California Crisis Update 8/7/2018 California Crisis Update February 5, 2001

Going Forward AB-1X signed into law on Thursday, February 1 Permits California’s Department of Water Resources (DWR) to negotiate long-term power purchases with generators and sell the power directly to rate payers, with the utilities serving the role of agent for rate collection. The state will use revenue bonds totaling $10-16 Billion to finance the power purchase contracts. The bonds would be paid off through the California Procurement Adjustment (CPA) carve-out, which is the difference between rates collected by the utilities and the utilities’ costs. The utilities never take legal title to the CPA carve-out, leaving it untouchable in any potential bankruptcy proceedings. If the CPA carve-out is insufficient to cover debt service, the CPUC has the ability to raise rates for commercial, industrial, and some residential customers. The DWR is not allowed to enter into contracts after Jan 1, 2003. An immediate 10% rate hike was made permanent. The DWR is expected to spend an incremental $600 million dollars on spot market wholesale power while the long-term contracting and bond placement processes are being finalized. Gov. Gray Davis has said his goal is to sign long-term contracts for below $69 / MWh. This represents an increase from the previously stated $55 / MWh target. Expectations are that the long-term power contracting will ultimately result in a residual 5% exposure to spot market power. The latest round of bidding began Friday (Feb 2) morning The bids seem to moving toward longer dated terms in order to bring down the fixed prices to desired levels. Question: At what long-dated term do credit concerns and the bid-ask spread actually start increasing the fixed price offers? Conceptually, there is some term that balances the curve backwardation with long-dated market uncertainty, resulting in a minimum price. Morgan Stanley on AB-1X: “A positive for gencos. Long-term contracts negotiated in a seller’s market should establish strong margins for five years or longer in a key market.”

Utilities’ Past Undercollection Under recovered purchase power balances for EIX and PCG total over $11.5 billion and a solution has yet to be resolved. Internal audits indicated EIX and PCG indicate the companies are on track to out of money in early February and March, respectively. There are various bills or proposed bills in the legislature that are looking to address this problem through potential revenue bonds or the issuance of securitized debt. Concurrently, both utilities have cases in federal district court alleging that their inability to pass on power costs through to ratepayers is illegal. The utilities are requesting that they should be able to raise rates to pass through their power procurement costs retroactive to August 2000. EIX’s petition against the CPUC will be heard on February 12.