California Faces Cash-Flow Crisis, Controller Says (Update1) By David Ward

Sacramento, March 21 (Bloomberg) -- California's energy crisis forced the state to spend more than half of its budget surplus, and may prompt it to borrow $2.4 billion to cover short- term spending needs, state Controller Kathleen Connell said.

California's budget surplus dropped from $8.5 billion in January to $3.2 billion currently, Connell said. The state will be forced to sell notes to cover cash deficits to meet a request by the Department of Finance to transfer $5.6 billion into an emergency reserves fund, Connell said in a statement.

``I am deeply concerned about putting the state's general fund in a deficit situation in light of the energy crisis,'' Connell said. ``We started this year with a generous budget surplus. The energy crisis has taken much of that away.''

California has spent more than $3.2 billion buying electricity in place of its investor-owned utilities, which are burdened by debt incurred buying power for more than they could charge under a 1996 deregulation law. The electricity shortage caused rolling blackouts in California this week and in January.

California is spending about $350 million each week buying electricity, and expects to have spent $3.9 billion by the end of March, the Department of Finance said. The department Monday released a sixth notice that it will need more funds to pay for electricity purchases.

All Repaid

State finance officials says the general fund will be repaid for all its electricity spending, and said that any short-term borrowing to cover electricity costs can be done from other budget accounts interest-free.

``The only borrowing would be from one fund to another,'' Finance Department Assistant Director Sandy Harrison said in an interview. ``It will all be made right by the end of the year.''

Treasurer Phil Angelides says he hopes to secure bridge financing to repay the general fund for its electricity purchases before May, when he expects the state to issue about $10 billion in bonds to cover electricity purchases. The legislature last month authorized that bond issue, which would be the biggest municipal bond issue in U.S. history.

That bridge loan is dependent on the state Public Utilities Commission issuing regulations allocating how much of utility customer payments must be dedicated to paying back the loans. That ruling is not expected before the commission's April 3 regular meeting.

At the current rate, the state will have spent the $10 billion that was authorized by the legislature by the end of July. California can issue only about $10 billion in power purchase bonds this year without paying a size premium or forcing a rate increase for utility customers, Angelides said earlier this month. The money might stretch for several more months, depending on the state's success in lowering power costs.

`No Immediate Threat'

So far, credit rating agencies say that the state's financial outlook remains stable, with one issuing a caveat.

Credit rating company Standard & Poor's, which cited California's recent budget surpluses when it upgraded the state's general obligation bonds to ``AA'' last September, warned in January that it might lower the rating if the state spent too much of its cushion on power purchases.

Some of that concern is offset because ``they have made plans to recapitalize the general fund'' with revenue bond sales, backed by utility rates, to cover the purchases, David Hitchcock, a director at S&P said.

Also, ``there's no immediate threat'' of the state draining its cash because it has about $12.5 billion of internal resources in various funds that it can borrow against, Hitchcock said, so ``you'd have to eat through a lot of money'' before concerns arose about the state's cash position.

S&P will wait on taking rating action until it can evaluate the state's rescue plan for the utilities, Hitchcock said.

Deficit in '97

``We're also worried about the effects on the state's economy'' if power shortages discourage companies from locating or expanding in California, Hitchcock said. State officials will keep the credit rating ``as long as they can demonstrate'' a commitment to avoiding general fund deficits, he added.

California last recorded such a deficit in 1997, largely because of lingering effects of a recession in the early 1990s.

PG&E Corp.s' Pacific Gas & Electric and Edison International's Southern California Edison ran up more than $13 billion in debts buying electricity last year at soaring wholesale prices. The state's 1996 deregulation law freed wholesale prices but kept the prices the utilities charged their customers fixed, leaving them unable to recoup their costs.

California stepped in and began buying power in place of the two utilities, along with Sempra Energy's San Diego Gas & Electric, in January. Davis is currently negotiating with the utilities on a financial rescue plan that would give them billions to pay down past debts in return for their 32,000 miles of transmission lines and other assets.

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-- Carl Jenkins (somewherepress@aol.com), March 21, 2001