noh_dh.doc

HAND DELIVERED

February 7, 2001

The Honorable Laird Noh
Idaho State Senate
Statehouse
Boise, ID 83720

RE: Federal District Court Rulings and the Securities & Exchange Commission
Order in ScottishPower

Dear Senator Noh:

This letter follows-up on your two requests for information last week. First, you asked for copies of California federal District Court opinions involving Southern California Edison (SCE) and PG&E. As I mentioned last week we have been unable to locate any written orders or decisions. However, we have obtained additional information which you may find helpful.

In particular, there appears to be not one but two federal District Court cases, both in the same court. SCE filed its complaint for injunctive and declaratory relief against the California PUC on November 16, 2000 in Los Angeles. The case number is No. 00-12056. SCE asserted in its complaint that during the latter part of 2000, its costs of purchasing electricity has exceeded the retail rates frozen under the state law by $2.6 billion (and this amount continues to grow). SCE claimed this uncollected amount equals about 71% of the equity value of the company.

SCE alleged a number of different legal arguments in pursuing a TRO against the California PUC’s unwillingness to raise customer rates to a level necessary to recover its purchase costs. More specifically, SCE argued that the PUC’s refusal to increase rates violates the filed rate doctrine; is confiscatory under the Takings Clause; and represents a violation of the Due Process Clause of the U.S. Constitution. Under the FERC filed rate doctrine, SCE argued it is entitled to recover its generating costs because they were incurred pursuant to FERC approved tariffs. In response to these arguments, the California PUC asked the Court to dismiss the complaints.

On January 8, 2001, Judge Ronald Lew declined to dismiss the case, preliminarily finding that the filed rate doctrine allows SCE to pass wholesale power costs to ratepayers. Left unanswered was the question of whether the utility is paying a reasonable and prudent price for the wholesale power. On Monday, February 12, 2001, Judge Lew is set to rule on whether SCE’s power purchases were reasonable and prudent. However, a ruling upholding the filed rate doctrine would almost certainly be challenged by the state and/or the California PUC. According to today’s Wall Street Journal, banks have agreed to forbear collection actions against SCE until February 13 – one day after the anticipated Court decision.

Turning to the “other” case, on January 25, 2001, PG&E filed a similar action in federal Court for the Northern District of California (San Francisco) asking for the same relief as SCE. PG&E suggested that its case be consolidated with the SCE case in Los Angeles. The San Francisco Court agreed and transferred PG&E’s request for a TRO to Judge Lew.

In related actions, the New York Times reported that Governor Davis “used emergency powers to seize” $150 million worth of power-purchase agreements from PG&E and $300 million from SCE. On the legislative front, the California Legislature enacted and Governor Davis signed into law the $10 billion bond authority to purchase power for California customers. Last week, the Electric Power Daily reported that the California Department of Water Resources has already spent nearly $600 million purchasing power in the spot market for SCE and PG&E since passage of the Bill authorizing DWR to purchase power.

On the federal level, the Energy Secretary’s emergency order expired yesterday, February 6, 2001. Prior to this expiration, Reliant Energy had gone to federal Court in D.C. requesting release from its California ISO sales agreements for non-payment. Yesterday a federal Court in Sacramento temporarily ordered Reliant to continue providing electricity from its California-based plants to the California ISO. A hearing on Reliant’s petition was scheduled for today, February 7, 2001. Reliant claims that the ISO owes it $300 million. I am unaware of the Court’s action on today’s hearing.

ScottishPower’s SEC Application
You also asked for copies of the SEC’s order regarding ScottishPower’s application for additional financing authority to acquire foreign wholesale generators and utility companies. In File No. 70-9669, ScottishPower filed an application (with several subsequent amendments) seeking SEC authority to invest in generators and foreign utility companies “up to an aggregate outstanding amount not exceeding $4.86 billion at any one time during the Authorization Period.” The authorization period runs through March 31, 2004.

In late November, the SEC asked the Idaho Public Utilities Commission for its opinion whether ScottishPower’s application would have any adverse impact on PacifiCorp or on the ability of the PUC to protect PacifiCorp or its customers. In a response dated November 22, the Commission expressed “serious concern with ScottishPower’s intent to incur an ‘aggregate investment’ exceeding 100% of its ‘consolidated retained earnings.’” The Commission recognized that investments in wholesale generators and foreign utility companies “carry with them some inherent risk that may impact the financial viability of ScottishPower and its stock value[. W]e recommend as a condition that any SEC approval require the detailed reporting that all FUCO and EWG investments to the SEC and the Idaho Public Utilities Commission.”

On December 6, 2000, the SEC issued an order and a supplemental order approving the requests with several reporting conditions. In addition, the SEC retained jurisdiction over several of the company’s activities. I have included a copy of the SEC’s order and supplement order for your information. If you have further questions regarding ScottishPower’s SEC filing and the SEC’s orders, you may wish to review this matter with the Commission.

I hope you find this information helpful. I will be out of the office until February 19, 2001, but the Commission will continue to monitor activities in California.

Sincerely yours,

Donald L. Howell, II
Deputy Attorney General

cc: Commissioners
Terry Coffin

Enclosures

bls/L:noh_dh
Senator Noh
February 7, 2001
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