S&P: Power bill risks Calif. downgrade

Several factors could trigger action by Standard & Poor's

By Lisa Sanders, CBS.MarketWatch.com Last Update: 12:58 PM ET Feb 5, 2001 NewsWatch

NEW YORK (CBS.MW) - Standard & Poor's said Monday that California's double-A credit rating could be in jeopardy if the state continues to deplete its financial reserves to purchase power.

CBS MarketWatch Columns Updated: 2/5/2001 4:13:36 PM ET Standard & Poor's initially placed California on CreditWatch negative on Jan. 19 as the state began using general funds to buy electricity on behalf of two of the state's near bankrupt utilities.

The rating agency reiterated its stance Monday after California passed a law last week authorizing the state to issue up to $10 billion in bonds to pay for long-term power contracts.

Dave Hitchcock, a director at S&P and lead author of the report, said California couldn't continue to appropriate funds for a long period of time. The state already appropriated $400 million from the general fund to the Department of Water Resources for electricity purchases, an amount quickly depleted. The bill passed into law last week gives the DWR another $500 million to buy power while it tries to cut longer-term deals.

"While the cumulative appropriation does not pose an immediate threat to state finances, a clear long-term resolution will be needed to avoid long-term depletion of state funds," according to the S&P report.

The law - AB1X - permits the Public Utility Commission to raise rates so the state won't have to appropriate funds from the treasury. "A substantial delay in such a decision, however, could cause a downward adjustment of the state's rating," S&P pointed out.

Under the law - AB1X - the DWR has the authority to enter into long-term power purchase contracts and pay for those contracts with revenue bonds. On Friday, the state treasurer's office issued a request for proposals on how to structure a bond issue worth as much as $10 billion. The responses are due Wednesday.

In regard to the bonds, Hitchcock said that S&P would have to see the structure of the deal before issuing an opinion.

"There are legal questions that would need to be answered," he said. "Is this insulated from any potential bankruptcy from the [investor-owned utilities]?"

The investor-owned utilities in question, Pacific Gas & Electric (PCG: news, msgs) and Southern California Edison (EIX: news, msgs), are near bankruptcy. AB1X does not address the issue of past due amounts, which the utilities have been unable to meet.

"I would suspect at a minimum, the state would get a clean legal opinion," Hitchcock said. "The state has assured us that they would insulate the bond issue from the [utilities], but we would need to take a look at it."

The report also noted that the state's electricity consumption ranks 49th out of 50 per capita, but its prices are the 10th highest in the nation.

"The state's economy may be affected by the power crisis," S&P wrote. "The effect on future corporate relocation and expansion decisions will need to be monitored in the future."

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