
Date: Tue, 8 May 2001 13:07:00 -0700 (PDT)
From: steve.hall@enron.com
To: elizabeth.sager@enron.com, christi.nicolay@enron.com,
christian.yoder@enron.com, richard.sanders@enron.com,
james.steffes@enron.com, alan.comnes@enron.com,
robert.badeer@enron.com, susan.mara@enron.com, tim.belden@enron.com,
greg.wolfe@enron.com, stephen.douglas@enron.com,
jeff.blumenthal@enron.com
Subject: The real reason for the windfall profits tax comes out: Davis wants
leverage with the generators/marketers at Wednesday's meeting

An excerpt from a recent article:
"Davis - who told reporters Monday that the state "is at war" with
Houston-based generators - is expected to meet with representatives from a
dozen energy companies Wednesday to discuss "unpaid debts, credit issues and
the supply of power." Those generators include Mirant, Williams and Duke
Energy.
At the meeting Wednesday, Davis will attempt to get the generators to take a
haircut on hundreds of millions of dollars of power bills owed by PG&E Corp.
unit Pacific Gas & Electric and Edison International unit Southern California
Edison. In exchange, a person close to Davis said, the governor may promise
to veto the windfall profits tax bill if it reaches his desk."


Generators Warn Of Blackouts If Calif OKs Windfall Tax Updated: Tuesday, May
8, 2001 07:19 PM ET
By Jason Leopold
Of DOW JONES NEWSWIRES
LOS ANGELES (Dow Jones)--Legislation to place a windfall profits tax on sales
of electricity into California will deter investments in new generation and
drive power out of the state, raising the risk of blackouts, wholesale-market
power suppliers said Tuesday.
"It would be totally counterproductive and prolong California's misery for
years to come," said Gary Ackerman, executive director of the Western Power
Trading Forum, an industry group. "New plants in California wouldn't get
built, and existing plants would cease operating. There would be blackouts
all day long"
On Monday, the Senate passed, by a vote of 25-12, a bill to tax at 100% sales
of electricity into California above $80 a megawatt-hour. A separate windfall
profits tax bill with a three-tiered rate system is moving through the
Assembly's committees and could come up for a vote in the full house later
this week. Electricity priced at $60/MWh would be taxed at 50%, sales of
power over $90/MWh would be taxed at 70% and electricity sales over $120/MWh
would be taxed at 90%.
Gov. Gray Davis has said he is "open" to the concept of windfall profits tax
on electricity sold into California, but hasn't said whether he supports the
bills moving through the Legislature.
Generators said they would seriously consider scrapping plans to build
much-needed new generation in California if the measure is signed into law.
"We do have some concerns on how (the bill) would affect new generation,"
said Mirant Corp. spokesman Chuck Griffin, whose company is investing about
$500 million in new power plants in Northern California. "We have said all
along that before we are able to build this generation we need to make a good
assessment of the business environment in the state, and the (windfall
profits tax) is certainly a factor."
Tim Thuston, managing director of government relations for Williams Cos.,
said a windfall profits tax is "confiscatory" and the state is trying to
circumvent the Federal Energy Regulatory Commission.
"I can tell you we think its a very poor idea," Thuston said. "I'm
speculating, but I think any time a state starts seizing profits it would
deter investment in that state."
Duke Energy, a power supplier investing more than $600 million in new power
plants in California, wouldn't comment on how the tax would affect its plans.
Mirant - following Williams' lead - supports short-term regional price
controls if they would bring stability to the state's wholesale power market,
Griffin said.
"We have expressed that we may be comfortable with some form of temporary
price mitigation in order to get through this crisis," Griffin said.
But the base prices for electricity written into the windfall-tax bills are
much lower than generators' actual costs, Ackerman said.
"Today's gas prices are much higher than that," he said. "Everybody would
automatically sell out of state."
Lawmakers Unmoved
Lawmakers aren't overly concerned with negative implications if the measure
becomes law.
"If the price for rolling out the welcome for generators is 10 to 30 times
more than Californians paid for power last year, then we ought to build our
own plants," said state Sen. Debra Bowen, D-Redondo Beach, and chairwoman of
the Senate energy committee. "The state's motto is 'Eureka,' not 'Welcome to
California, please come gouge us.'"
Paul Van Dyke, press secretary to state Sen. Nell Soto, D-Ontario, who is
sponsoring the windfall profits tax bill in the Senate, said "there's no
evidence that leaving things the way they are now will be better."
"California has a limited policy chest, and federal energy regulators are not
moving fast enough to solve the problems," Van Dyke said. "California needs
to build up its tool chest. So at the end of the day, whether we solve this
problem through windfall profits or a negotiated agreement with the
generators, the bottom line is consumers cannot be gouged."
Davis - who told reporters Monday that the state "is at war" with
Houston-based generators - is expected to meet with representatives from a
dozen energy companies Wednesday to discuss "unpaid debts, credit issues and
the supply of power." Those generators include Mirant, Williams and Duke
Energy.
At the meeting Wednesday, Davis will attempt to get the generators to take a
haircut on hundreds of millions of dollars of power bills owed by PG&E Corp.
unit Southern California Edison. In exchange, a person close to Davis said,
the governor may promise to veto the windfall profits tax bill if it reaches
his desk.
The governor's office wouldn't comment on the substance of the meeting
Wednesday.
Wall Street analysts said the measure could have severe effects on
California's economy if it passes and will pressure generators' shares as the
bills move through the Legislature.
"We expect weakness in (generators) shares with California exposure," Dan
Ford, an analyst with Lehman Brothers, said in a research note Tuesday. "A
windfall profits tax bill will motivate generation developers to remove
existing and new capital to other states and potentially destroy California's
already softening economy."
Ultimately, however, Ford expects the bill to be used as a bargaining chip
rather than passed.
The tax also raises regulatory questions, several lawmakers said. In essence,
California is attempting to set wholesale power rates, which are governed by
the Federal Energy Regulatory Commission.
A FERC commissioner wouldn't comment directly on the issue, but told Dow
Jones Newswires that the state has "no jurisdiction on wholesale power rates
and does not have the legal authority to adjust rates set by FERC."
-By Jason Leopold, Dow Jones Newswires; 323-658-3874;
jason.leopold@dowjones.com <mailto:jason.leopold@dowjones.com>
