February 16, 2001

Commissioners

California Public Utilities Commission

505 Van Ness Avenue

San Francisco, CA 94102

Dear Commissioners:

As you are aware, pursuant to recently enacted provisions of the Water Code, the Department of Water Resources (the "Department") is authorized to contract for the purchase of power for sale to retail end use customers within the State of California at such prices and on such terms and conditions as the Department determines appropriate. The Department has begun to enter into contracts for the purchase of power ("Power Purchase Contracts") in accordance with such provisions and pursuant to the Proclamation of Governor Gray Davis dated January 17, 2001 concerning shortages of electricity.

In order to induce the sellers of power to enter into such Power Purchase Contracts on favorable terms to the State and to provide assurances to prospective lenders to the Department as to the ability of the Department to recover its revenue requirement, it is critical that the Commission begin to implement the provisions of AB 1X so that the Department will realize at least a portion of its current revenue requirements from the sale of power to retail end use customers.

The power being purchased by the Department has been and is being delivered to retail end use customers. Revenues relating to such power, which pursuant to the Water Code are the property of the Department, have been or will very shortly begin to be collected by the electrical corporations. Such revenues, of course, are a critical source of funding for the power purchases being made and reimbursing the State for moneys appropriated to the Department to fund such purchases. In order to assure that the Department's revenues are properly segregated and accounted for and promptly remitted to the Department and to minimize the continuing need for General Fund appropriations, it is critical that the Commission at the earliest possible opportunity adopt an appropriate emergency order addressing several matters discussed below.

Pursuant to Section 80110 of the Water Code, the Department is entitled to recover as a revenue requirement amounts necessary to enable the Department to, among other things, pay for the power purchased by it, and to make payments under any contracts, agreements and obligations entered into by the Department in the amounts and at the times the same become due. Under the terms of said Section 80110, any "just and reasonable" review under Section 451 is to be conducted by the Department and not by the Commission.

As part of an emergency order, the Department requests that the Commission confirm the Department's understanding that charges for power delivered to retail end use customers will provide sufficient revenues, together with other moneys available to the Department within the Department of Water Resources Electric Power Fund for such purpose, to meet the entire revenue requirement of the Department under Section 80110, including all payments made on or after January 17, 2001 by the Department under Power Purchase Contracts entered into by the Department and determined by the Department to be just and reasonable.

The Department also requests that such emergency order establish an interim method of allocating current generation charges paid by retail end use customers in order to assure a current recovery by the Department of a portion of its ongoing costs. We recognize that any interim allocation of such charges may be adjusted in accordance with subsequent Commission action and that the rates and charges for Department power will ultimately be established pursuant to a further agreement with the Department, all in accordance with relevant provisions of the Water Code. However, it is critical to the success of the Department's power purchasing program that an initial allocation of revenues be made and that appropriate collection provisions be immediately implemented.

We also request that such order require the electrical corporations to (i) transmit and distribute the Department's power, (ii) provide billing and collection services for the Department, (iii) segregate in a separate account and hold in trust for the Department all revenues allocable to the Department's power as received, and (iv) remit such revenues to the Department upon receipt. We also request that the electrical corporations be directed to enter into servicing agreements with the Department to implement the foregoing.

In addition, we request that the order provide that, upon its acceptance by the Department, the order will constitute an agreement between the Department and the Commission within the meaning of Section 80110 of the Water Code.

Thank you for your assistance and attention to this important matter. We will be submitting additional information and requests to the Commission relating to the Department's power purchase program and financing plans and appreciate your continuing cooperation.

Sincerely,

/s/ Raymond D. Hart

for Thomas M. Hannigan

Director

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