Published Friday, April 20, 2001, in the San Jose Mercury News

CALIFORNIA'S ENERGY CRISIS

Credit-raters put state on watch BY JENNIFER BJORHUS Mercury News All three of the nation's influential judges of credit risk now have California on a credit watch, saying they are deeply concerned about the economic impact of the state's power crisis.

The Fitch credit rating agency made it unanimous Wednesday when it warned that the thickening electricity quagmire, as well as lower than expected tax revenue in February and March, could mean broader risk for the state's budget.

The announcement is a signal that Fitch, too, may downgrade its ratings on California's nearly $30 billion in public debt, a move which could cost taxpayers millions.

The announcement comes as state lawmakers consider a bailout plan for Southern California Edison, Pacific Gas & Electric Co. sits in bankruptcy and state officials bleed through the state's general fund as they buy expensive electricity for consumers.

Earlier this week, Gov. Gray Davis announced that the average bill for electricity purchases has risen from $45.8 million a day in the last week of March to $73 million a day.

Moody's Investors Service and Standard & Poor's have already issued their own credit warnings, although none of the three agencies has downgraded the state's very good double-A credit rating.

Bond ratings are important yardsticks that bankers and investors use to price municipal and corporate bonds. A downgrade would force California to offer bond buyers higher interest rates going forward, costing taxpayers.

The state was last at a lower A rating back in 1994.

Moody's changed California's Aa2 general obligation bond rating outlook from stable to negative on April 6, the day PG&E filed for bankruptcy. Standard & Poor's has had the state's AA rating outlook at negative since January, when the state began buying electricity for the utilities.

The deciding factor for Fitch, said Fitch vice chairman Claire Cohen, was the disagreement over how the money from the new electricity rate increase will be spent.

The California Public Utilities Commission ruled in late March that money generated by higher electricity bills should go first to pay the state Department of Water Resources, which has been buying electricity for the utilities. PG&E has argued that if the state is paid first, there won't be any money left for the company.

The utility is formally challenging the PUC decision, and the move threatens to hold up the estimated $12 billion to $14 billion of bonds the Department of Water Resources plans to issue to buy more electricity.

``With that being appealed, you don't have a clean authorization,'' Cohen said. ``It signals to me that it could delay the financing process.''

A second concern is that the state isn't collecting as much in taxes as expected, Cohen said. Tax collections for both February and March were below forecast. The amount of personal income tax the state collected in those months fell short by $455 million, or 14 percent less than expected.

Cohen said she made her decision before hearing that the state's power costs now exceed $70 million a day. Cohen and David Hitchcock, the California analyst for Standard & Poor's, agreed those rising costs are a definite concern.

``It doesn't take much of a change in economic growth to make some of these projected fund balances disappear and so we're very worried about what the current economic activity is, particularly in Northern California with some of the problems with the high-tech area,'' Hitchcock told analysts and investors last week in a conference call.

Other economy-watchers expressed concern.

Sandy Harrison, assistant director of the state Department of Finance, said the move reinforced the importance of solving the power problems soon.

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-- Martin Thompson (mthom1927@aol.com), April 20, 2001