NYT - latest on CA bond offering.
June 30, 2001
Official Questions the Math Behind California's Energy
Bond Issue
By LAURA M. HOLSON
SACRAMENTO, June 29 — To hear California's state controller tell it, the
problem with the state's plans for a $13.4 billion bond sale, the largest in history,
is that the math does not add up.
By September, Controller Kathleen Connell calculates, even before the bonds are sold, the
state's general fund will have spent $8 billion buying electricity on behalf of utilities so
short of cash that power producers refuse to do business with them. Plus, Gov. Gray
Davis has just arranged a short-term loan of $4.3 billion to buy additional power.
So by the time the bonds go to market in October — as currently planned, after a series
of postponements — only about $1 billion of the proceeds will be left to buy additional
power, Ms. Connell calculates. If energy prices spike during the summer, the state might
have to ask Wall Street for even more money. Or it might have to delay paying back the
general fund, which normally is used to finance education and build roads.
"This is a tremendously risky strategy," said Ms. Connell, who is the state's elected fiscal
watchdog. Like the governor, she is a Democrat.
Another Democrat, State Treasurer Philip Angelides, has to persuade investors to buy the
bonds. And even Mr. Angelides is concerned that if various state officials fail to make
some critical decisions in the next few weeks, plans for an October bond sale will be in
jeopardy.
"Our backs are against the wall," he said in a recent interview.
California's energy crisis may be easing — electricity prices have come down;
conservation has helped stave off a predicted wave of blackouts; the first big power
plant built in the state since 1988 has just been switched on — but Wall Street remains
focused on the negatives.
In a conference call last week, bond investors peppered Mr. Angelides with questions for
45 minutes. Most wanted assurances that ratepayers' checks would not be diverted from
paying off the bonds.
But that, said Bernie Schroer, manager of the Franklin California Tax-Free Income Fund
— who could be a big buyer at the offering — is just one of the guarantees that investors
are demanding.
He wants to see evidence that the California Public Utilities Commission will keep raising
rates to pay for state power purchases. The judge overseeing the bankruptcy of Pacific
Gas and Electric, a unit of the PG&E Corporation, will need to go along with the
commission's recommendations. And the state, Mr. Schroer added, will need to spell out
more clearly how much energy it is buying under long-term contracts, and at what
prices.
Only then, he said, will investors be able to figure out how much revenue is coming in
and how much money is being spent.
"They claim they have it all down pat but investors should be wary," said Mr. Schroer of
Franklin Templeton Investments, whose $13.6 billion fund is the biggest California
tax-free income fund. "There is no use getting excited, because they have to come up
with these numbers, and they have to be real."
It does not help that Ms. Connell and Mr. Angelides are barely on speaking terms. Ms.
Connell said they had not talked about the power crisis in six months.
"I've been waiting for him to call me and tell me when he's ready to talk," she explained.
Mr. Angelides countered, "I'm ready to talk any day of the week." But he does not plan
to pick up the phone first. "The number," he said, "is published."
As a practical matter, prospects for the bond issue hinge mainly on whether Mr.
Angelides can coax regulators to adhere to a timetable that would ready the bonds for
sale this fall. On various fronts, both legislators and regulators have failed to meet
self-imposed deadlines since the energy crisis exploded earlier this year, and the bond
offering itself has been postponed three times, from June to August to September and,
now, October.
The treasurer is asking the utilities commission to settle several issues. For one, the
utilities must be authorized to collect money on behalf of the state. The commission, too,
must strike an agreement with the state to guarantee that a certain percentage of the
revenue paid by utility customers be set aside to pay off the bonds, Mr. Angelides said.
For the bonds to be sold in October, these issues need to be resolved by the commission
by mid-July, he said. Then, interested parties — including the utilities and consumer
groups — have 30 days to appeal, and after that another 30 days to file a lawsuit if they
are still unsatisfied. By then it would be well into September.
A spokeswoman for Mr. Angelides said today that the treasurer was considering not
asking the commission for a decision until mid-August, when provisions of the
bond-authorization law would kick in shortening the time consumer groups and utilities
would have to appeal.
The commission has been chided for missing deadlines before, a criticism its president,
Loretta Lynch, scoffs at. "Everyone wants to bash the P.U.C.," she said. Still, just this
week, the commission delayed two items related to the bond sale that had been on its
agenda for Thursday.
Then there are bankruptcy issues. Earlier this month, Pacific Gas and Electric filed a suit
claiming that regulators were already giving the state too much of the revenue being
collected from customers, limiting the amount available to pay off the utility's debts.
It does not help having so many parties in the process who are unused to dealing with
each other, including legislators, other elected officials, regulators and a bankruptcy
judge. "One of the frustrations is I don't know who to negotiate with," said State Senator
Jim Brulte, the Republican minority leader.
Mr. Angelides said the structure of the bond offering would be determined in August. But
he offered this much detail last week: There will be a mix of tax-exempt and taxable
bonds, with a final maturity in 2016. About $6 billion will be in tax-exempt fixed-rate
bonds, about $4 billion in tax-exempt variable-rate bonds and the rest in taxable fixed-
and variable-rate bonds.
Ultimately, the offering will have to provide investors enough reward to justify the risks.
On Wednesday, a subsidiary of Edison International, which owns the cash-poor
Southern California Edison utility, was forced to reduce a $1.2 billion bond offering to
$800 million and pay an eye-popping 14 percent return in a private sale, analysts said.
Whether the utility can stay out of bankruptcy court, though, is becoming less clear.
For the state's part, Governor Davis's success in arranging the $4.3 billion in short-term
loans prompted Standard & Poor's to remove the state from a credit review. Senator
Brulte said developments like that would determine the fate of California's financing
plans. "At the end of the day," he said, "the investors will assess the validity of the bonds,
not a political person in Sacramento."
And investors remain skeptical. "I think we are in the same boat as everyone," said Mr.
Schroer, the fund manager. "Quit the talk, and when you have the facts then come back
to us."
Copyright 2001 The New York Times Company |
