Utility Bonds Spur Interest Despite Legal Challenge

Yields on about $6 billion of bonds sold last year by three California power utilities increased to levels that some investors find attractive, even as consumer groups mount a legal challenge to the bonds’ validity.

The bonds, which sold with top-notch AAA ratings, are backed by surcharges on electric bills, and were sold as part of a plan to reduce electricity prices by 10% and help the utilities prepare for more competition. Some consumer groups want 20% rate cuts and recently won space on the state’s November ballot for an initiative to repeal part of the state law that created the bonds.

The controversy has hurt the bonds, causing their yields to rise relative to Treasuries. Still, many investors and credit-rating companies say the courts will protect the bonds, even if the initiative passes.

“I believe very strongly that no matter what these initiatives do, they won’t be able to destroy the bonds,” said John Queen, who helps manage $1.3 billion at Hotchkis & Wiley in Los Angeles.