Impasse Ends on Energy Bonds

After four months of deadlock, utility regulators and state officials struck a deal Thursday intended to allow California to float as much as $13.4 billion in energy-related bonds.

Gov. Gray Davis and other state officials struggling with a serious budget shortfall welcomed the proposed agreement, saying they hope it allows them to quickly restore money to be spent on schools and hospitals.

But Wall Street, which is crucial to California’s plan, reserved judgment pending closer scrutiny. Consumer advocates criticized the deal, saying it short-circuits public oversight of electricity rates and does nothing to amend the state’s dozens of relatively expensive long-term power contracts.

The proposed agreement between the Public Utilities Commission and the state Department of Water Resources faces a vote Feb. 21 at the commission, where it is expected to pass. It would earmark money from the monthly electricity bills of 12 million utility customers for the next decade to pay off as much as $13.4 billion in bonds.

Money from the bonds would be used to reimburse the state, which spent $6.5 billion for electricity dating to last January and then borrowed $4.2 billion more in June. It was last January when soaring wholesale electricity prices drained Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric of the cash needed to buy electricity for their customers.

The agreement does not specify rate increases. But it shifts control of future rate increases from the commission, California’s historic regulator of rates, to the fledgling power-buying unit of the Department of Water Resources.

The precise electric rates under the deal would depend on the final size of the bond offer and the state’s electricity costs.

Credit Agencies Will Scrutinize Deal

There’s no guarantee that Thursday’s agreement will lead to a bond sale. Credit agencies on Wall Street, which scrutinize such deals to be sure that bondholders will be assured of getting paid back, were wary.

“We’re going to have to go through this with a legal fine-tooth comb,” said David Hitchcock, director of the local and state government group of Standard & Poor’s, a credit rating agency.

Joseph S. Fichera, chief executive officer of Saber Partners, who until recently served as an energy advisor to Davis, said lenders will be studying the agreement for “certainty of cash flow and that the political battles ... would never be able to undermine the timely payments of the bonds.”

He declined to comment further on the agreement until he could examine it more thoroughly.

Utilities commission President Loretta Lynch said she was confident that the rate agreement would allow California to win an investment-grade rating for its bonds.

“I do think this structure works,” she said.

In January 2001, shortly after the governor thrust the Department of Water Resources into the emergency job of buying electricity to avoid wide-scale blackouts, Davis also urged it to sign dozens of long-term power contracts in order to avoid buying electricity in the dysfunctional, exorbitant spot market that had been created under a 1996 deregulation plan.

For many months, the bond deal has been stalled by the politics of those long-term power contracts. In October, the utilities commission voted 4 to 1 to reject Davis’ plan for paying back the bonds. Lynch argued that the governor’s plan would prevent the state from renegotiating the $43 billion worth of power contracts signed by the Department of Water Resources.

Lynch preferred a plan that would separate repayment of bonds from payment of the long-term contracts and free the state to renegotiate those contracts. Wholesale electricity prices in the West crashed in June to roughly one-tenth the prices prevailing when the contracts were signed.

Lynch negotiated for months with Davis administration officials on a compromise bond repayment plan.

At her urging, Department of Water Resources officials began meeting again with several power suppliers, such as Calpine and Sempra Energy, to renegotiate long-term contracts.

Pressure Mounts to OK Repayment Plan

But so far, those talks have yielded no amended contracts. And with each round of bad news about the state’s dwindling revenue projections, pressure has mounted on the utilities commission to approve a bond repayment plan.

Bonds cannot be sold without such an agreement, and without bonds or some other way of paying back the $6.5 billion, legislators would have to make even more severe cuts in the state’s roughly $100-billion budget.

Under the deal announced Thursday, the utilities commission would be forced to raise utility rates within 120 days of being notified by the Department of Water Resources that it needed more money to make payments on bonds or cover its electricity costs.

Nettie Hoge, executive director of the Utility Reform Network, a San Francisco consumer group, complained of the lack of utilities commission oversight, saying that the needs of Wall Street were driving California policy.

Lynch said it appears utility rates will not have to be increased this year, given how much wholesale power prices have dropped.

But that could change, Lynch said, if the Department of Water Resources’ costs of buying electricity rises or if the utilities, which are expected to resume the job of buying electricity for their customers in 2003, do not hold down costs.

Some accused Lynch of abandoning her efforts to reform the state’s long-term power contracts.

“We had expected that there would be some kind of iron fist to pry open the long-term contracts,” Hoge said.

“Instead this is a kid glove to go hand in hand with [the Department of Water Resources] to the same place we were before.”

But Lynch said since she began urging renegotiation of the power deals, the governor, attorney general and other state officials have come to agree that the state should seek cheaper electricity.

“Now we have a unified approach,” she said.

Joe Ronan, a Calpine senior vice president, said the utilities commission and the Department of Water Resources agreement will not snuff out his company’s willingness to discuss amending contracts.

“I don’t think this changes at all our position,” he said.