crisis.
The stock, which trades on the New York Stock Exchange, closed at $49.30 on
May 31, the day Maviglio says he placed the purchase order. The order was
executed as the stock dipped below $40 on June 20, closing that day at
$39.85.
The day before, the Federal Energy Regulatory Commission announced a
price-control plan that investors believed was damaging to generators'
profits. On Monday, the stock closed at $37.13.
Last week, the Davis administration stopped doing business with five energy
traders under contract with the administration after Maviglio said
administration lawyers "came to the determination that there are possible
violations of the law or close to it."
"It's not a crime to own energy stock," Maviglio said Monday. "The difference
with these traders is they're making governmental decisions. They're
committing the state's resources by spending money to buy power."
Jim Knox, director of California Common Cause, said he believes the
Governor's Office made critical errors while hiring staff to purchase energy
for the state.
"Had the Governor's Office gone to the trouble to have these people fill
statements of economic interest, as they were required to do by law, they
should have known this before they were hired and they shouldn't have been
hired," Knox said.

The Bee's Amy Chance can be reached at (916) 326-5535 or achance@sacbee.com
<mailto:achance@sacbee.com>.
Emily Bazar of The Bee Capitol Bureau contributed to this report.

Davis energy aide leaves -- without pay
By Emily Bazar
Bee Capitol Bureau
(Published July 31, 2001)
A high-paid consultant to Gov. Gray Davis who came under fire for his
dealings with a California utility has cut ties with the administration and
won't be paid for work already completed.
Under terms of a settlement made final Monday, former Clinton damage control
specialist Chris Lehane will no longer help shape Davis' public response to
the energy crisis.
Neither Lehane nor partner Mark Fabiani -- who were hired by Davis in May on
a six-month, $30,000-a-month contract -- will receive any money for their
services. Fabiani left last month.
Because Lehane and Fabiani each received at least $10,000 under contract with
Southern California Edison in the past year, Lewis Uhler, president of the
National Tax Limitation Committee, filed a lawsuit alleging that conflict of
interest laws had been violated.
But Davis spokesman Steve Maviglio said Lehane and Fabiani were instrumental
in persuading the Federal Energy Regulatory Commission to limit the wholesale
cost of power in the state.
"Chris Lehane provided an invaluable service to the people of California in
helping us get action after a yearlong wait from FERC," he said. "It's a
shame that politics gets in the way of public service."
Uhler, however, said he believes Lehane and Fabiani represent a larger
problem in the Davis administration, and he pointed to the recent dismissal
of energy traders who held stock in energy companies.
"Doesn't anybody in the Governor's Office understand conflict of interest?"
Uhler asked.
"This is really sending a signal that the Governor's Office thinks that it is
somehow above the law."

The Bee's Emily Bazar can be reached at (916) 326-5540 or ebazar@sacbee.com
<mailto:ebazar@sacbee.com>.

Power delivery efficiency questioned: Output at low-cost generating plants
has been cut while costlier ones continue to operate.
By Carrie Peyton
Bee Staff Writer
(Published July 31, 2001)
California is sometimes deliberately cutting output from low-cost power
plants while running more expensive ones, utility and grid officials say.
The sporadic episodes haven't cost much yet, but they illustrate a
potentially troubling disconnect in the system that has quickly grown between
two agencies that help deliver electricity to a power-strapped state.
"We seem to be building this inefficiency into the system, and it doesn't
seem to be getting better," said Mike Florio, a consumer advocate who sits on
the governing board of the Independent System Operator.
The trouble is that the ISO, created in 1996 to manage the power grid in a
deregulated electric market, tries to run the grid by auctions that -- in
theory -- provide the cheapest electricity for the state's consumers.
Meanwhile, the state Department of Water Resources, which in January stepped
in to buy power on behalf of cash-strapped utilities, isn't bidding at some
auctions because it believes it can provide cheaper power if it doesn't.
"We have an inefficient market and an inept government entity. It's sort of
the worst of both worlds," Florio said, criticizing his agency and the DWR.
ISO staffers decline to discuss the situation in detail, saying it involves
confidential bidding behavior.
But Pete Garris, chief of operations for the power-buying arm of the
Department of Water Resources, confirmed that the ISO has been asking his
agency to take part in more auctions, but the state has declined.
The state's role is to buy electricity for customers of utilities whose
credit was no longer good enough to buy on their own, he said.
"We're not in it to do those kinds of marketing functions," he said. "It's
not necessarily a good fit."
Some of the ISO auctions are used to lessen congestion on transmission lines.
Others are used to stabilize the grid by slightly increasing or decreasing
output when demand doesn't match forecasts.
Generally, the highest-cost power plants should be the ones cutting back, a
process the industry calls "decking."
But since May, on ISO orders, Southern California Edison has repeatedly
throttled back on the Mohave Generating Station, which produces some of the
cheapest power available to California today, costing as little as $10 to $20
a megawatt-hour.
Edison, which owns a majority share of Mohave, has cut its output by 5,660
megawatt-hours between May and July, about one-half of 1 percent, at the
ISO's behest, according to data Edison provided to The Bee.
The ISO could probably have saved the state's consumers $370,000 at one plant
if it had asked a higher-cost gas-burning plant to cut back instead of
Mohave, a coal-burning workhorse in Laughlin, Nev., Florio said.
The amount sounds like "small potatoes," but in some ways it is more alarming
than the $14 million the state lost recently by selling excess power for less
than it paid, he said.
Industry experts agree that such below-cost sales are common in a business
where power needs fluctuate dramatically based on the weather.
By contrast, "this is a dead weight loss. Higher costs are being incurred for
no good reason," Florio said.
"The question is, why is the ISO calling on Mohave and not (cheaper) gas
plants? The answer is, the gas plants aren't bidding ... probably because
they're contracted with DWR," he said.
Four Corners, another low-cost coal plant partly owned by Edison, has also
been throttled back at ISO request, Edison officials said.
In addition, so few bidders have shown up at ISO auctions to ease stress on
transmission lines that the system has fallen into disarray, with the ISO
instead ordering across-the-board power production cuts that are boosting
costs, Florio said.
For its part, the ISO will say only that "we are making the most economical
decisions we can based on the bids available," said spokeswoman Stephanie
McCorkle.
DWR's Garris said the state and the ISO have been meeting repeatedly on
bidding and other coordination issues, and he hopes to have a
smoother-running system in place by next summer.

The Bee's Carrie Peyton can be reached at (916) 321-1086 or
cpeyton@sacbee.com <mailto:cpeyton@sacbee.com>.

Davis: FERC excluding $5 billion of owed refunds
By Jim Sanders
Bee Capitol Bureau
(Published July 31, 2001)
A ruling by the Federal Energy Regulatory Commission last week could cost
Californians $5 billion in energy refunds, according to Gov. Gray Davis, who
filed a formal request Monday for a rehearing in the case.
Although the commission's order suggested that California is owed refunds
because of exorbitant electricity prices during the recent energy crisis, the
order's fine print placed severe limits on such refunds, Davis said.
"FERC is up to its old tricks again," he said. "They talk about refunds for
California. But in this case, talk really is cheap: The details of its latest
order show it has no intention of making California whole."
Tamara Young-Allen, a FERC spokeswoman, declined comment Monday and said the
agency does not discuss pending cases.
California is seeking $8.9 billion in alleged overcharges for electricity
purchased from May 2000 to June 19, when FERC imposed new rules to prevent
price gouging.
On Wednesday, FERC ordered hearings to determine precisely how much money
electricity generators would have to pay in refunds to California.
At the time, Davis applauded FERC's ruling, saying it validates California's
claim that "significant refunds are due" and that the agency's action "gets
us closer to realizing that refund."
But after poring over details of the 40-page order, state officials said
Monday that it excludes from consideration more than half the amount sought
by the state -- leaving $3.9 billion in dispute.
Attorney Barry Goode and Nancy McFadden, key members of Davis' energy team,
said the FERC order would not allow refunds:
For about $2 billion in alleged overcharges stemming from electricity
purchased by Californians between May and October of last year.
For electricity bought by the state Department of Water Resources from
private companies this year. The state says it is owed about $3 billion from
such purchases.
The FERC ruling means that only DWR's purchases through the state's
now-defunct Power Exchange or through the operator of a statewide electricity
transmission grid will be considered for refunds, officials said.
Such limitations by the regulatory agency are impractical because the market
was dysfunctional, leaving DWR with few options, when the state began buying
electricity for debt-strapped private utilities in January, Goode said.
"Now FERC says Californians are not entitled to refunds even though they
determined the prices were excessively high," Davis said. "It's time for FERC
to decide who they are working for: the greedy out-of-state generators or the
people of California."
The motion filed Monday sets the stage for a possible lawsuit.
"We are calling on FERC to change its order," Davis said. "If it doesn't, we
will be in court."

The Bee's Jim Sanders can be reached at (916) 326-5538 or jsanders@sacbee.com
<mailto:jsanders@sacbee.com>.

Bill would streamline the path to local power: More cities, including Davis,
are taking a look at creating municipal utility districts.
By Ed Fletcher
Bee Capitol Bureau
(Published July 31, 2001)
With the future of California's investor-owned utilities clouded by the
state's energy crisis, more and more cities, including Davis, are looking to
control their own power destinies.
Cities, public-power advocates and state Sen. Nell Soto, D-Pomona, are
pushing a bill through the state Legislature that would make it easier to
create municipal utility districts.
"My solution to the power crisis is to reassert our interests and declare our
independence from out-of-state gougers and in-state irresponsible utility
companies," said Soto, who is carrying the bill, SB 23xx.
The Senate approved the bill earlier this month. The Assembly is expected to
take it up when the Legislature reconvenes in mid-August. The state's three
investor-owned utilities are fighting the proposal.
Davis and other cities look longingly at the Sacramento Municipal Utility
District's success in sheltering ratepayers from the brunt of rate increases.
Given the cloudy financial future of Davis' power provider, Pacific Gas and
Electric Co., public power supporters say it's easy to understand why cities
want local control. If run well, public power can be cheaper and more stable
than that supplied by investor-owned utility companies, they say.
"You get to choose the type of energy you want. ... I can't think of a bad
reason" to have public power, said Robert Milbrodt, a Davis resident active
in the drive.
After Yolo County officials last year denied an effort to form a public power
authority in Davis, the city is ready to take a fresh look. The city, which
did not formally support last year's attempt, this week is expected to name
members to a public power task force. It is also hiring a consultant to help
evaluate the pros and cons of a Davis version of SMUD.
Soto's bill would create a path to public power that takes county local
agency formation commissions out of the process. Under the bill, if all the
cities and counties affected by the proposed municipal utility district sign
on, the plan bypasses the local LAFCO, goes directly to the California Pubic
Utilities Commission for analysis and then to the voters of the affected
areas.
It was the Yolo County Local Agency Formation Commission that turned down the
Davis request a year ago, saying critical issues were unresolved. Davis
public power activists said their plan would have put the basic formation
question before the voters, leaving the details to be worked out later.
Public power boosters said lobbying by PG&E doomed their plans.
SB 23xx also simplifies the approval process, allowing a simple majority of
voters in the proposed district to create the new power district.
Seizing transformers, power lines and other utility company infrastructure
through eminent domain would become much easier for agencies starting
municipal utility districts under the bill. A utility company would not be
able to challenge the taking of property based on the merits, but could only
fight over price.
The utility companies say the provision would take away a key protection
against abuse.
Surveys show Californians like the idea of local officials controlling their
power, in part because they blame investor-owned utilities for the state's
electricity mess.
Nearly two-thirds say local governments taking the place of investor-owned
utilities would be a good thing, according to a poll released earlier this
month by the Public Policy Institute of California.
There are those that warn, however, that pubic power is not without risk.
"This bill does not address generation," said Dale Hunter, a PG&E lobbyist,
and municipal utility districts that can't generate their own power will be
"exposing ratepayers to the volatility of the (power purchasing) market."
In Los Angeles, the Department of Water and Power has been highly successful
because it has surplus power to sell, Hunter said. SMUD has only recently
been forced to raise its rates largely because it generates some of its
power, Hunter said.
By creating a way around LAFCOs, shifting the Public Utilities Commission to
an advisory role and stripping the right of utility companies to fight in
court, the bill would be removing important public safeguards, Hunter said.

The Bee's Ed Fletcher can be reached at (916) 326-5548 or
efletcher@sacbee.com <mailto:efletcher@sacbee.com>.

SDG&E denies it deceived ratepayers about debt

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Company calls gain on sales, debts 'separate transactions' By Craig D. Rose
UNION-TRIBUNE STAFF WRITER  July 31, 2001  San Diego Gas & Electric yesterday
denied allegations that it systematically lied about the debt it racked up
during the power crisis, despite revelations that the company earned hundreds
of millions from some power sales.  SDG&E and its parent company, Sempra
Energy, acknowledged making profits from selling electricity but insisted
those gains have no bearing on the $750 million debt the utility claims to be
owed by customers for power purchases during the energy crisis.  "Those are
completely separate transactions," said Ed Van Herik, a spokesman for SDG&E.
The company's effort to seal a deal with the state to clear the $750 million
debt has come under attack by the Utility Consumers' Action Network. The San
Diego-based consumer group says SDG&E's claimed debt is the result of
selective bookkeeping, bordering on fraud.  The bottom line, says UCAN, is
that SDG&E engaged in deception and probably owes its customers money.
SDG&E, which claimed to have sold customers electricity without markups,
actually "was buying electricity at a low price and selling it at a higher
price to us," said Shames. "SDG&E customers have been systematically lied to
over the past year about this balancing account."  UCAN says that SDG&E
earned an estimated $450 million from its power sales to the state, while
publicly declaring that it was posting only losses from buying power.  Shames
said much of the information leading to UCAN's conclusion came from a
detailed analysis of documents made available in recent weeks.  The state
Office of Ratepayer Advocates, meanwhile, yesterday said a new filing by
SDG&E that claims its power-sales profits belong to stockholders, not
consumers, is "specious" and "without merit."  Van Herik insisted the company
had not been misleading. The spokesman noted that the company earlier was
required to buy electricity from the Power Exchange, a now-defunct
marketplace established by the state as part of its deregulation plan.  "What
we said is that we were buying electricity for our customers and passing
along the cost without markup," said Van Herik.  What SDG&E failed to
publicly announce was that it was simultaneously selling electricity to the
Power Exchange for an apparently healthy profit.  Under certain contracts,
SDG&E had locked in electricity at prices substantially below going rates
during the ongoing power crisis. The company declined yesterday to reveal
terms of the contracts. But UCAN estimates the contracts provided electricity
to the utility at no more than 5 cents per kilowatt-hour.  SDG&E then sold
that relatively cheap power to the Power Exchange for a higher price and
pocketed the profit, which it also declined to disclose.  As it profited from
the power sales, SDG&E bought power at higher prices from the exchange and
billed customers for what it paid.  Whenever SDG&E's costs to buy electricity
exceeded what state regulators would allow the utility to charge customers,
it recorded the amounts in balancing accounts. That account grew to $750
million.  But SDG&E never offset its losses from electricity purchases with
its profit from sales.  Van Herik said the practice was appropriate because
the lucrative contracts for cheap power were owned by the company's
shareholders, not its customers. The practice of keeping profits and losses
entirely separate, he said, was endorsed by a California Public Utilities
Commission audit.  But the first formal ruling on that matter came in June,
when the full commission ruled that all profits from SDG&E's contractual
power deals belong to its customers.  SDG&E went to court to overturn the
commission's ruling, but put the legal effort on hold shortly before Sempra
reached a tentative agreement with the state to clear the $750 million debt.
The proposal with the state would reverse the utilities commission ruling and
award the company's shareholders ownership of the profits SDG&E made from
selling power.  Van Herik said yesterday that the state made the concession
because it recognized that SDG&E had a strong legal case.  But Shames says
the state had a strong case and noted that the Office of Ratepayer Advocates
agreed. He is asking the utilities commission to reject the deal.  State Sen.
Steve Peace, D-El Cajon, said he believes that consumer objections to the
balancing account deal are aimed at getting ratepayers a better deal -- and
that's something he supports.  "If Michael Shames can improve on the
balancing account deal I'm in full support as long as we don't lose any of
the gains we've already gotten," he said.  A spokesman for Gov. Gray Davis
did not return a telephone call seeking reaction to the UCAN allegations.
Outside UCAN's office in Little Italy yesterday, a group of trade unionists
demonstrated in support of SDG&E's position. Dave Moore, a business manager
for the International Brotherhood of Electrical Workers Local 465, said SDG&E
has handled its power purchases in accordance with utilities commission
rulings.  But Shames said the company sought to shield its actions from the
scrutiny of consumer groups and the public.  "They consistently said they
were not making money from this," said the consumer advocate. "For them to
split hairs and say, 'We didn't make money from purchases, we made it from
sales,' is disingenuous."  Staff writer Bill Ainsworth contributed to this
report.

Sempra set to unveil plans for new plant, business park

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By Jonathan Heller  UNION-TRIBUNE STAFF WRITER  July 31, 2001  ESCONDIDO --
City officials are expecting to get their first look today at long-awaited
plans to build the largest power plant in North County since the Encina plant
came on line more than 30 years ago.  Sempra Energy Resources will file a
200-page application with the city Planning Department for a 550-megawatt,
natural gas-fired power plant and roughly 100-acre business park in southwest
Escondido, Sempra spokesman Tom Murnane said.  "It (the application) is very
detailed," Murnane said. "We have not done an application of this sort
before. This is the first time Sempra Energy Resources has been involved in
the development of a business park."  Sempra is building the project in
partnership with JRM Real Estate, a Carlsbad-based developer.  The California
Energy Commission will have final say on the power plant, which could take
three to four years to get on line. The City Council will decide on the
industrial park.  City officials have awaited Sempra's bid ever since the
idea was broached in January. The project addresses two needs: The power
plant would provide enough energy to power almost a half-million homes, and
the business park would bring higher-paying jobs to a city with the lowest
median income in North County.  "I'm awaiting with great anticipation to see
what they have planned," said City Councilwoman June Rady. "I have met with
Sempra officials several times in the past and what they have shared with me
I've been very excited about."  Sempra has promised that its proposed plant
would have lower emission levels than any plant now in the state. The company
also has said the plant would not have a tall smokestack, or a visible vapor
plume such as the one produced by the city's Iceoplex generating plant.  The
plant and park are slated for Quail Hills, the last large parcel of vacant
industrial land in the city. Several previous plans by other developers have
failed after they discovered the high costs involved with building on the
hilly terrain.  Neighbors near the area have voiced concerns about noise,
traffic and dust associated with rock crushing, which would be needed to
create level foundations for the project.

Davis press secretary confirms buying energy company stock

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ASSOCIATED PRESS  July 31, 2001  SACRAMENTO ) Gov. Gray Davis' press
secretary recently purchased the same energy stock as five consultants the
governor fired last week, he disclosed Monday.  Steve Maviglio confirmed that
on June 20, he bought 300 shares of stock in Calpine Corp., a San Jose-based
power generator that has received about $13 billion in state contracts to
supply electricity for up to 20 years.  Maviglio's disclosure comes after
Davis' office hastily ended the contracts of five consultants who helped
negotiate state power contracts and held stock in energy companies.  In a
related development, an anonymous source told the Los Angeles Times on Monday
that the Securities and Exchange Commission has launched a preliminary
inquiry into whether the consultants used inside information to trade the
energy stocks.  About two dozen Davis energy consultants were required to
fill out financial disclosure statements after complaints of conflict of
interest by Republicans and consumer groups.  "When we reviewed them, we
found possible violations of the law and took swift action," Maviglio said
Monday before Secretary of State Bill Jones issued a press release calling
for his termination.  Jones, a Republican, is a candidate for the GOP
nomination to challenge Davis in November 2002.  Maviglio defended his
purchase, saying that he "owns several stocks in companies in all fields that
are growing and are based in California."  Maviglio said Monday that he
requested on May 31 to purchase the stock if it dipped to $40 a share, which
it did two days after a June 18 ruling by federal energy regulators
restricting wholesale electricity prices in California and 10 other states.
Maviglio served as Davis' chief spokesman urging the Federal Energy
Regulatory Commission to impose price ceilings on electricity wholesalers.
He also said he owns between $10,000 and $100,000 stock in Houston-based
Enron Corp. He said he purchased the stock in 1997 and has reported it on
financial disclosure forms. He said that it is "closer to $10,000."
Meanwhile, two energy consultants to Davis have agreed to forgo more than
$50,000 in work they did for the state.  Chris Lehane and Mark Fabiani will
forgo the payments as part of a settlement with a Sacramento-area resident
who filed a lawsuit objecting to their hiring, calling it a conflict of
interest.  Fabiani could not be reached for comment Monday. In the
settlement, they admitted no wrongdoing.  Lehane issued a statement through
the governor's office, calling it "simply not worth the bother to challenge
the controller in court."  Davis has come under fire for his May hiring of
Lehane, former press secretary for Vice President Al Gore, and Fabiani, a
deputy campaign manager for Gore's presidential run.  They were hired to help
shape Davis' response to the energy crisis, and helped craft Davis'
aggressive attack on Texas-based energy companies and President Bush.  Both
also have advised Southern California Edison, which is negotiating for state
help in avoiding bankruptcy. Financial disclosure forms showed they have each
received at least $10,000 from Edison in the past year.  Davis announced at
the end of June that Fabiani terminated his contract, and Davis scaled back
Lehane's role with the state.  State Controller Kathleen Connell then said
she would not pay Lehane and Fabiani for any of their work and now the two
have agreed they will not fight her decision, Maviglio said.  Lewis K. Uhler,
the Placer County man who filed the lawsuit, said the settlement
"accomplished our objectives."  "We wanted to block the egregious use of
taxpayer funds for essentially political spinmeisters," he said. Uhler is
president of the Roseville-based National Tax Limitation Committee.  Maviglio
said that Fabiani and Lehane "did good work for the state" and helped the
state win victories with federal regulators.

THE STATE
Davis' Energy Advisors Draw SEC Attention
Probe: Under review is the possible use of inside information to buy power
company stocks. GOP rival of governor requested the inquiry.
By WALTER HAMILTON JEFFERY L. RABIN and DARYL KELLEY
TIMES STAFF WRITERS

July 31 2001

The Securities and Exchange Commission has launched a preliminary inquiry
into whether energy consultants advising Gov. Gray Davis used inside
information to trade stocks of power companies doing business with the state,
a source with knowledge of the matter said Monday.

The federal agency began its review late last week, the source said, in
response to a request from California Secretary of State Bill Jones. A
Republican rival of Davis, Jones charged that stock trading by consultants
may have violated federal laws barring buying and selling based on
information not available to the public.

On Friday, top aides to the governor disclosed that five consultants had been
fired for possible conflicts of interest between their official positions and
their personal finances. As news of the SEC inquiry spread through the
capital Monday, Davis officials were confronted by a flurry of questions
about who in the administration owns energy stocks.

Financial disclosure records filed by the governor's spokesman, Steve
Maviglio, show that he owns between $10,000 and $100,000 in a Texas company
he and his boss have accused of making "obscene" profits while California has
been "on its knees." Maviglio said he bought the shares in Houston-based
Enron Corp. in 1996.

"It's not a crime to own energy stock," Maviglio said.

He also owns 300 shares of San Jose-based Calpine Corp., which has the
largest share of the $43 billion in long-term state power contracts.

Maviglio placed the order for the stock on May 31, one day after San Jose's
mayor dropped his opposition to a controversial Calpine plant favored by the
governor and others. Under the terms of Maviglio's purchase, the transaction
was completed about three weeks later when the stock reached $40 a share, a
value of $12,000. It has since fallen in value.

"I viewed it as a good long-term investment," Maviglio said, adding that he
purchased the shares for his retirement account based on publicly available
information.

The Davis administration has spared Calpine the kind of fierce criticisms
that it has leveled at other electricity suppliers, such as Enron. But
California's grid operator has identified the company as one of many energy
merchants to overcharge the state millions of dollars.

The fired consultants also owned shares in Calpine, ranging in value from
several thousand dollars to more than $100,000, records show.

Another top Davis administration official, legal affairs secretary Barry
Goode, disclosed in his economic interest statement that he recently held
between $100,000 and $1 million in another out-of-state company accused of
multimillion-dollar price gouging.

In a statement, Goode said he sold his stock in Williams Co's. a month after
he began working for the governor in February. Goode said the shares were
supposed to be sold before he went on the state payroll, but his broker
failed to do so.

In light of the recent disclosures, Secretary of State Jones said the
governor must do more to ensure the public that its interest comes first.

"The governor should direct all of his staff to immediately file updated
conflict of interest statements that reflect current holdings and any
activity since their last statement of economic interest was filed," said
Jones, who is seeking the GOP nomination for governor.

Word of the SEC's entry into California's energy problems comes as the
governor faces harsh criticism from lawmakers and others for the quick and
broad hiring of highly paid private consultants to guide him through the
crisis.

In his written request to the SEC, Jones said that recently filed disclosure
documents showed that at least one consultant bought and sold shares of two
energy companies within the same month, raising "a red flag" about the
possibility of insider trading.

State law prohibits officials from participating in decisions involving their
personal financial interests.

The five consultants fired last week were among 11 named in Jones' letter,
delivered to the San Francisco office of the SEC last Wednesday. It was not
clear which individuals are the focus of the SEC's inquiry, or whether the
agency's review would result in any charges.

Two of the former traders said Monday that they had not been contacted by
federal investigators and knew nothing of an inquiry into possible insider
trading.

But William Mead, fired Thursday, said it is no mystery why so many of his
colleagues owned Calpine stock.

Mead said he bought it 2 1/2 years ago and made so much money he recommended
it to his colleagues last year, while they all still worked for the
now-defunct California Power Exchange in Alhambra. Calpine power was not
traded on that exchange, so there was no conflict of interest, he said.

Mead and three other energy traders--hired by the state in February and
March--were terminated by the Davis administration for allegedly buying power
for the state from Calpine while owning the company's stock. Fired traders
Herman Leung, Peggy Cheng and Constantine Louie did not list the date of
their Calpine purchases on financial statements that the state required to be
filed only two weeks ago.

"But I'm sure they bought it while they were still at the power exchange,
because that's when we discussed it," Mead said. "It was kind of like a
hobby. I'm sure it wasn't done with the intent to manipulate."

Former trader Elaine Griffin, who also owned Calpine stock and resigned two
weeks ago to take another job, said she didn't know she owned energy
securities until she checked with her financial advisor July 13, just before
leaving her state job.

Griffin said she and her husband own about $10,000 worth of Calpine stock in
individual retirement accounts managed by their advisor, who bought the stock
Feb. 1 without their knowledge, she said, after research found it to be a
good investment.

"I kind of feel like we've been used for political reasons," Griffin said.
"We would have disclosed anything right at first, but they never asked."

As a trader, Griffin said she occasionally bought Calpine power for the
state, but only at market prices.

Meanwhile, two Democratic political consultants, who helped Davis polish his
image after the ongoing energy crisis caused his poll numbers to plummet,
have agreed to accept no payment for their work as part of an out-of-court
settlement of a taxpayer lawsuit.

Tom Hiltachk, a lawyer for conservative anti-tax activist Lewis Uhler, said
the settlement was reached last Friday after negotiations with lawyers for
communications consultants Mark Fabiani and Chris Lehane.

"Now they will not receive one red cent," said Hiltachk. "Very simply Mr.
Fabiani and Mr. Lehane have agreed to cease all activities for the governor,
to accept no payments for their services and to basically get out of the
consulting business with the governor."

As his part of the agreement, Hiltachk said, Uhler withdrew his lawsuit
Monday morning.

Uhler had filed a lawsuit against the two consultants and Controller Kathleen
Connell in June contending that they should not receive any payments because
of a conflict of interest. The two men also did consulting work for
financially troubled Southern California Edison, which was seeking help from
Davis and the Legislature.

Connell, a former Los Angeles mayoral candidate who has been at odds with
Davis since he endorsed an opponent, had held up the payments pending the
outcome of the lawsuit.

Under an agreement with Davis, the men were to have been paid $30,000 a month
for six months.

Fabiani and Lehane could not be reached for comment.

*

Times staff writers Nancy Vogel and Virginia Ellis in Sacramento and Robert
J. Lopez in Los Angeles contributed to this story.
Copyright 2001, Los Angeles Times <http://www.latimes.com>

California governor's press secretary confirms buying energy company stock
ALEXA HAUSSLER, Associated Press Writer
Tuesday, July 31, 2001
,2001 Associated Press
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2001/07/31/natio
nal1023EDT0543.DTL>
(07-31) 07:23 PDT SACRAMENTO, Calif. (AP) --
Gov. Gray Davis' press secretary says he owns stock in the same energy
company as five state consultants who were fired because of possible conflict
of interest.
Steve Maviglio confirmed Monday that on June 20 he bought 300 shares of stock
in Calpine Corp., a San Jose-based power generator that has received about
$13 billion in state contracts to supply electricity for up to 20 years.
Secretary of State Bill Jones called for Maviglio's termination. Jones is a
candidate for the GOP nomination to challenge Davis in November 2002.
The five energy consultants were fired last week because they owned shares in
Calpine and also had helped the state buy electricity from the company. "We
did not want them making governmental decisions and holding these stocks,"
said Barry Goode, the governor's legal affairs secretary.
An anonymous source told the Los Angeles Times on Monday that the Securities
and Exchange Commission has launched a preliminary inquiry into whether the
consultants used inside information to trade energy stocks.
Maviglio defended his investment, saying that he "owns several stocks in
companies in all fields that are growing and are based in California."
He said he had arranged to buy Calpine stock if it dipped to $40 a share,
which it did two days after a June 18 ruling by federal energy regulators
restricting wholesale electricity prices in California and 10 other states.
Calpine stock closed Monday at $37.13.
Maviglio had served as Davis' chief spokesman urging the Federal Energy
Regulatory Commission to impose price ceilings on electricity wholesalers.
He also said he owns stock worth $10,000 to $100,000 in Houston-based Enron
Corp., the nation's largest power wholesaler. He said he bought the stock in
1997 and has reported it on financial disclosure forms. He said his holding
is "closer to $10,000."
,2001 Associated Press

PG&E's $500,000,000 second-quarter surprise
Verne Kopytoff, Chronicle Staff Writer <mailto:vkopytoff@sfchronicle.com>
Tuesday, July 31, 2001
,2001 San Francisco Chronicle </chronicle/info/copyright>
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/31/
BU213760.DTL>
PG&E Corp. said yesterday that it will earn $500 million to $600 million more
than anticipated in the second quarter because its bankrupt utility was able
to buy cheaper electricity in March as wholesale prices dropped.
As a consequence, PG&E reduced the amount of money it says the utility,
Pacific Gas and Electric Co., lost during California's energy crisis from
$5.2 billion to between $4.6 billion and $4.7 billion.
"Its a good thing for PG&E," said Paul Fremont, an energy industry analyst
with Jefferies & Co., an investment bank in New York. "But it clearly does
not get them to the level where they are able to emerge from bankruptcy and
make all of their creditors whole."
The disclosure by PG&E Corp. yesterday adds a modest boost to its quarterly
earnings report, set for tomorrow morning. The company is expected to report
an operating profit of 71 cents per share, according to analysts polled by
Thomson Financial/First Call, an investment research firm.
PG&E Corp. is the owner of Pacific Gas & Electric Co., which filed for
Chapter 11 bankruptcy protection in April after electricity prices soared
this year. The utility had previously estimated that it lost $1.1 billion in
the first quarter and $4.1 billion in the fourth because it was prohibited by
the state Public Utilities Commission from passing higher costs on to
consumers.
PG&E Corp. also includes a energy producing unit, which generally makes
money, and a venture capital arm. Neither of those divisions is affected by
the utility's bankruptcy.
The utility said it got a small break in March as the price it was paying to
the California Independent System Operator for energy declined sharply. The
unanticipated drop was attributed to declining demand because of energy
conservation, low tempera-
tures and the opening of new power plants in the state.
The utility also benefited from the cancellation of power contracts by
companies that did not want to do business with a bankrupt partner. Those
contracts were for selling power at below cost.
What is the utility's gain, though, may be a negative for PG&E's power-
producing division. The lower prices could mean the energy-producing group
will make less money from its sales, analysts said.
E-mail Verne Kopytoff at vkopytoff@sfchronicle.com
<mailto:vkopytoff@sfchronicle.com>.
,2001 San Francisco Chronicle </chronicle/info/copyright> Page E - 1

Power and 'juice'
 <mailto:chronfeedback@sfchronicle.com>
Tuesday, July 31, 2001
,2001 San Francisco Chronicle </chronicle/info/copyright>
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/31/
ED133454.DTL>
GOV. GRAY DAVIS seems to have an ethical blind spot when it comes to the
hiring of outsiders to help manage California's energy crisis.
Throughout the crisis, Davis has been intolerably slow in responding to
questions about whether certain members of his inner circle -- drawing big
checks off the public payroll -- might have possible financial conflicts.
As of yesterday, the governor's office still has not required 16 contractors
to file public disclosure documents that would reveal whether they have any
financial stake in companies affected by policies they help develop.
Steve Maviglio, the governor's press secretary, said 42 energy "consultants"
have filed their economic disclosure statements. But he said the other 16
were "contractors" -- without actual decisionmaking authority -- and were
thus not required to fill out the forms.
Maviglio's "contractor versus consultant" distinctions are technical and
semantic. His spin simply doesn't wash.
The bottom line is that "contractors" who are making big decisions involving
big dollars for the state are not playing by the same rules as others in the
public trust.
For example, Davis has exempted two Wall Street executives, Joseph Fichera
and Michael Hoffman, who are putting together a rescue plan that involves a
$12.5 billion bond issue. They are getting $275,000 a month for their advice.
Yet they have not been required to fill out disclosure forms, which would
allow the governor -- and any other Californian -- to assess whether a
potential conflict exists.
"They told us they don't have any conflicts," said Maviglio, who,
incidentally, confirmed yesterday that in June he bought $12,000 worth of
stock in the Calpine Corp., the generating company with the largest chunk of
state power contracts. On July 2, Davis publicly praised Calpine as "the most
responsible of the generators."
Davis should have finally learned his lesson last week after having to fire
five consultants -- all involved in energy trading -- when their belatedly
filed disclosure forms showed serious potential conflicts. A sixth consultant
quit. Four of those traders owned Calpine shares.
A week earlier, the Davis administration was forced to order a group of
consultants to hastily unload their power-company holdings or lose their
contracts.
The governor's office also has been stung by revelations that political
consultants Chris Lehane and Mark Fabiani, hired at $30,000 a month to
develop energy-related "communications strategies," also had a contract with
Southern California Edison.
Moreover, some of the disclosure forms that have been filed to date have been
less than complete, especially regarding the timing of the buying and selling
of energy stocks.
How many scandals will it take for Davis to insist on full disclosure -- and
the highest ethical standards -- of everyone who is working for him on the
energy crisis?
,2001 San Francisco Chronicle </chronicle/info/copyright> Page A - 16

S.F. to vote on electric power to the people
Measures would start public utility districts
Rachel Gordon, Chronicle Staff Writer <mailto:rgordon@sfchronicle.com>
Tuesday, July 31, 2001
,2001 San Francisco Chronicle </chronicle/info/copyright>
URL:
<http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/07/31/
MNW145417.DTL>
San Francisco -- After decades of trying to persuade San Francisco to take
control of its electrical system, advocates of public power now have the
issue before city voters.
"The timing couldn't be better," said consumer advocate Medea Benjamin, co-
director of San Francisco's Global Exchange.
"It's not just the threat of blackouts or the highest rate hikes in history.
It's the fact that PG&E is in bankruptcy. It's the depletion of the state
budget," she said. "This is a hell of an opportunity."
The opportunity she is talking about centers on two November ballot measures
that would pave the way for creating a public power system and taking Pacific
Gas and Electric Co. out of the city's electricity market.
Under the proposed measures, an elected board of directors would set the
rates and have control over everything from the terms for buying electricity
to whether to use more renewable energy sources, such as wind, hydroelectric
and solar power.
Public power would base policies "on a more localized basis, where the values
of an individual community can be put into practice," said Ed Smeloff, a
longtime public power advocate who was recently hired as an assistant general
manager at the San Francisco Public Utilities Commission.
One proposal, an initiative placed on the ballot by residents, calls for
setting up a municipal utility district in San Francisco and neighboring
Brisbane. The district would be governed by an elected board of directors.
The other measure, placed on the ballot last week by the Board of
Supervisors, would create a municipal water and power agency and would affect
only San Francisco.
PG&E has mounted a campaign to defeat the measures, so far pumping more than
$200,000 into the effort.
"We think the (ballot proposals) are a bad idea," said Frank Gallagher,
spokesman for the Coalition for Affordable Public Services, the PG&E-financed
group fighting the measures. "They're confusing and do nothing to address the
problem."
The company has a history of opposing public power proposals, derailing a
plan in Davis in the 1990s and using a legal challenge to stall the start of
Sacramento's Municipal Utility District for two decades.
For years, private utilities have enjoyed a powerful hold on state and local
politicians. But the energy crisis has caused widespread public anger and
concern, forcing city and state officials to take another look at public
power.
A poll conducted this month by the Public Policy Institute of California, a
nonpartisan think tank in San Francisco, found that nearly two-thirds of
Californians support the replacement of private electric companies with
municipal power authorities formed by local governments.
San Francisco already owns a power system, Hetch Hetchy, which provides power
for city departments. PG&E provides power to residents and businesses.
The San Francisco Charter amendment placed on the ballot by the supervisors
calls for abolishing the city's existing Public Utilities Commission, which
is run by commissioners and a director appointed by the mayor. The proposed
public power board would have seven elected directors, but the agency still
would retain some ties to City Hall.
The supervisors' plan is intended to be used as a backup to the municipal
utility district -- commonly known as a MUD -- which is considered to be more
vulnerable to the expected legal challenges from PG&E.
"It's a great marriage, and will ensure that we get public power in San
Francisco," said Board of Supervisors President Tom Ammiano, chief sponsor of
the board's measure.
San Francisco is not alone in looking at public power. San Diego, the first
city to feel the hard pinch of the energy crisis, wants to establish a
regional public power system in an attempt to pool resources and bring down
energy costs.
The East Bay Municipal Utility District, which provides water and sewer
service, is considering expanding its reach to power. In the Bay Area, the
cities of Alameda and Palo Alto already have public power. The two largest
public power agencies in the state serve Los Angeles and Sacramento.
In San Francisco, the pro-public power forces are going to tout the promised
virtues of turning the electric utility over to a public authority that by
law cannot turn a profit. That, they contend, means lower rates.
"It's an expectation, but it's also tried and true," said Ross Mirkarimi,
campaign director of MUD Now, the group sponsoring the ballot initiative.
On average, consumers pay 18 percent less for power from public utilities, he
said.
Gallagher, spokesman for the opposition campaign, said ratepayers shouldn't
assume that public power means lower energy bills. "There's no way the rates
are going down," he said.
He blamed the energy crisis not on deregulation but on a shortage of
electricity, which jacked up prices and undercut reliability.
"The measures do nothing about supply," Gallagher said. "All this will do is
cost people money. You can't just take PG&E's assets. You have to pay for
them."
E-mail Rachel Gordon at rgordon@sfchronicle.com
<mailto:rgordon@sfchronicle.com>.
,2001 San Francisco Chronicle </chronicle/info/copyright> Page A - 11

Davis' advisers probed by SEC
Published Tuesday, July 31, 2001, in the San Jose Mercury News
BY WALTER HAMILTON, JEFFERY L. RABIN AND DARYL KELLEY

Los Angeles Times

The Securities and Exchange Commission has launched a preliminary inquiry
into whether energy consultants advising California Gov. Gray Davis used
inside information to trade stocks of power companies doing business with the
state, a source with knowledge of the matter said Monday.
The federal agency began its review late last week, the source said, in
response to a request from California Secretary of State Bill Jones, who is
seeking the GOP nomination for governor. Jones charged that stock trading by
consultants may have violated federal laws barring buying and selling based
on information not available to the public.
On Friday, top aides to the governor disclosed that five consultants had been
fired for possible conflicts of interest between their official positions and
their personal finances.
In addition, financial disclosure records filed by the governor's spokesman,
Steve Maviglio, show that he owns between $10,000 and $100,000 in a Texas
company he and his boss have accused of making ``obscene'' profits while
California has been ``on its knees.'' Maviglio said he bought the shares in
Houston-based Enron Corp. in 1996.
``It's not a crime to own energy stock,'' Maviglio said.
Calpine purchase
He also owns 300 shares of San Jose-based Calpine Corp., which has the
largest share of the $43 billion in long-term state power contracts.
Maviglio placed an order for the stock with an electronic broker May 31, one
day after San Jose Mayor Ron Gonzales dropped his opposition to a
controversial Calpine plant under pressure from the governor and others.
Under the terms of Maviglio's instructions, the stock was automatically
purchased on his behalf when Calpine fell to $40 a share, according Hilary
McLean, a spokeswoman for the governor. It has since fallen in value.
``I viewed it as a good long-term investment,'' Maviglio said, adding that he
purchased the shares for his retirement account based on publicly available
information.
The Davis administration has spared Calpine the kind of fierce criticisms it
has leveled at other electricity suppliers, such as Enron. But California's
grid operator has identified the company as one of many energy merchants to
overcharge the state millions of dollars.
The fired consultants also owned shares in Calpine, ranging in value from
several thousand dollars to more than $100,000, records show.
Another top Davis administration official, legal affairs secretary Barry
Goode, disclosed in his economic interest statement that he recently held
between $100,000 and $1 million in another out-of-state company accused of
multimillion-dollar price gouging.
In a statement, Goode said he sold his stock in Williams Co's. a month after
he began working for the governor in February. Goode said the shares were
supposed to be sold before he went on the state payroll but his broker failed
to do so.
In light of the recent disclosures, the secretary of state said the governor
must do more to assure the public that its interest comes first.
``The governor should direct all of his staff to immediately file updated
conflict of interest statements that reflect current holdings and any
activity since their last statement of economic interest was filed,'' Jones
said.
Word of the SEC's entry into California's energy problems comes as the
governor faces harsh criticism from lawmakers and others for the quick and
broad hiring of highly paid private consultants to guide him through the
crisis.
In his written request to the SEC, Jones said that recently filed disclosure
documents showed that at least one consultant bought and sold shares of two
energy companies within the same month, raising ``a red flag'' about the
possibility of insider trading.
State law prohibits officials from participating in decisions involving their
personal financial interests.
The five consultants fired last week were among 11 named in Jones' letter,
delivered to the San Francisco office of the SEC last Wednesday. It was not
clear which individuals are the focus of the SEC's inquiry, or whether the
agency's review would result in any charges.
Two of the former traders said Monday that they had not been contacted by
federal investigators and knew nothing of an inquiry into possible insider
trading.
But William Mead, fired Thursday, said it's no mystery why so many of his
colleagues owned Calpine stock.
Mead said he bought it 2 1/2 years ago and made so much money he recommended
it to his colleagues last year, while they all still worked for the
now-defunct California Power Exchange in Alhambra. Calpine was not traded on
that exchange, so there was no conflict of interest, he said.
Traders fired
Mead and three other energy traders -- hired by the state in February and
March -- were terminated by the Davis administration for allegedly buying
power from Calpine while owning the company's stock. Fired traders Herman
Leung, Peggy Cheng and Constantine Louie did not list the date of their
Calpine purchases on financial statements that the state required to be filed
only two weeks ago.
``But I'm sure they bought it while they were still at the power exchange,
because that's when we discussed it,'' Mead said. ``It was kind of like a
hobby. I'm sure it wasn't done with the intent to manipulate.''

Mercury News Staff Writer Noam Levey contributed to this report.

Ethics issue in stock buy?
A top Davis aide bought shares in a power company dealing with the state.
July 31, 2001
By JOHN HOWARD
The Orange County Register
SACRAMENTO A top aide to Gov. Gray Davis bought stock in a power company that
received a long-term contract with the state, the latest in a series of
energy investments that have cast an ethical cloud over the state's
electricity purchases.
Steven Maviglio, Davis' press secretary and acting communications director,
ordered through his broker 300 shares of San Jose-based Calpine Corp. stock
May 31, to take effect when it dropped to $40 per share. It dropped below
that June 20 and Maviglio purchased $12,000 worth, he said.
Two days earlier, federal regulators had placed a cap on what Calpine and
other energy producers could charge for energy -- a cap Maviglio had touted
on behalf of Davis.
Monday's disclosure of Maviglio's transaction comes just days after Davis
fired five consultants who were purchasing energy for the state from a
company whose stock they owned. At the time, Maviglio said it "appeared to us
there was a possible violation of the law, or very close to it."
He said his own situation was different, "because they (the five) were
committing state resources and timing their purchases." The disclosure of his
transaction, he said, was "clearly a political smear by a desperate
candidate," referring to Secretary of State Bill Jones, a Republican
gubernatorial hopeful and rival of Davis.
Jones said Maviglio "should be fired immediately" and that Davis should order
all of his staff to immediately file updated conflict-of-interest statements
to reflect current holdings.
Maviglio said he would sell the Calpine stock - which closed at $37.13 a
share Monday - if requested by Davis' legal staff. He said he spoke with
those lawyers Monday and they had not made that request, nor had he been
asked to resign.
A Davis aide, Hilary McLean, said, "Absolutely, the governor has confidence
in Steve."

Aide denies stock deal was improper
Maviglio says the June 20 purchase, submitted online, was in the hands of
others.
July 31, 2001
By JOHN HOWARD
The Orange County Register
SACRAMENTO The governor's chief spokesman denies he committed any impropriety
by buying Calpine Corp. stock June 20, saying the purchase was actually in
the hands of others.
Steven Maviglio said he submitted on May 31 a purchase order through his
online brokerage to buy 300 shares of Calpine, a San Jose-based power
generator that has a long-term energy contract with the state.
"It could have happened an hour after later (after the purchase order), a
month later or five years later," he said. "Or never."
But Sherry Bebitch Jeffe, a political scientist at Clare mont Graduate
University, questioned the wisdom of Maviglio's stock transaction.
"What I find puzzling is that he moved to change the dynamic of his stock in
the middle of this energy problem, in the middle of the governor's attacks
and the governor's negotiations," she said. "There ought to have been an
understanding that even if not illegal, there should have been a perception
that he shouldn't be involved in playing with stocks."
The disclosure of the transaction couldn't have come at a worse time for the
administration, or Maviglio: On Friday, five state energy consultants with
stock-firm stock were summarily fired and a state lawyer was reassigned to
another job. Another consultant with similar investments quit July 14 to take
a private job.
All were involved in the energy-purchasing program that was launched under an
emergency order Jan. 17, in which the state began buying power on behalf of
the strapped utilities, which did not credit to purchase power on their own.
Dozens of people were directly involved in the energy purchases.
Earlier in the day Monday, in a separate issue, the governor's office
disclosed that two key consultants who had been hired to help Davis with his
public relations had decided to forgo $50,000 in contract fees as part of a
legal settlement with Davis' critics.
The two consultants, Chris Lehane and Mark Fabiani, both veterans of the
Clinton-Gore White House and political campaigns, had been hired in May under
a $30,000-a month state contract.
Republicans complained that Davis was using state money to finance political
operatives. Fabiani left the payroll earlier under pressure; Lehane left this
month.

Power firms amp up lobbying
Politics: Edison spends $5.5 million to gain support for bailout to prevent
bankruptcy.
July 31, 2001
By KIMBERLY KINDY
and HANH KIM QUACH
The Orange County Register
SACRAMENTO Edison International has spent more than $5.5 million this year to
enlist residents and stockholders to lobby the Legislature to bail out its
subsidiary Southern California Edison and save it from bankruptcy, reports
released Monday show.
The latest financial disclosure statements show that energy companies
continue to spend millions of dollars to influence the Legislature. Meals,
campaign contributions and tickets to sporting events continue to flow to
lawmakers and their staffs.
Overall, the amount spent on direct lobbying of the Legislature rose slightly
over last quarter, but gifts and contributions to candidates continued to
fall. The deadline for statements is today, but many companies and candidates
filed early.
Edison's $5.5 million is so far the largest expenditure directed toward an
orchestrated campaign to influence Capitol politicians. Spokesman Brian
Bennett said Edison spent the money on television commercials to reach all
Californians and on a telephone appeal directly to stockholders.
"This was to educate the public about the dangers of bankruptcy to the
state's economy and to solicit their support in conveying a message to the
Legislature that bankruptcy is not an option for the Edison company," Bennett
said.
The telephone work involved telling stockholders that the company's value
would drop if lawmakers did not support a bill to save Edison. Then they
offered to directly connect the stockholders to lawmakers' offices, asking
that they tell the lawmakers directly to support the bailout.
Consumer advocate Doug Heller said Edison's spending - which totaled $5.7
million for the three-month reporting period and jumped from $318,802 from
the prior quarter - is out of line.
"It's amazing that a company teetering on the edge of bankruptcy has millions
of dollars to throw around to politicians and to create phony grass-roots
campaigns to influence legislators," said Heller, of the Foundation for
Taxpayer and Consumer Rights.
Edison said no contributions were made directly to anyone running for office
or re-election for this quarter.
In all, lawmakers sitting on energy committees and who had reported by Monday
night accepted nearly $61,000 from energy-related companies.
As of late Monday, Assemblyman Dean Florez, D-Shafter, who sits on the
Assembly Energy Committee, had received the largest contribution from energy
companies this quarter, $21,000.
Seven of the largest power producers that sell electricity to the state spent
a total of $546,488 on lobbying and other efforts to influence the
Legislature.
Topping the list was Calpine Corp., which spent $141,204. Duke Energy came in
second at $99,735.44 - a $20,000 leap over the prior quarter. Most of Duke's
money was spent on consultants who worked overtime building a defense for the
company against accusations of price gouging made by former employees.
"Overall, our consultants spent more time setting the record straight against
some blatantly false and misleading statements, regarding our rates and plant
operations, which the state's own documents proved were false," said Duke
spokesman Pat Mullen. Some lawmakers and energy experts say the state
documents do not clear Duke of wrongdoing, and the accusations are still
being investigated by a Senate committee.

Gouger Gray Davis
California's petulant governor ignores reality as he overpays for electricity

LANCE T. IZUMI Mr. Izumi is a senior fellow in California Studies at the San
Francisco- based Pacific Research Institute.
On the surface, things seem to be going pretty good for Gov. Gray Davis with
regard to California's electricity crisis. The governor has scored some nice
publicity by switching on some new power plants. The weather has been
unseasonably cool. His poll numbers are edging back up. Yet beneath this
optimistic picture lie troubling problems. For example, Davis's argument that
out-of-state power generators are responsible for the electricity crisis has
been falling apart. For months, Davis has been claiming that private
generators have overcharged California by $8.9 billion and demanded that this
amount be refunded to the state. However, after a two-week mediation between
state officials and the generators, Curtis Wagner, the federal government's
chief energy regulatory judge, rebuked Davis's claim saying that such a huge
overcharge "has not and cannot be substantiated." Further, while the
generators may be liable to refund a much smaller amount to the state,
perhaps $1 billion, Wagner said that generators are owed more money by the
state than they owe the state in refunds: "Can a cash refund be required
where a much larger amount is due the seller? The chief judge thinks not."
Davis reacted to the judge's ruling by calling it a "raw deal" and by urging
the Federal Energy Regulatory Commission to ignore the lack of evidence and
the judge's conclusions and to "step up and provide the refunds we've asked
for." Davis's position, as usual, is motivated purely by politics. Indeed,
Dan Walters of the Sacramento Bee says that Davis is operating in a
"melodramatic virtual world" de-linked from reality.
Davis's blame-the-generators argument took another body blow when newly
released documents showed that, on average, major out-of-state power
companies such as Enron, Duke, Dynergy and Mirant charged less than the
average prices paid by the state during the first three months of the year.
California government utilities, on the other hand, such as the Los Angeles
Department of Water and Power and the Sacramento Municipal Utility District
(SMUD), charged the state much more for electricity than the out-of-state
generators. For example, while Texas-based Enron, a favorite Davis whipping
boy, charged an average $181 per megawatt hour, SMUD charged an average $330
per megawatt hour.
Davis responded to this revelation in typical political fashion. A Davis
spokesman said that the governor had expressed his anger at "the generators
who wear cowboy hats" and that "just because there are other entities that
are charging us more doesn't change the fact that we are getting ripped off
by companies from Houston, Tulsa, Atlanta or Charlotte."
Yet, for all Davis' feigned indignation about consumers being ripped off, it
turns out that he and his regulators are poised to ensure that business
consumers are ripped off by state government. Davis has signed $43 billion in
ill-advised long-term purchase contracts at rates above-market-price. The
state must, therefore, ensure that enough business customers remain in the
current state-controlled distribution system to pay for high-priced state
power purchases. This is especially important to Davis since the high prices
are borne disproportionately by business. Thus, Davis' regulators are set to
eliminate "direct access," which allows businesses to shop for cheaper power.
Who's the real gouger? No matter how much Davis points the finger,
Californians are paying dearly for his political opportunism and bad
policies.

Turning Coal into a tradable commodity
By Rick Stouffer
rstouffer@ftenergy.com <mailto:rstouffer@ftenergy.com>
With the California power debacle offering a neck-snapping jolt, a number of
states have determined they must offer more than lip service to ensure that
residents and businesses have enough power to function.

While deregulation's brakes may have been applied in some locales, it doesn't
mean that development incentives likewise have been scaled back.

"There is no question that California was the wake-up call for these states,"
said Craig Goodman, president of the National Energy Marketers Association.

Midwest a hotbed for incentives
Many of the states that have already passed legislation to entice new plant
development are located in the Midwest, an area that, while not yet suffering
from a lack of power, slowly, inexorably is heading in that direction.

"Iowa, Illinois and Ohio are located in ECAR (the East Central Area of the
North American Electric Reliability Council, or NERC), which is not yet in a
crisis situation when it comes to sufficient power, but is only a year or two
away from that crisis," said Robert Burns, senior research associate with the
National Regulatory Research Institute at Ohio State University in Columbus,
Ohio.

In its latest self-assessment presented as part of NERC's most recent 10-year
projection, 2000-2009, ECAR said that if 10,400 MW of new capacity is not
added within ECAR as planned, capacity margins within the region will go
negative in 2005.

PPAs a no-no in Iowa
No plant of any significant size has been built in Iowa since 1983, but
legislators, during a one-day special session in June, put in place what they
hope will spur additional development.

The Iowa measure allows utilities to see how their costs will be incorporated
into rates prior to plant investment, and also permits municipal systems to
band together to finance new facilities.

One item the Iowa legislature could not get past a veto that Gov. Tom Vilsack
promised was allowing utilities to purchase power via power purchase
contracts from unregulated affiliates.

The governor said such a measure would lock in profits for utilities and
preclude potential rate cuts. Proponents say the governor effectively locked
out millions of dollars of investment in Iowa by Madison, Wis.-based Alliant
Energy Corp., which reportedly wanted to build as much as 1,200 MW of
capacity in Iowa.

Wisconsin Energy likes the tune
Northeast of Iowa, Wisconsin appears to be heading off a problem nearly all
power plant developers have these days: a bad case of "not in my backyard."

"Even if a state approves a new power supply, you still have to deal with
local siting officials and NIMBYism," said Goodman.

One Wisconsin proposal given serious consideration is to double the impact
plants have on shared revenue payments, to $250 million from $125 million.

Changing shared revenue payments to provide additional compensation to local
governments that favor plant construction on existing plant sites also has
been introduced in Wisconsin.

Wisconsin Gov. Scott McCallum also has proposed lowering the state's gross
receipts tax on wholesale power to 1.59% from the current 3.19%.

Many of the proposals floating around the Badger State are music to the ears
of Wisconsin Energy, which is looking to spend some $7 billion over the next
decade to construct five new power plants.

Not everyone likes the look of incentive legislation in Iowa, Wisconsin and
other states. Many of the new laws are geared toward assisting incumbent
utilities*effectively snubbing independent power producers, the IPPs say.

"I would not call many of these incentive packages incentives for merchant
power producers," said Samantha Slater, manager of state and regional affairs
for the Electric Power Supply Association. "Utilities only building new
plants definitely is not the way to go."

Big doings in Illinois
Perhaps the biggest, most all-encompassing incentive package passed by a
state in recent memory isn't specifically about promoting plant development.

Illinois Gov. George H. Ryan in late June signed legislation that provides up
to $3.5 billion in incentives designed, industry watchers say, to preserve
and promote the state's $1 billion coal industry*and keep 25,000 coal-related
jobs intact.

"Illinois in part wanted to protects its coal jobs with this legislation,"
said Paul Cetevich, director of energy services at the Utility Research
Center at the University of Florida's Warrington College of Business in
Gainesville. "Illinois has been trying to do similar things for a number of
years."

The Illinois plan includes sales (6.5%) and utility tax exemptions, along
with an investment tax credit, millions for a financial assistance program
for coal-fired facilities, bond funds set aside to be used for transmission
upgrades and to finance renewable energy projects, even a review by the state
Environmental Protection Agency to determine if new regulations concerning
older coal-fired plant emissions are warranted.

Highlights of Illinois energy incentive legislation  Designates new baseload
plants, the mines that fuel them or firms that construct new or upgrade
existing transmission lines as so-called high-impact businesses. These
businesses are provided sales tax exemptions on building materials and
equipment, utility tax exemptions and investment tax credits. (Natural
gas-fired plants are only eligible for sales tax exemption.)  Creates a $500
million financial assistance program for coal-fired plants equal to the
amount of general obligation bond funding that can be repaid by coal tax
revenues gained on new Illinois coal purchases.  Provides up to $1.7 billion
in revenue bond authorization to provide financing for electric plants
generating Illinois coal mining jobs, including mine-mouth plants and plants
that use clean-coal technology, repayable by the developers.  Provides up to
$300 million in revenue bond authorization designed to spur upgrades to the
transmission grid in Illinois, repayable by the wires' owner.  Provides up to
$500 million in revenue bond authorization to finance renewable energy
projects, and $500 million for existing coal-fired plants to add scrubbers,
both repayable by the developers.  Mandates a review by the Illinois
Environmental Protection Agency of the need for new state regulations
governing emissions by older coal-fired plants not subject to stricter air
quality restrictions imposed on new units.  Creation of additional local
options for property tax abatement.  In addition, Illinois Gov. George H.
Ryan amended an earlier executive order creating the Governor's Energy
Cabinet. Under the revised order, the Energy Cabinet will have responsibility
for siting new generation, overseeing implementation of environmental
regulations on new plant developers and streamlining the state's permitting
process for new generation.

"When the legislative session began in January, you had all the publicity
about California, the price of natural gas had spiked, there was talk of $3 a
gallon gasoline, so there were probably three or four versions of coal
legislation floating around at one time," said Brian Reardon, a spokesman for
the Illinois Department of Commerce and Community Affairs.

Ryan convened a coal summit in March, took ideas from all invited and put
together what became the state's $3.5 billion incentive package.

"I'm very impressed with what Illinois has put in place," the energy
marketers' Goodman said. "I'm not aware of any other state with as
comprehensive a package."

A newly created Governor's Energy Cabinet in Illinois would seem to put
NIMBYism to bed, if not totally to rest, by assuming responsibility for
siting new generation, overseeing environmental regulation implementation and
streamlining state permitting.

"We were able to develop a comprehensive strategy that addresses our state's
energy needs while providing for a long overdue boost to our coal industry,"
Gov. Ryan said in a statement.

Looking at the broader picture
Illinois is preserving the coal industry, but also looking at the broader
picture, according to the University of Florida's Cetevich. Illinois, and
many other states, have determined that natural gas-fired plants may not be
the saviors the country should rely upon.

"I believe the No. 1 overriding factor, while some states are putting
incentive packages together, is that the states and public utility
commissions have realized that with the numerous natural gas price spikes,
coal is not such a bad option after all."

"Having all our eggs in the natural gas basket could be a bad thing," agreed
the National Regulatory Research Institute's Burns. "It cannot have good
implications."

Debt Pitch:
California's Next Test
In Electricity Crisis:
Selling Power Bonds
---
The $12.5 Billion Offering,
Crucial to State Finances,
Faces Skeptical Investors
---
The Risk of Big Budget Cuts
By Mitchel Benson and Gregory Zuckerman

07/31/2001
The Wall Street Journal
Page A1
(Copyright (c) 2001, Dow Jones & Company, Inc.)
SACRAMENTO, Calif. -- For the past seven months, Gov. Gray Davis has begged,
cajoled and even threatened legislators and regulators, to lay the groundwork
for a $12.5 billion bond issue California needs to cover the cost of keeping
its lights on.
Now comes the tough part: persuading investors that the bond is an attractive
investment. On that score, Mr. Davis's team, whose credibility has been
battered by California's months-long electricity crisis, is hoping to bounce
back from a rocky start.
This week, a delegation headed by state Treasurer Philip Angelides is
scheduled to visit Wall Street to pitch the municipal debt offering, which
would be the largest in U.S. history by a factor of nearly four. To succeed,
Mr. Angelides will have to allay investors' fears of the kind of political
infighting that already has delayed the issue several times. He will have to
satisfy bond-rating agencies that the bond is safe enough to merit a top-tier
investment-grade rating. And he'll have to make investors want to buy it
without demanding costly inducements that would give California financial
headaches for decades to come.
"This isn't building the Panama Canal. It's not Apollo 11," says Mr.
Angelides. But, he concedes, the bond sale will be "uniquely challenging."
That is because this giant bond issue won't be backed by the full faith and
credit of the state or by tax dollars -- the types of guarantees public-debt
investors often prefer. Instead, the bonds, which will have maturities of as
long as 15 years, are to be paid off by the state's electricity ratepayers
from their monthly bills, which some view as a riskier source of cash flow.
Moreover, there is still a question as to whether the issue's proceeds will
be adequate to repay the bonds, restore the state's financially troubled
private utilities to health and finance future electricity purchases.
Despite these hurdles, many analysts predict California will eventually
succeed in pulling off the bond deal, though at a cost far higher than
originally anticipated. In fact, the apparent easing of the state's energy
crunch may make its marketing job a bit less difficult. A recent drop in the
price of natural gas, which fuels many California power plants, a mild summer
in the West and a June decision by the Federal Energy Regulatory Commission
to impose electricity price caps in the region have helped avert the rolling
blackouts that roiled the state earlier this year.
Still, the specter of history overhangs the bond offering. Rating agencies
are haunted by having failed to warn investors of such public-finance
disasters as the 1983 default of the Washington Public Power Supply System
and the 1994 bankruptcy of Orange County, Calif. Moreover, Moody's Investors
Service and Standard & Poor's assigned investment-grade ratings as recently
as early January to debt issued by Pacific Gas & Electric Co., just three
months before the California utility sought Chapter 11 bankruptcy-court
protection.
By the time California hopes to sell its bonds, in October or early November,
the state's electrical-power purchases are expected to leave it owing a total
of about $10 billion to its lenders and its own general fund. If the bond
issue is delayed beyond that, or canceled, or if the offering flops,
California could be forced to make billions of dollars in spending cuts,
raise taxes or increase electricity rates for the third time in the past year
to pay back what it owes.
If the bond sale fails "the state of California will be in deep trouble,"
says Mr. Angelides. "The state general fund must be repaid so money for
education, health care and children's services can be safe."
California's need for the bonds -- like most of the state's energy woes --
stems from its troubled 1996 electricity-deregulation plan. Under the plan,
the state's investor-owned utilities were obliged to sell many of their power
plants to other companies and purchase electricity through a state-sponsored
power auction. Consumer rates were frozen, but wholesale rates weren't.
The system worked fairly well until May 2000, when wholesale rates began
soaring amid tight electricity supplies and stronger-than-expected demand.
Last year, the state's cost of wholesale power climbed to $27 billion from $7
billion in 1999. In the first six months of this year, that sum hit $20
billion.
With retail rates frozen, Pacific Gas & Electric, a unit of PG&E Corp., and
Edison International's Southern California Edison racked up billions of
dollars of debts. In January, after power generators stopped doing business
with the utilities, the state began buying power on their behalf. It borrowed
the money from its general fund, normally used to pay for everything from
public safety and environmental programs to social services and education, at
a pace of more than $1 billion a month.
In February, Mr. Davis's allies in the state Legislature helped him pass a
bill authorizing the state to sell bonds to replenish the fund and to
continue making power purchases. But legislators cautiously capped the size
of the borrowing, using a complex formula. Under the new law, the formula
would allow only for a bond sale of less than $1 billion.
Realizing that wasn't sufficient, the governor and the assembly drafted
another bill that scrapped the formula and allowed the state to sell up to
$13.4 billion of bonds. But, in a setback for Mr. Davis, Republican lawmakers
banded together to deny him the two-thirds majority needed for the bill to
immediately become law. As a result, the law won't take effect until
mid-August, when the public-finance market is all but moribund.
In the meantime, Mr. Angelides moved to hire underwriters. After receiving
four dozen bids from Wall Street investment bankers in February, he retained
a team led by J.P. Morgan Chase & Co. But under pressure to get the financing
moving, the treasurer didn't negotiate firm underwriting fees on the deal.
At the time, Mr. Angelides said he expected the underwriters to "skinny down"
their fees given the enormous size of the offering. But Morgan, representing
a team of underwriters that includes Lehman Brothers Holdings Inc., Citgroup
Inc.'s Salomon Smith Barney unit and Bear, Stearns & Co., says it expects to
charge standard fees, given the significant challenges presented by the
issue's size. In the case of a $12.5 billion sale, that amounts to around $56
million. J.P. Morgan and the California treasurer's office now say the fees
won't be decided until they determine the bond issue's final size and
structure.
From the start, relations between California officials and Wall Street seemed
fraught with miscommunication. In February, Mr. Davis called a meeting to
explain to institutional investors, analysts and rating-agency executives his
blueprint for getting a grip on California's energy crisis. The session, his
only face-to-face meeting with investors to date, was held at Manhattan's
Cornell Club. Attendees say the governor kept them waiting for 20 minutes
before breezing into the room and giving them only a general overview of the
state's energy plan, which left investors grumbling.
During the discussion, Mr. Davis, a Bronx, N.Y., native, made light of a
conversation he had had with Richard Cortright Jr., a Standard & Poor's
director. "I told him: `You're from Indiana, that explains why you're not
getting it,'" the governor said, according to several people present.
"It was intended as a joke, but no one was laughing," says A.J. Sabatelle, a
Moody's vice president. A spokesman for Mr. Davis says the governor doesn't
recall the exchange; Mr. Davis is frequently late for public engagements. A
spokesman for Mr. Cortright wouldn't comment.
Then, in March, the governor's office set up a conference call to update
investors. Figuring they wouldn't get a big turnout, they used an open-mike
system that allowed each investor's comments to be heard by everyone else.
But with around 100 investors taking part, the presentation by Joseph
Fichera, a paid consultant who is one of Mr. Davis's top financial advisers,
turned into a free-for-all, with one caller cursing Mr. Fichera in response
to one of his answers.
Infighting among California politicians hasn't helped. Earlier this year, for
example, state Controller Kathleen Connell criticized the way her fellow
Democrats, Messrs. Davis and Angelides, were handling the bond sale. Unless
it was far bigger, she warned, the state would face a "cash-flow crunch" by
February or March of 2002. The governor's office fired back, calling her
claims "completely" political.
California policy makers have "spent most of the year bickering and finger
pointing," Standard & Poor's director Peter Rigby said in a recent report,
"and that will raise some uncertainty among lenders." Moreover, investors
know the state needs the money, and so "it's a buyer's market," Mr. Rigby
added.
Aware that it needed a financial pro to make its case to Wall Street, the
Davis Administration pushed Mr. Fichera to the forefront. Since May, the
former Prudential Securities investment banker has spent hours on conference
calls with Wall Street explaining the state's strategy. That and a sense that
California has gotten a better grip on its electricity woes indicates that
"the governor's staff is far higher on the learning curve than just a few
months ago," says Paul Patterson, an electric-power analyst at ABN Amro Inc.
Critical barriers remain. The state's Public Utilities Commission has yet to
make key decisions intended to ensure that there's enough ratepayer revenue
set aside to guarantee that bondholders get paid. On Aug. 23, for example,
the PUC is expected to take up a rate agreement giving the state's power
purchaser, the Department of Water Resources, unprecedented authority to
raise rates without a public hearing. The commission also is expected to
decide how to divvy up current ratepayer revenue among state and private
utilities and to take up a measure that would prohibit large industrial
consumers from, in effect, bypassing the utilities and buying their juice
directly from generators or traders.
But opponents of those controversial measures are expected to put up a fight.
Businesses and consumer groups are particularly upset that the state might
get carte blanche to raise rates and are threatening to sue to block the PUC
decision before the state Supreme Court.
California already has some of the highest electricity rates in the nation.
Residential consumers in San Francisco, for instance, pay around 14 cents per
kilowatt hour for power, up from about 10 cents in December. That compares
with around seven cents per kilowatt hour in Atlanta and 10 cents in Chicago,
but it is still lower than the nearly 23 cents charged in New York City.
High costs are a big reason businesses think they ought to be free to buy
electricity directly. It's not "in the best interest of consumers to
eliminate direct access in order to market bonds that will keep the price of
electricity in California higher than necessary for at least 10 years," says
Allan Zaremberg, president of the California Chamber of Commerce.
The state's three largest investor-owned utilities, PG&E, SoCalEd and Sempra
Energy's San Diego Gas & Electric Co., are expected to demand the largest
possible share of the revenues they collect from ratepayers. PG&E, for
example, has already asked for a public hearing to examine the state's claim
that it needs so much money. The pressure to allocate more cash to the
utilities could also rise if a state-sponsored bailout plan for SoCalEd fails
and the utility joins PG&E in bankruptcy proceedings.
Sorting all these issues out before the PUC may lead to legal challenges that
could delay the bond issuance for months. And potential investors face
another nagging concern: Under a $43 billion series of long-term power
contracts signed by the state, electricity generators and traders involved
get first call on revenue from ratepayers. Only then would bondholders, who
are accustomed to being first in line, get paid.
In fact, some investors who were initially enthusiastic about a bond that is
expected to pay more than half a percentage point above other municipal
issues in the market are starting to have doubts. Marilyn Cohen, president of
Envision Capital in Los Angeles, a firm that manages bond portfolios for
individual investors, says she spent several months setting aside money to
participate in the deal. Now, she says, she is starting to look elsewhere. "I
don't have confidence that it will get done," she adds.
Many investors are concerned the state hasn't proved it can overcome its
energy crisis. "These are the same guys who told us energy prices were going
south five years ago, they're trying to gloss over the potential problems,"
says Kelly Mainelli, a portfolio manager at Montgomery Asset Management in
San Francisco, who is considering investing in the bonds. He says he also
worries about a spike in natural gas prices ahead of the offering.
To reassure potential investors, the state now is offering to amass a $3
billion reserve -- from bond proceeds and ratepayer revenues -- to ensure
that bondholders would get paid in the event of any unforeseen developments
in the power market. In addition, California lawmakers are moving a bill
through the Legislature that would set aside a specific portion of revenues
from ratepayers solely to pay bondholders. Such an approach could help the
bond issue "to get a higher rating," says David Hitchcock, director of
Standard & Poor's state and local government group.
It might not, however. It isn't clear whether bankruptcy courts can overrule
state government. So, some investors worry that PG&E's bankruptcy judge could
rule that money collected by the utility should go to the company's
creditors, and not to paying investors in the coming bond deal, throwing a
wrench into the offering. The same would be true in the case of SoCalEd if it
ended up filing for Chapter 11 protection.
Underwriters are moving to broaden the appeal of the planned issue by
chopping it into small slices aimed at different types of investors. There
will be taxable, tax-free, variable-interest, fixed-interest, short-term and
long-term bonds. State Finance Director Tim Gage says the state is assuming a
rating "in the range of single-A" on the power bonds and thus expects to pay
an average annual interest rate of 5.77% on the tax-exempt issue and 7.77% on
the taxable bonds.
Investors and analysts "may think we're crazy," says Guy Phillips, one of the
state's top legislative aides on energy matters, "But in the end, the
decision for them is: `Do we see a path to get our money.'"
---
Journal Link: Would you purchase California bonds that are backed by utility
payments? Participate in the Question of the Day, in the online Journal at
WSJ.com/Question.

     (Graph)

California ; Op Ed Desk
Commentary The State Will Pay for Davis' Panic
KATHLEEN CONNELL; PETER NAVARRO

07/31/2001
Los Angeles Times
Home Edition
Page B-13
Copyright 2001 / The Times Mirror Company
The five-to-20-year power contracts signed in a panic by the Davis
administration have saddled California with billions of dollars of "stranded
costs" that will burden our economy and state budget for years to come.
Now, Gov. Gray Davis' spin doctors want us to believe that these $43-billion
long-term contracts were both necessary and the impetus for a moderating
energy market. Here's the real story:
Last summer, under a flawed deregulation, a handful of large out-of-state
generators effectively cornered California 's wholesale electricity market.
This "sellers cartel" first drained our electric utilities dry. In November,
it became the taxpayers' turn to be victimized, when the Davis administration
gave carte blanche authority to the Department of Water Resources for energy
purchases. Between November and July, the department burned through $8
billion in short-term energy purchases, devouring almost the entire state
budget surplus. This required the state Public Utilities Commission to pass
the largest rate hike in California history and will require the state to
issue $12.4 billion in bonds this fall to service this debt.
In February, with spot market prices at all-time highs and rolling blackouts
rippling through the state, the governor's representatives began to negotiate
long-term contracts with the sellers cartel. This was an ill-advised
long-term strategy to fight a short-run crisis. To understand why, look at
the negotiating chessboard from the electricity cartel's perspective. The
cartel's negotiators knew that within 18 to 24 months, there would be a huge
glut of power on the market as many power plants were already under
construction in California and throughout the West. Once the new energy
resources were available, the cartel would no longer be able to manipulate
the market. This supply glut would drive prices back to the 1999 range of
three to five cents per kilowatt-hour, far lower than the prices now set in
the long-term energy contracts.
To the cartel members, this looming power glut was a recipe for heavy losses.
Locking the state into long-term contracts at lucrative rates was their
redemption. The Davis administration walked into this market inferno,
bargaining from extreme weakness at the top of the market, signing contracts
that were too expensive. The administration also capitulated on two highly
objectionable clauses. The first requires the state to absorb all costs of
environmental protection for many of the generators. The second holds the
generators "harmless" for any increase in taxes imposed on the generators by
the state. This provision essentially freezes taxes on the generators over
the next several years, requiring taxpayers to pick up the tab.
Notwithstanding the administration's spin, the current improvement in our
energy situation may be traced to at least four other factors: This summer
has been unusually cool, Californians have increased their conservation,
recessionary forces have reduced demand and, most important, the Federal
Energy Regulatory Commission finally imposed price caps on the sellers
cartel, dampening market manipulation.
The bottom line is this: Long after the rolling blackouts stop, California
still will be saddled with billions of dollars of unnecessary electricity
costs and high bond debt. These higher costs will hurt consumers and
businesses, put heavy pressure on the state budget for years and inhibit the
state's economic growth.
There are two lessons from this multibillion-dollar mistake. The first is to
have full public review of major energy decisions. Equally important, the
Public Utilities Commission must be allowed to retain its rate-making
authority so that problems are not hidden in a state bureaucracy.

Electrical Switch: Now, Cheaper Power
Is Causing Hefty Losses for California
By Rebecca Smith

07/31/2001
The Wall Street Journal
Page A3
(Copyright (c) 2001, Dow Jones & Company, Inc.)
Mild weather means that California is escaping blackouts, but it also means
that the state is amassing power-trading losses that are adding to the cost
of an energy mess now in its 15th month.
Internal documents show that so far in July, California has resold the
equivalent of 8% of the power it bought under short-term and long-term
contracts that were designed to reduce the state's reliance on the volatile
and costly spot market. The problem is, the state has had a surfeit of power,
and it has been selling the juice into the market at a fraction of the price
it paid, leading to losses from July 1 through Thursday of about $30 million
to $35 million.
The losses illustrate the difficulties dogging the state's new energy czar,
the California Department of Water Resources, despite a softening of
electricity prices and demand. The department got into the power-purchasing
business in a big way in January, when the state's biggest investor-owned
utilities quit buying power because they were no longer creditworthy. Since
then, the state has signed $43 billion worth of contracts, one for as much as
20 years, in a bid to tamp down high spot-market prices. Critics now say it
was a mistake to lock in so much power at such a high cost.
Power officials say the state has been in the odd position since last month
of having too much power contracted for off-peak hours. "It's something you'd
expect when you first get into a new business and you'd hope to reduce it,"
said Pete Garris, chief of operations for the power-purchasing agency.
Internal numbers from the DWR, which the agency has confirmed, show that on
average the state paid, from July 1 to Thursday, $123 per megawatt hour for
some 1.8 million megawatts of power purchased under long-term contracts, and
$148 per megawatt hour for some 2.2 million megawatt hours of power purchased
under short-term contracts. In the same period, the records show it sold
excess power amounting to 320,000 megawatt hours at an average price of $27
per megawatt hour, less than what it costs to fuel many plants. At times, the
DWR sold the juice for as little as $2 per megawatt hour.
This, ironically, has offered an opportunity to power traders that the state
was seeking to hem in through its contract program. They have been able at
times to substitute cheap power they buy from the state for the more costly
power they otherwise would have to generate to meet their contract
obligations.
Despite the agency's power-trading losses, total market costs still are down
substantially from previous months, partly due to price limits set June 19 by
the Federal Energy Regulatory Commission. Slacker demand also has been a
factor. In June, Southern California Edison, a unit of Edison International,
sold 11.8% less electricity to its customers than in June 2000, reflecting
energy conservation and reduced demand for air conditioning.
Since January the state has spent $9.5 billion buying power at an average
cost of $237 per megawatt hour, according to internal DWR documents. That is
more than double the price of wholesale electricity last year, when prices
averaged $114. The state's cash-strapped utilities have reimbursed the agency
$1.53 billion of the $9.5 billion it has spent so far. As a result of the
huge shortfall, the state has tapped California 's general fund and now is
pursuing a plan to sell $12.5 billion worth of revenue bonds to replenish its
coffers.
The state signed dozens of long-term power contracts after January, pushed by
federal energy regulators to protect itself against spot-market volatility.
So far this year, it has spent $851 million under long-term contracts, $2.36
billion under short-term arrangements and $5.54 billion on spot-market
purchases, according to the DWR documents.
But the state's "long" position in July, in which it had too much power, has
at times given power-trading companies an arbitrage opportunity. Last
Wednesday, for example, the state sold electricity for as little as $2 per
megawatt hour on the same day that it was paying $22 to $75 on the spot
market, presumably because its advance purchases did not exactly match the
actual shape of demand.
John Stout, senior vice president for Houston-based Reliant Energy Inc., a
big energy supplier to California , said a trader can double or triple his
company's profit by substituting cheap market power from the water-resources
agency for power the company otherwise would generate. It is also free to
resell the natural gas it might have used to fuel its plants. "That's what
the trader is there to do and not leave money on the table," said Mr. Stout.
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