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Calif. sets huge bond issues to end energy crunch Sunday February 25, 11:38 AM EST By Michael Kahn

SAN FRANCISCO, Feb 25 (Reuters) - California's power crisis is forcing the state to rush to market with a set of massive municipal bond sales that could top a staggering $20 billion, including the single largest bond issue in history.

While the astronomical debt load might appear a dangerous maneuver for state, financial planners, analysts and the state treasurer say it will be structured in such a way that California should emerge with good credit and finances firmly in the black.

In fact, using bonds to fund initiatives aimed at stabilizing electricity prices, ensuring reliable power sources and saving the state's two biggest utilities from bankruptcy should leave California's fiscal future far rosier than it is today, they say.

"To the extent that we can end this disruption in the markets we are better off as a state economically, no question about it," state Treasurer Phil Angelides told Reuters in a recent telephone interview.

So far, lawmakers have authorized up to $10 billion in debt to finance state purchases of long-term power contracts. But those bonds -- along with any others related to the power crisis -- would not be backed by state coffers.

Instead, a dedicated portion of consumers' electricity bills would go toward paying off the power-purchase bonds. Any debt issued to finance the building of new power plants, for example, would be repaid from profits these plants would make from selling electricity.

This means the state will not have to put its good credit on the line to back the bonds, or tap state coffers to meet California's power needs. But paying the power-purchase bonds off using electricity revenues will likely bring a spike in utility rates to ensure bondholders get repaid.

"It is our understanding that when those bonds are sold the state will be reimbursed for whatever money it has, to that point, put out," said Claire Cohen, vice chairwoman at Fitch rating agency. "Assuming that that happens and that the bonds are secured by the (consumer) rate base it shouldn't affect the credit of the state of California."

While promising to be politically unpopular, consumer rate hikes will allow California both to maintain its healthy financial standing and its budget reserves, pegged at some $6.7 billion for the current budget year, analysts say.

California's worst-ever power crisis stems from its own bungled 1996 power deregulation law, which required Edison International's (EIX) Southern California Edison and PG&E Corp.'s (PCG) Pacific Gas and Electric to buy energy on the spot market, where prices have skyrocketed, but maintained caps on the rates they could charge consumers.

The result has been a power crunch that has roiled the world's sixth-biggest economy and caused the state's two biggest utilities to rack up debts of nearly $12 billion, leaving them nearly bankrupt. The crisis blindsided state lawmakers, who were sent scrambling to find ways to keep the lights on in the nation's most populous state.

BIGGEST MUNI BOND ISSUE IN HISTORY

One of the first emergency bills to be signed into law was the $10 billion bond sale for long-term power purchases targeted for May. That deal is expected to be the biggest municipal bond issue in history, surpassing the $7 billion in debt sold by the Long Island Power Authority in 1998.

But that could only be the beginning.

Gov. Gray Davis is now in negotiations with the two utilities to buy their transmission lines in a bid to help ease their massive debts. Under plans floated by a variety of lawmakers, the state would issue somewhere between $3 billion to $9 billion in bonds to cover the cost of buying their share of the power grid.

The state Senate also recently passed a proposal to issue as much as $5 billion more in revenue bonds to set up a state authority to build new power plants and upgrade existing ones -- bringing the state's potential power-related bond issues to more than $20 billion.

It's a huge amount of debt that Angelides says must be made attractive to investors because California could soon run out of money to fund other important state programs, such as education and housing.

At the moment California is burning through an estimated $50 million a day to keep electricity flowing, and the final tab for these short-term purchases could eventually go as high as $5 billion, he noted.

"We are spending substantial amounts of money that may rise to $5 billion by May," Angelides said. "If we keep spending general fund money we are going to eat into money for education, for social services and for health care."

This pricey power-buying strategy has also spurred rating agency Standard & Poor's to put California on negative CreditWatch, raising the possibility of a downgrade for the state. This would make it more expensive for California to borrow money.

Steven Zimmermann, managing director at Standard & Poor's, said it is too early to say exactly the impact the first bunch of revenue bonds would have because the state is still working out how to structure them. Nevertheless, lawmakers need to quickly turn off the spigot to stop money flowing from the general fund.

"We would like this all to be wrapped up as soon as possible so they don't have to keep spending their own money," Zimmermann said in a recent interview. "They are fortunate they have extra resources to use but it can't go on forever."

http://money.iwon.com/jsp/nw/nwdt_rt.jsp?section=news&news_id=reu-n2514679&feed=reu&date=20010225&cat=INDUSTRY

-- Martin Thompson (mthom1927@aol.com), February 26, 2001

Answers

This California situation is becoming more bizarre by the hour.

-- Martin Thompson (mthom1927@aol.com), February 26, 2001.