Panel OKs Energy Bond Hike to Ease Fears on Wall St.
To ease Wall Street’s fears that electricity prices will again go haywire, California officials have boosted the size of the energy crisis bond--already the biggest borrowing by a government agency in U.S. history--from $11.1 billion to $11.95 billion.
The additional money is to be used as a cash buffer in case power prices skyrocket.
With no debate, the California Public Utilities Commission voted 5 to 0 Monday to amend the documents that spell out the basic elements of the bond sale, which is expected to take place this fall.
The $850-million adjustment is intended to address the concerns of three Wall Street rating agencies. Those agencies assess the risk to lenders, and their judgments, expected within weeks, will greatly influence how much California pays to borrow money.
“The stronger the level of reserves, the stronger the rating,” said Dan Aschenbach, senior vice president for Moody’s Investors Service.
The $11.1-billion bond deal already included reserves of at least $2.2 billion. But more is better, rating agency analysts say, given the uncertainty of future power prices and the complicated relationship between the state agency that buys power and the Public Utilities Commission, which controls the utility rates that ultimately pay for that power.
Though wholesale electricity prices have been relatively low and stable for more than a year, tight supplies threatened the state during a heat wave last month and private power plant construction has stalled.
“Clearly the more reserves you’ve got, the more protection you’ve got,” said Claire Cohen, vice chairwoman at Fitch, one of three key Wall Street rating agencies.
State officials working to prepare the bond sale said that deeper reserves would save California money over the long run. Experts estimate that the difference between a “B” rating and the “A” sought by California can total $1 billion in interest paid over the 20-year life of the bonds.
“It’s hard to figure that you take out more debt and it saves you money, but in this case it does,” said Oscar Hidalgo, spokesman for the Department of Water Resources.
The Department of Water Resources has been buying electricity for the customers of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric since the height of the electricity crisis in January 2001.
State Treasurer Phil Angelides said the $850 million in additional reserves will be needed only so long as the Department of Water Resources buys power for the utilities. By law, the agency’s role will end Jan. 1, but it may be extended if the utilities are not creditworthy by then. Once the utilities resume their full duties, the $850 million could be used to cut electricity rates or to help pay off the energy bonds.
“The money is not lost,” Angelides said.
Joseph S. Fichera, chief executive officer of Saber Partners, an investment banking firm that advised Gov. Gray Davis during the electricity crisis, said bolstering reserves through borrowing is like “using a credit card rather than a checking account.”
“If everything goes right, you will get it back,” Fichera said, “but the nearly billion dollars is still costing you in interest. It’s still almost a billion dollars at risk, sitting around unused.”
The bonds will be paid off through the monthly utility bills of 27 million people served by the three utilities. The bonds are designed to replace the $6.5 billion the state spent in the winter and spring of 2001 and $4.3 billion borrowed in June 2001 to buy electricity.
