State to Pay Electric Bill With Loan, Not Taxes

California taxpayers, who have had to bankroll billions of dollars in electricity purchases for the teetering power utilities, will soon no longer see their money evaporate at record rates, under an executive order by Gov. Gray Davis.

As early as next week, the order will stop the hemorrhaging of the state budget by allowing Treasurer Phil Angelides to borrow $5 billion to buy electricity. That money is expected to cover power purchases until this fall, when the state plans to sell an unprecedented $12.5 billion in bonds to repay the general tax fund and buy future electricity.

Angelides said Tuesday that he has already lined up $3.5 billion in loans from two Wall Street firms, and expects to secure at least another billion by next week, when he plans to close the deal and obtain the money.

The loan is critical, he said, because without it, electricity purchases would completely deplete state coffers as early as October.

“In essence, it stops the general-fund bleeding,” Angelides said. “What this interim financing does is take the pressure off the general fund and, hopefully, avert a cash crisis.”

The loan could also ease concerns on Wall Street that California’s risky entry into the power business has placed the state budget in a precarious position. Those concerns were one of the main reasons two major credit rating agencies downgraded the state earlier this year.

“We have been looking forward to this day,” said Ray Murphy, a vice president at Moody’s Investors Service, one of the two firms that downgraded California’s credit rating. “We view this as a positive first step toward getting the state out of the power business. We wanted the state to get the general fund out of the business as quickly as possible.”

California has allocated $8.2 billion in taxpayer money for electricity since January because the state’s private utilities became too saddled with debt to continue purchasing power on the open market. and massive blackouts loomed.

Under a plan devised by Davis and approved by the Legislature, the state budget is supposed to be reimbursed for the power purchases with the bond issue, the largest in American history. The bonds, in turn, are to be paid off by utility ratepayers through their monthly bills.

The bond issue, however, has been delayed by partisan politics and complex legal issues raised by the bankruptcy of Pacific Gas & Electric Co., the state’s largest private utility.

A bond sale initially planned for May is now scheduled for late September, according to Angelides’ latest estimate. The state’s Public Utilities Commission still needs to take a number of technical actions before the sale can take place.

As a result, the state budget has been drained for power purchases far longer than initially anticipated--a situation that has imperiled spending on education, transportation and other critical needs, at least temporarily.

Angelides had earlier sought to secure a $4-billion bridge loan to repay the state budget for power purchases until the bonds were sold, but was rebuffed by Republicans in the Legislature, who argued that the loan was not necessary.

Davis’ executive order, issued late Monday as part of the Democratic governor’s emergency powers during the energy crisis, gives Angelides the authority to press ahead.

But it does not allow the treasurer to use the loan to repay the budget for the billions spent so far this year on electricity, as he had originally intended. Rather, it permits Angelides to use the loan proceeds to assist the Department of Water Resources, the state agency buying power, with its future electricity expenses.

If the bond issue is further delayed, Angelides estimated, the loan would gives California another four to six months before it would begin to run out of money. Furthermore, the loan closes a potential loophole that existed in the long-term contracts Davis had signed to stabilize the cost of electricity, which would have let power suppliers walk away from the deals if the state had not secured a source of financing by next month.

But Republicans warned that by entering into a bridge loan deal without knowing when the bonds would be sold, Davis and the Democrats were incurring major risks that could further drive up the price tag of the crisis.

The loan carries a blended interest rate of about 4.5%, but if it is not repaid by Oct. 31, the rate jumps to 7%. Because the loan is to be repaid by the bonds, which have been marred by a history of delay, GOP officials Tuesday were already calling the bridge loan a “bridge to nowhere.”

“The thing that is most troubling is that the governor did not bother to consult with anyone,” said Assembly Republican leader Dave Cox (R-Fair Oaks), who learned of Davis’ order from reporters. “It’s disappointing, but the governor does not seem to recognize there is a legislative branch.”