The first news article seen that expressly cites California's impending insolvency and Bankruptcy. This hit, coincidentally on the same day as the first "wave" of summer rolling Blackouts. Today is a major Y2K "milestone" indeed, at T + 493 Days.

Hyperlink: http://www.nctimes.com/news/2001/20010506/64713.html

Analysts, officials say state running out of cash

DAN McSWAIN, Staff writer

SACRAMENTO ---- An energy crisis plan by Gov. Gray Davis that bets on lower electricity costs has lawmakers, state finance officials and market analysts worried that the California government, which has already run through its cash reserves in less than four months buying power for utilities, could be bankrupt by October.

Last week, the governor began lobbying for a plan to spend $27 billion on power for the next two years. He would raise the money through rate hikes ---- bills would go up 20 percent in San Diego County and most of the state ---- and by borrowing $12.5 billion in bonds.

Key to the plan is an assumption that the state will pay less for power this summer than it has this spring, even though hot weather typically drives prices to yearly highs as consumers turn on energy-hungry air conditioners.

Advisers to Davis say the state will rein in the runaway electricity market through conservation, smart buying and a boost in power production.

The plan was met with skepticism by lawmakers and near-ridicule among power companies and market-watchers.

"This summer is almost saucered and blown," said Gary Ackerman, director of the Western Power Trading Forum, a group that lobbies for power companies.

"We're going to have blackouts, we're going to have high prices, and we're going to have rate increases," he said.

Based on recent market prices, analysts say that the state could spend $70 billion this year alone for power ---- $2,000 for every person.

The governor is betting it will be much less.

Now policy-makers are pondering the consequences if Davis has guessed wrong: Will power costs outstrip the state's ability to borrow, sparking a credit crisis that could raise prices further? And will the state be forced to dump a big rate increase on consumers, possibly wrecking a weak economy?

State running out of cash

In fact, a major credit rating agency says the state is already in trouble.

"We do feel the general fund is at risk," said David Hitchcock, a director in the municipal bond group of Standard & Poor's.

California is nearly out of cash right now and will have to begin borrowing "shortly," he said.

Standard & Poor's is an influential group of analysts which evaluates the credit-worthiness of companies and governments. A negative report by the credit agency can raise borrowing costs and, if ratings fall enough, can scare off lenders.

Hitchcock said his agency lowered the state's credit rating on April 24 after getting an advance look at the power-puchasing plan the governor released to lawmakers last week. "We were privy to that plan before it came out," he said.

Even after the reduction, the state's rating remains barely in the top tier after years of booming tax revenues and economic growth. But a further downgrade would add to interest costs ---- already projected to be half a billion dollars a year ---- that would be borne by consumers under the governor's plan.

Republicans have blocked a bill in the state Legislature to issue $10 billion in bonds.

Democrats have generally argued that electricity consumers should repay the Treasury for power purchases, while some Republicans have demanded that state money be used to offset some of the historic run-up in wholesale prices.

Republican strategists also sense that Davis is vulnerable on the issue: legislative staffers say a recent internal poll showed that voters are starting to grumble about a second plan of the governor's to pay the power-purchasing debts of San Diego Gas & Electric Co., Southern California Edison and Pacific Gas & Electric.

The state has been buying power since January because Edison and PG&E stopped paying their bills to suppliers. SDG&E continued to pay its bills, but by February the utility said lenders were revoking credit, forcing the state to also begin buying the utility's electricity.

More than $5 billion has been drained from cash reserves, erasing most of a projected state budget surplus.

Hitchcock said the state retains vast borrowing power without the bonds, with the ability to grab $20 billion to $27 billion from existing programs and tax revenues. But with the power purchases, he said even that money will be quickly used up.

State Treasurer Phil Angelides said California will exhaust both its cash and its ability to borrow by the end of September unless the bond sale is approved.

"If we don't sell these bonds, by October the state will be in the same shape as PG&E and Edison," Angelides said.

Getting the money

In March, state regulators approved a rate increase for customers of Edison and PG&E which is central to the governor's plan. A similar rate hike for SDG&E customers is expected soon.

Less clear is how the state will get its hands on the money.

Both big utilities have sued in federal court, saying that regulators should allow the companies to pay their debts and internal costs before reimbursing state buyers.

Last week, a federal judge dismissed the PG&E lawsuit, saying the utility hadn't exhausted the regulatory process. The matter is still very much alive, analysts say, and the outcome could force Davis to ask for even higher rates to cover state purchases.

Then there is the expectation that power prices will fall.

From January through March, a period of low power consumption, state buyers paid an average 28.5 cents per kilowatt hour for electricity, said a briefing document distributed to lawmakers by Davis advisers.

The governor's plan predicts that cost will fall to 17.3 cents per kilowatt hour in July through September, the hottest months of the year in California.

"I hope he's right," said William Hogan, an economist at Harvard University's electricity think tank. "It seems incredibly optimistic to me." On Friday, the price was 52.5 cents per kilowatt hour for electricity contracts for delivery in August at a key purchasing hub.

State Controller Kathleen Connell, a frequent critic of the governor, said last week that the state would run through the $27 billion envisaged by the Davis plan by February or March ---- even if the lower costs come true.

Buyers bet on conservation

California's $27 billion gamble is managed from an unmarked building, pushed back from tree-lined streets in a strip mall in a Sacramento suburb.

The building houses the nascent power trading operation of the Department of Water Resources, an obscure agency that until January pumped water from Northern California to San Diego County, among other destinations.

Ray Hart, a 23-year veteran and deputy director of the department, supervises what has become the capitalist world's single biggest purchaser of electricity.

He said in a recent interview that the agency has overcome a slow start to become a nimble trader, locking up cheap contracts for the most expensive, "super peak" hours of the day this summer.

The governor's plan predicts that people and businesses will cut electricity consumption by 7 percent, shrinking the market and catching generators "long" on power.

Electricity can't be stored in large amounts, so traders who buy power contracts agree to pay for production, betting that consumers will use the electricity. If cool weather or conservation causes demand to fall, economic theory dictates that prices will collapse as traders scramble to unload their contracts.

"Conservation is the most important thing," Hart said. "If we get conservation, we'll catch these guys long and we'll get rational prices." But prices rose this winter during falling demand, causing Davis and other state officials to charge that generators were withholding production to create an artificial shortage, a charge the companies deny.

Joseph Fichera, the governor's financial adviser who briefed lawmakers on the plan, said state buyers are hoping that federal scrutiny will eliminate any withholding of electricity.

"If they truly withhold power, they can cause prices to go nuts," Hart said.

The governor's plan also amounts to a bet that Hart and his buyers can beat some of the most experienced electricity traders in the nation, who have outmaneuvered regulators and buyers for 11 months.

Industry veterans are skeptical. They point to the futures markets, where power traders are betting that summer prices will be more than double the estimates of state buyers.

"So they know more than the market?" said Ackerman, the spokesman for power marketers. "I find that unbelievable because traders make their living and their bonuses on the bid/ask.

"I would have to go with the marketers, because they put their own money on the line," he said. "The state is relying on consultants, who get paid no matter what happens."

Contact staff writer Dan McSwain at (760) 740-3514 or dmcswain@nctimes.com webmaster@nctimes.com editor@nctimes.com

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-- Robert Riggs (rxr.999@worldnet.att.net), May 08, 2001