http://www.latimes.com/news/local/la-100401energy.story

Power Bill Impasse May Jolt Taxpayer

Finances: PUC rejection of Davis bond proposal leaves state with no fallback plan and facing $250,000 a day extra in interest on its loans.

By MIGUEL BUSTILLO and DAN MORAIN Times Staff Writers

October 4 2001

SACRAMENTO -- California has no fallback plan to repay the state budget for billions spent on electricity this year, and as early as next week taxpayers could be facing sharply escalating costs as a result.

For most of the year, the state has been buying electricity on behalf of its three large private utility companies, which have not been able to buy power on their own because they are deemed not credit-worthy. The utilities then sell the electricity to consumers.

Buying that power has cost the state about $10 billion. To reimburse the treasury, Gov. Gray Davis has planned to float a $12.5-billion bond issue. The bonds would be paid off by using part of the money consumers pay for electricity.

But on Tuesday, the state Public Utilities Commission, voting 4 to 1, defeated the plan Davis had put forward that would guarantee that there would be enough money to pay off the bonds.

Wednesday, Davis and his aides began considering alternatives, but the Plan B list is decidedly short, primarily because the Davis administration and the PUC remain at loggerheads over how to finance the costs of the energy crisis.

Officials have considered, but appear to have rejected, trying to bypass the PUC. That would result in lawsuits that could delay the bond sale further, they believe.

Davis also has rejected calling lawmakers back into session to seek a legislative solution.

That leaves the administration with having to renegotiate with the PUC. Though Davis has appointed three of the five commissioners, relations between Davis and his appointees, particularly PUC President Loretta M. Lynch, increasingly are strained.

"We're going to have to have a good sense of what [Lynch] cares about. We don't have a good sense of that," a top Davis administration aide said, requesting anonymity.

California has enough money to get through the current budget year without any problems after recently borrowing $5.7 billion, according to state Controller Kathleen Connell and Treasurer Phil Angelides.

But if no solution is reached by next week to allow the record bond sale to move forward, the state will be in default on a $4.3-billion loan it took out earlier to finance power costs. A default would trigger an interest-rate increase that would add an estimated $250,000 a day to the state's expenses.

And if no solution is reached quickly in coming weeks, California may have a hard time floating the bonds before next summer. That would leave a hole in the next budget as large as $10 billion, requiring deep cuts in vital government programs.

"If we don't do this and allow the bonds to move forward, the hole in the budget becomes crippling," said Assembly Speaker Bob Hertzberg (D-Sherman Oaks). "This is not about electricity anymore, this is about the fundamental services the state provides."

Publicly, Lynch continues to hold out hope that Davis will accept her preferred Plan B, and sign legislation she backs that would allow the bond deal to proceed on a different path. But that bill, SB 18xx by Senate President Pro Tem John Burton (D-San Francisco), repeatedly has been declared dead on arrival by administration officials.

The Davis administration, meanwhile, hopes that Lynch will be more willing to negotiate after she realizes that Davis is serious about vetoing SB 18xx and will then reconsider Tuesday's vote.

"Maybe then the PUC will understand he is serious and that their action puts the general fund at great risk," said Davis advisor Richard Katz.

The dispute threatens the state budget, but what it is primarily about is the estimated $46 billion in long-term electricity contracts that the Davis administration signed earlier this year to stabilize the power market and ensure an adequate supply of electricity.

Under the state's plan to sell energy bonds, the PUC would essentially have to rubber-stamp those contracts and pass the costs on to consumers. The PUC would agree to raise power rates if necessary to guarantee that consumer bills would generate enough money to pay for the electricity bought under the contracts as well as the cost of the bonds.

The California Department of Water Resources cut the controversial power deals this spring and summer, after electricity prices reached exorbitant levels, the state's private utilities fell into deep debt and the threat of massive blackouts became a major cause for concern.

But power prices have since plummeted, and megawatts can now be purchased for far less on the open market than many of the contracts lock in for the next decade.

Critics of the deals, including Lynch and several lawmakers, would like to see them renegotiated. They believe that if the PUC approves a plan to go forward with bonds that are specifically tied to the power contracts, they will never be able to redo the contracts after the bonds are sold.

The Davis-Angelides proposal "absolutely locks down contracts, preventing any kind of renegotiation or reform outside the court," Lynch said.

Burton's bill seeks to allow the contracts to be revisited, by essentially separating the bond deal from the power contracts. The bill would guarantee money to pay off the bond deal--covering what the state already has spent on power--but would not necessarily guarantee money for future purchases made under the contracts.

Lynch argues that there is enough time left to work out a solution. Even if the PUC had allowed the Davis-Angelides bond deal to proceed this week, she said, lawsuits from utilities and power generators that dislike the way it divides electric rates would almost certainly have delayed the bonds. The Burton bill is a simpler, cheaper way to allow the bonds to be paid off, she said.

"It is a fantasy and a fallacy that the [original] bonds will be issued in this fiscal year--even if the PUC had done everything the treasurer claims was needed to have been done," Lynch said. "Litigation stands in the way, and the litigation is real."

Angelides and administration officials, however, say Burton's bill is equally fraught with legal risk, is technically unworkable and fails to reflect the reality of California's current fiscal predicament.

At the beginning of the year, California might have been able to craft a framework for financing the energy crisis similar to the one Burton and Lynch support, said Barry Goode, the governor's legal affairs secretary. But now is simply too late to change course, Goode said, because the state has incurred a series of major financial obligations all based on the premise that it would sell the bonds to pay them back.

The most pressing of those obligations may now be the $4.3-billion short-term loan from JP Morgan, which has an escalating rate of interest the longer it goes unpaid. The loan was also supposed to be paid back by the $12.5-billion power bonds. As part of the contract between the state and the investment bank, the loan goes into default if the state is not proceeding with the bond financing by Oct. 10.

A spokeswoman for JP Morgan, which is also the lead underwriter on the bond deal, said the firm continues to believe that the state will move forward with the financing and has no plans to take any action against it for violating the terms of the loan.

"We stand ready to sell the bonds, and it's a great market to sell bonds," the firm said in a statement. "We're disappointed that the rate agreement did not pass."

However, Davis lieutenants note that the bank will be legally entitled to more money and could take a more aggressive stance if the PUC does not approve a plan soon.

"By holding out this false hope that SB 18xx would be approved," Goode said, "the PUC is going to cost the ratepayers $250,000 a day." For information about reprinting this article, go to http://www.lats.com/rights/register.htm

-- Martin Thompson (mthom1927@aol.com), October 04, 2001