Underwriters wary of bond deal

State needs funds to cover costs of buying power

Greg Lucas, Sacramento Bureau Chief Thursday, June 7, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/06/07/MN168905.DTL

Sacramento -- A $12.5 billion bonds-for-electricity deal considered critical to California's budget solvency may be delayed unless the state takes steps quickly to assure underwriters that the bonds are a sound investment.

Backers want greater certainty that buyers of the bonds will be guaranteed revenue from utility ratepayers before taking the sale to market, according to state bankers and lawmakers.

Without those assurances, the bond sale could be delayed or, if it is not, the selling costs could be higher for the state if buyers see the bond issue as a riskier investment. Providing that certainty, however, could mean a rate increase should the state's energy costs rise.

"The bond market simply is not going to respond to a sale where there is not an assured revenue stream," said Sen. Steve Peace, D-Chula Vista, chairman of the upper house's budget committee. "And that revenue stream is not there yet."

STATE BUDGET AT RISK Without the bond sale, the state budget would be forced to absorb the more than $8 billion it has spent since January to purchase power for cash-strapped utilities. A financial blow of that size could only be absorbed by making deep cuts in spending, raising taxes or both.

The three state budget proposals created by the Democratic governor, the Assembly and the Senate all assume the bonds will be sold and the state's coffers replenished.

But a lot must be done to accomplish that.

Although underwriters and bond lawyers working with State Treasurer Phil Angelides declined to comment, Angelides and other sources close to the negotiations said several key elements necessary to market the bonds are not in place.

The first of these is that buyers of the bonds want to be sure they will get paid.

The plan is for a portion of each utility customer's bill to be devoted to paying off bond holders.

Essential to the bond deal is a formal agreement between the Public Utilities Commission and the state that whatever costs the state incurs, buying power will be covered by the rates charged utility customers.

That pledge, which could mean a rate increase if energy prices don't keep falling, is intended to give bond buyers the confidence there will be enough revenue to pay them off.

The Department of Water Resources, which buys the state's power, estimates that it needs about $700 million a month to cover its costs -- a total of $9.2 billion through June 2002.

The assumption is that as energy prices fall, state costs will drop, freeing up cash to pay off bond holders.

"Ratepayer revenues, including the most recent rate increase, are expected to cover all of (the state's) costs and the debt service," said Tim Gage, director of Gov. Gray Davis' Department of Finance, which is involved in the negotiations with the PUC.

PUC DUBIOUS ABOUT DEAL Participants in the negotiations say the PUC is reluctant to sign the agreement because it would surrender its power over deciding whether the state spent more than it should in buying power.

PUC Commissioner Jeff Brown said that giving a blanket assurance the state's expenses will be covered might lead to an automatic rate increase if current rates turn out to be too low to cover both utility costs and the state's power purchases.

"The PUC has rate setting authority," Brown said. "We have to be in a position to protect the ratepayers."

But Brown said the PUC has just begun the process of determining how the money will be shared, an issue that is likely to be hotly contested over the next month.

UNRESOLVED ISSUES There are still other issues that must be resolved before the bond sale.

The state must sign agreements with Pacific Gas and Electric Co., Southern California Edison and San Diego Gas & Electric on how the utilities will route ratepayer money to the state to pay its costs.

And the PUC must increase rates for SDG&E customers because higher rates for those ratepayers is part of the revenue flow to the state, Angelides said.

Peace and others predict that the bonds will eventually be sold, probably at high yields for investors and higher costs for the state.

The sale probably won't happen in August as first hoped, however.

Angelides said the two weeks before Labor Day are poor ones to sell the bonds because many so people are on vacation. He predicts a sale some time in September.

That would put the state uncomfortably close to the time it will no longer be able to raid various funds to cover the drain on the general fund from revenue buys.

"It's a pretty narrow window that has to be met," Angelides said.

-- Martin Thompson (mthom1927@aol.com), June 08, 2001