Next stumbling block: Big debt -- Who will pay two utilities' giant bills?

By Dale Kasler Bee Staff Writer (Published Feb. 4, 2001) Now that the state has agreed to buy power on behalf of California's beleaguered utilities on a long-term basis, officials must face up to an even knottier problem: dealing with the staggering debts the utilities have accumulated.

Gov. Gray Davis and legislative leaders are working on a complicated financing plan under which the two big publicly traded utilities' shareholders would repay billions in debt -- and ratepayers would avoid further increases.

But state officials say the plan leaves open the possibility of more rate increases.

The plan is far from settled.

Utility executives oppose significant portions of it -- especially Davis' insistence that the utilities surrender "financial instruments" or some other asset to the state for being restored to financial health.

The utility executives say the utilities shouldn't have to give up anything to get something to which they believe they're entitled -- rate hikes to cover their costs of doing business.

Complicating the negotiations is a preliminary court ruling that the utilities say bolsters their argument.

Last month, a federal judge in Los Angeles ruled that Southern California Edison, one of the two utilities fighting to stave off bankruptcy, has the right to pass on reasonable costs to ratepayers. The other utility, Pacific Gas and Electric Co., joined in the lawsuit.

"We believe the past debt is the obligation of the ratepayers ... as we have alleged in the lawsuit," said Ronald Olson, a director and attorney for Edison's parent, Edison International.

Experts say the preliminary court ruling doesn't guarantee an ultimate victory for the utilities, but it could give Edison and PG&E significant leverage in their negotiations.

"It is one of the risks that all of us have to look squarely in the eye," said Paul Hefner, spokesman for Assembly Speaker Robert Hertzberg, D-Sherman Oaks.

But aides to the governor, who is sensitive to charges that he is bailing out the utilities, said Davis will continue to resist rate hikes -- and press the utilities for assets.

The state is doing plenty for the utilities, they argue. It has put itself financially at risk, having spent more than $400 million buying electricity on behalf of the utilities and, with the passage of landmark legislation Thursday, committing itself to spending $10 billion more on power during the next several years.

The state believes it needs financial assets -- probably warrants that can be converted into stock -- to create some sort of guarantee it will get paid for its costs, said Davis spokesman Steve Maviglio.

"I'm in no mood and have no inclination to bail out anyone," Davis said last week after the Western governor's energy summit in Portland, Ore. "I consider this a financial transaction that provides benefits to both sides."

About the only thing everyone agrees on is that the billions in debts, owed to companies that sold wholesale electricity to the utilities, must be repaid. Just because California plans to buy power long-term for the utilities -- and stabilizing the chaotic electricity markets -- doesn't mean the crisis is over.

"Those debts have to be dealt with," or else various creditors can drag PG&E and Edison into bankruptcy, said Susan Abbott, corporate finance director at New York's Moody's Investors Service.

No one is quite sure what bankruptcy would mean for the two companies, but many experts believe it would lead to serious deterioration in their ability to deliver electricity.

Who repays the utilities' debts is the controversial part. While the utilities and many in the private sector believe customers should have to cover those costs, Davis has opposed rate increases.

As it is, Davis already has signed one bill that could lead to rate increases: Thursday's legislation calls for the state to negotiate inexpensive, long-term contracts for buying power, but holds out the possibility of rate hikes for many users if it can't buy power cheaply enough.

Those users are those who use more than 130 percent of the so-called "base line" amount of energy each month, and some experts believe millions of ratepayers will fall into that category.

And now the debt-reduction proposal creates the risk of more rate increases, according to a source in the governor's office.

The plan involves the concept known as "securitization." The utilities or the state would issue billions in bonds, use the proceeds to pay bills to the wholesale suppliers, then repay the new bond debt over as many as 10 years.

"Securitization is the magic bullet," said credit analyst Shawn Burke of Wall Street investment bank Barclay's Capital, who's been briefed on the proposal.

Although the utilities' credit ratings have been reduced to so-called junk-bond status -- making it nearly impossible for them to borrow funds through traditional sources -- Burke said there would be willing buyers for these bonds.

That's because the bondholders would be guaranteed a portion of the monthly bills paid by utility customers, he said.

The bondholders get paid "as long as people are still buying and selling electricity," Abbott said.

The plan is designed so rates wouldn't go up. But by dedicating part of the utilities' revenue stream every month to bondholders, the plan leaves open the possibility of higher rates, according to the source in the governor's office.

If, for instance, the costs of generating electricity soar, the utilities would still be obligated to make those bond payments first, then find a way to pay for the electricity -- either by cutting costs or seeking a rate increase.

Another uncertainty is the size of the debt. The utilities say their indebtedness totals $12 billion -- the gap between what they've paid for wholesale electricity and what they've been able to collect from customers.

But consumer advocates and many state officials say the $12 billion includes more than $3 billion that the utilities in effect owe themselves for profits they made on power they generated themselves. They argue that the $3 billion should be deducted from any debt-repayment plan.

"Those two numbers have got to be netted against each other," said Hertzberg spokesman Hefner.

The utilities haven't said whether they're willing to accept that idea.

"In the context of an overall settlement, that would be on the table," said Tom Higgins, an Edison International senior vice president.

PG&E officials couldn't be reached for comment.

Bee staff writer Dan Smith contributed to this story.

http://www.capitolalert.com/news/capalert01_20010204.html

-- Martin Thompson (mthom1927@aol.com), February 05, 2001

Answers

What?

Gov. Gray Davis and legislative leaders are working on a complicated financing plan under which the two big publicly traded utilities' shareholders would repay billions in debt -- and ratepayers would avoid further increases

How would you make shareholders repay the debt? Am I missing something here. Maybe someone would enlighten me on how this could be pulled off.

And the saga continues.

-- Martin Thompson (mthom1927@aol.com), February 05, 2001.