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May 16, 2001

California May Face a Cash Crunch

Due to Mounting Electricity Costs By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL

California's mounting electricity expenditures are putting the state on a slippery slope that could lead to a cash crunch later this year.

And even if the nation's most economically important state is able to arrest the slide by raising billions of dollars in bonds as it currently anticipates, residents will still face spiraling electricity rates and a mountain of state debt that will affect them for years to come.

That is the grim assessment of credit analysts and even the state treasurer, who is attempting to assess the long-term costs of a three-year-old experiment in electricity deregulation that has gone badly awry. Sums up Rich Raphael, a credit analyst at Fitch: "The situation is serious, and the state is taking on more and more risk."

Tuesday, Moody's Investors Service Inc. lowered its ratings on $25.5 billion of state of California bonds, citing "substantial revenue deterioration" caused by the state's slowing economy and "financial risks" posed by state electricity woes. Last month, Standard & Poor's Ratings Group took a similar step, shortly after the state's biggest investor-owned utility, Pacific Gas & Electric Co. sought bankruptcy-court protection. Moody's action lowered the rating on $19.8 billion worth of general obligation bonds to Aa3 from Aa2 and $5.7 billion in lease revenue bonds to A1 from Aa3.

Pricing-Data Blackout

Moody's says it believes that by August the state treasury will have spent $10 billion for power, but it conceded that a blackout on pricing information imposed by state officials means estimates are partly guesswork. Raymond Murphy, an analyst in Moody's public-finance group, said "not very much" information has been given to his unit detailing state expenditures for electricity. This is unusual, both because the state is a public entity and because credit-rating agencies usually are given full access to internal data by clients.

California Utility Board Approves Electricity Rate Hike of Up to 47%

S&P Downgrades California's Bonds as State Looks for More Power Funds (April 25) The state has been the largest buyer of electricity in the nation since January, when runaway wholesale power costs outstripped the purchasing ability of the state's biggest investor-owned utilities, Edison International's Southern California Edison unit and PG&E Corp.'s Pacific Gas & Electric unit. To date, the state has allocated $6.8 billion for electricity purchases.

How much the state is paying daily for electricity isn't clear. Since April, the state Department of Water Resources, which is purchasing power on behalf of the utilities, has enforced a ban on the public release of cost information.

It pressured the California Independent System Operator to suspend posting of that information on the ISO's Web site. In a letter sent to the ISO, Water Resources Deputy Director Ray Hart said "premature disclosure" of price data "disadvantages" the state in its quest to buy electricity at the lowest cost.

At the time, out-of-state generators were being paid an average of $520 per megawatt hour for power supplied to the state grid operator.

In a Sunday television interview, Mr. Davis said the state last week paid as much as $1,900 per megawatt hour for power.

Trouble for State Coffers

If California is paying that kind of price very often, it spells big trouble for the state's ability to replenish its coffers. Last week, the state Legislature approved a plan to issue a record $13.4 billion in revenue bonds, but they can't be issued before mid-August. If there is further delay, says State Treasurer Philip Angelides, the state will have "significantly depleted" the funds it can tap internally.

Indeed, Mr. Angelides says the state will have enough internal resources to meet its power-purchase obligations through the fall only if average spot prices are no higher than $195 per megawatt hour during the critical July-through-September time period. If daily prices are substantially higher than that "they will bust the plan," he says. The result, credit analysts fear, would be a liquidity crisis. The state would have essentially run out of money before receiving bond proceeds needed to repay the general fund.

Complicating matters is an expected sharp drop in tax receipts. The state said it expects annual revenue to decline by $3.2 billion for fiscal 2002, the first drop since 1992.

Some people disagree that the state is substantially at risk. S. David Freeman, an energy adviser to Mr. Davis, says the state is following a "sensible plan" to stretch out power costs into future years, when they are expected to drop substantially. Mr. Freeman argues that higher rates will prompt greater conservation, reducing the amount of money the state has to spend. "All this stuff about the economy going under is a bunch of hogwash," Mr. Freeman says.

Write to Rebecca Smith at rebecca.smith@wsj.com

http://interactive.wsj.com/articles/SB989956725720482663.htm

-- Martin Thompson (mthom1927@aol.com), May 16, 2001