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<title>Will the Voters Restructure California’s Landmark Electricity Law?</title>
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<td width="25%" valign="top" align="center"><!--webbot bot="ImageMap" rectangle="(14,297) (97, 322) http://www.powermarketers.com/adrates.html" rectangle="(11,230) (95, 257) http://www.powermarketers.com/pmajobs.htm" rectangle="(12,163) (96, 189) http://www.powermarketers.com/main.htm##_parent" rectangle="(12,95) (96, 121) http://www.powermarketers.com/power2.htm##_blank" rectangle="(11,29) (96, 54) ../pmamag.htm" src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" startspan --><MAP NAME="FrontPageMap"><AREA SHAPE="RECT" COORDS="14, 297, 97, 322" HREF="http://www.powermarketers.com/adrates.html"><AREA SHAPE="RECT" COORDS="11, 230, 95, 257" HREF="http://www.powermarketers.com/pmajobs.htm"><AREA SHAPE="RECT" COORDS="12, 163, 96, 189" HREF="http://www.powermarketers.com/main.htm" TARGET="_parent"><AREA SHAPE="RECT" COORDS="12, 95, 96, 121" HREF="http://www.powermarketers.com/power2.htm" TARGET="_blank"><AREA SHAPE="RECT" COORDS="11, 29, 96, 54" HREF="../pmamag.htm"></MAP><a href="../_vti_bin/shtml.dll/calview/9807dd.htm/map"><img src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" ismap width="110" height="350" usemap="#FrontPageMap"></a><!--webbot bot="ImageMap" endspan i-checksum="46782" --><p><a href="../searchpma.htm"><img src="../images/archives.gif" alt="Archives Search" border="0" align="center" WIDTH="70" HEIGHT="40"></a></p>
<p align="left"><font face="Arial"><strong><small>About The Author:</small></strong></font></p>
<font SIZE="2"><p align="left"></font><font size="1">Daniel W. Douglass is a partner in
the Los Angeles office of Arter & Hadden, a full-service law firm with a national
practice in the energy, deregulation and telecommunications areas, as well as related
transactional, corporate, real estate and environmental issues. He can be reached at (213)
629-9343 or e-mailed at <a href="mailto:[email protected]">[email protected]</a></font></p>
<p align="left"><font size="1">Founded in 1843 in Cleveland, Ohio, <strong><a href="http://www.arterhadden.com/" target="_blank">Arter & Hadden</a></strong> is a
national law firm with offices in <a href="http://www.arterhadden.com/cleveland.htm">Cleveland</a>
and <a href="http://www.arterhadden.com/columbus.htm">Columbus</a>, Ohio: <a href="http://www.arterhadden.com/austin.htm">Austin</a>,<a href="http://www.arterhadden.com/dallas.htm"> Dallas</a> and <a href="http://www.arterhadden.com/sanantonio.htm">San Antonio</a>, Texas; <a href="http://www.arterhadden.com/washdc.htm">Washington</a>, D.C.; and <a href="http://www.arterhadden.com/irvine.htm">Irvine</a>, <a href="http://www.arterhadden.com/la.htm">Los Angeles</a>, <a href="http://www.arterhadden.com/sanfran.htm">San Francisco</a>, <a href="http://www.arterhadden.com/sandiego.htm">San Diego</a> and <a href="http://www.arterhadden.com/whills.htm">Woodland Hills</a>, California. The Firm is
comprised of approximately 350 Attorneys and 50 Legal Assistants.</font></p>
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<td width="75%" valign="top"><img src="../images/douglass.gif" alt="California Viewpoint by Daniel Douglass" border="0" WIDTH="375" HEIGHT="75"><p><b><u>July 1998</u><br>
</b></p>
<p><font size="6"><strong>Will the Voters Restructure California's Landmark Electricity
Law?</strong></font></p>
<p><strong>by Daniel Douglass -- Arter & Hadden. L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
07/98</em>)</font></p>
<p> </p>
<p ALIGN="JUSTIFY"><font face="Arial">Voters in California have signed petitions to add a
proposed initiative to the November 3 ballot which would significantly amend the
state’s electricity restructuring law. The initiative is known as the "Utility
Rate Reduction and Reform Act" (now officially named Proposition 9). The sponsor of
the initiative is a group called Californians Against Utility Taxes ("CUT") and
includes The Utility Reform Network, Consumers Union and the Public Media Center. The
Secretary of State’s Office certified that 495,847 of the 700,000 signatures turned
in by petitioners were valid, which means the initiative qualifies for the ballot. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The initiative would prohibit nuclear stranded-cost
recovery and the use of bonds to finance the 10% rate reduction for residential and small
commercial customers which went into effect on January 1 of this year. Assembly Bill 1890
("AB 1890"), the state’s landmark electric industry restructuring
legislation, provided that the 10% rate reduction would be financed through rate-reduction
bonds issued through the California State Infrastructure and Economic Development Bank.
The initiative would instead impose a 20% rate reduction derived primarily by capping the
amount which utilities could collect for their nuclear generation at a level equal to the
prices paid for energy through the California Power Exchange. Most importantly (and
perhaps, most illegally), the initiative would prohibit utilities from collecting the
Competition Transition Charge for repayment of $6.3 billion in rate-reduction bonds issued
earlier this year. The initiative would also overturn the California Public Utilities
Commission ("CPUC") orders adopted last year which approved the bond issues. The
CPUC would be prohibited from approving similar financing orders in the future, and the
costs of repaying the bonds would fall to utilities. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Given the utilities’ varying dependence on
nuclear power, the initiative would have different impacts on their electric rates. A
draft California Energy Commission staff analysis reportedly suggests that the initiative
could cause 17.5% reductions for SDG&E, 27.3% reductions for PG&E and 32% for
Southern California Edison. This report is being cited by the initiative’s sponsors
in support of their activities. One thing is clear, however. If Proposition 9 passes in
November, there will be substantial utility write-offs which could total as high as $5.3
billion. Most of the write-offs would be related to nuclear plant stranded assets (Diablo
Canyon for PG&E and San Onofre for Edison and SDG&E). The three major utilities
have also estimated, in filings made at the SEC, that they would experience earnings
reductions beginning as follows:</font></p>
<div align="center"><center><table CELLSPACING="0" BORDER="3" CELLPADDING="7" WIDTH="420">
<tr>
<td WIDTH="63%" align="center"><font face="Arial"><big><strong>Utility</strong></big></font></td>
<td WIDTH="37%"><p align="center"><font face="Arial"><big><strong>Write-Offs</strong></big></font></td>
</tr>
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<td WIDTH="63%" align="center"><p ALIGN="center"><font face="Arial">Southern California
Edison</font></td>
<td WIDTH="37%" align="center"><p ALIGN="center"><font face="Arial">$1.9 billion</font></td>
</tr>
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<td WIDTH="63%" align="center"><p ALIGN="center"><font face="Arial">Pacific Gas &
Electric</font></td>
<td WIDTH="37%" align="center"><p ALIGN="center"><font face="Arial">$2-3 billion</font></td>
</tr>
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<td WIDTH="63%" align="center"><p ALIGN="center"><font face="Arial">San Diego Gas &
Electric</font></td>
<td WIDTH="37%" align="center"><p ALIGN="center"><font face="Arial">$400 million</font></td>
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</table>
</center></div><p ALIGN="JUSTIFY"><font face="Arial">The annual earnings reductions varied
from year to year, with Edison suggesting that its shareholders would see a reduction of
$210 million the first year, which would gradually decline to $10 million in 2007.
PG&E’s estimate was for reductions of $200 million per year from 1999 through
2001 and approximately $50 million for each of the remaining years through 2007. SDG&E
said its earnings would decrease by $50 million in 1999 but did not provide a continuing
estimate of future declines.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Surprisingly, according to an early public opinion
poll on the initiative, Californians would oppose the measure by a 2 to 1 margin. However,
in a follow-up poll, where voters were asked whether they would vote for the initiative if
it caused a 20% reduction in their electric rates, the results were reversed, with a
similar margin supporting the initiative. As a result, it is clear that the initiative is
being taken seriously by parties who oppose the uncertainty it would create for electric
restructuring. Proposition 9 is already facing a legal challenge from a coalition of
utilities and business groups such as the California Manufacturer’s Association, the
California Chamber of Commerce, California Taxpayers’ Association, California School
Boards Association and the state’s three major investor-owned utilities. The lawsuit
seeks to keep the initiative off the ballot on the grounds that the repudiation of the
already-issued rate reduction bonds would violate state and federal constitutional law. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Both the United States Constitution and the
California Constitution prohibit the passage of any "law impairing the obligation of
contracts." These provisions have traditionally been relied upon by investors in
state or local bonds. Furthermore, AB 1890 contains a provision which expressly commits
the State of California not to alter the methodology for collecting utility stranded costs
unless arrangement is made for payment of all of the outstanding rate reduction bonds.
Since Proposition 9 is designed to eliminate the financial means for repaying more than $6
billion of bonds issued through an instrumentality of the State of California, it has the
potential for adversely affecting the ability of other California local governments to
sell their own bonds and other financial instruments. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Nevertheless, on July 2, 1998, the California Third
District Court of Appeal rejected the group’s petition. This denial does not go to
the validity of the constitutional issues raised, however, and therefore would not prevent
a challenge after the election, should Proposition 9 pass. The California Supreme Court
could reverse the Court of Appeal decision, but that appears unlikely for now. If the
initiative passes, there undoubtedly will be further litigation, premised on the legal
arguments outlined above. In the meantime, however, California’s aggressive stance
with regard to electricity restructuring would be compromised.</font></p>
<hr color="#FFFF00">
<blockquote>
<p align="left"><font face="Arial">You may address e-mail to Dan Douglass at </font><a href="mailto:[email protected]">[email protected]</a></p>
<p align="left">Founded in 1843 in Cleveland, Ohio, <strong><a href="http://www.arterhadden.com/" target="_blank">Arter & Hadden</a></strong> is a
national law firm with offices in <a href="http://www.arterhadden.com/cleveland.htm">Cleveland</a>
and <a href="http://www.arterhadden.com/columbus.htm">Columbus</a>, Ohio: <a href="http://www.arterhadden.com/austin.htm">Austin</a>,<a href="http://www.arterhadden.com/dallas.htm"> Dallas</a> and <a href="http://www.arterhadden.com/sanantonio.htm">San Antonio</a>, Texas; <a href="http://www.arterhadden.com/washdc.htm">Washington</a>, D.C.; and <a href="http://www.arterhadden.com/irvine.htm">Irvine</a>, <a href="http://www.arterhadden.com/la.htm">Los Angeles</a>, <a href="http://www.arterhadden.com/sanfran.htm">San Francisco</a>, <a href="http://www.arterhadden.com/sandiego.htm">San Diego</a> and <a href="http://www.arterhadden.com/whills.htm">Woodland Hills</a>, California. The Firm is
comprised of approximately 350 Attorneys and 50 Legal Assistants.</p>
</blockquote>
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