The Bond Buyer

SAN FRANCISCO: The California Department of Water Resources is a step closer to issuing $11.1 billion of power purchase revenue bonds now that the state Public Utilities Commission has affirmed orders it set out last month detailing how the bonds will be repaid.

In a closed session late Thursday, the commission decided not to reconsider its approval of a rate agreement that spells out how the bonds will be paid off by customers of the investor-owned utilities for which California has purchased power since January 2001.

Any appeals to the PUC‘s decisions must now be heard by the state Supreme Court and must be filed within 30 days.

While an official bond sale schedule will not be set until the court hears any appeals, market participants are hopeful the deal can be priced before the end of the year.

Pacific Gas & Electric Co., California’s largest utility, earlier this month filed the only complaint against the rate agreement, saying it establishes a secretive rate-setting process by allowing the DWR to dictate its revenue needs.

PG&E did not return calls asking if they expect to appeal to the Supreme Court.

The commission also affirmed DWR’s request to get $9.045 billion from ratepayers for power purchased last year and this year.

Earlier in the meeting, commissioners voted 3-2 to maintain a Sept. 20, 2001, cutoff date, after which large utility customers could no longer buy electricity from a provider other than their local utility.

For months the commission had discussed rolling back the date for cutting off so-called direct access to July 1, 2001.

The commission said it will consider imposing surcharges, or exit fees, on those customers who opted for direct access after July 1, 2001. Doing so would force such customers to pay for a share of the costs of power bought by the state during last year’s energy crisis and committed to in DWR’s long-term contracts extending years into the future.

Besides industrial companies and businesses, many public entities, including the University of California system, Los Angeles Unified School District, San Diego County, and other cities and transit districts benefit from direct access contracts that allow then to buy cheaper power. Direct access was instituted as part of California’s ill-fated plan to deregulate its electricity market.

Suspending direct access was necessary to assure potential DWR bondholders there would be a stable customer base to pay off the debt. In July 2001 only about 2% of the state’s energy load was provided through direct access contracts, according to the state. By September, that figure had jumped to 12%.

The issue of when to cut off direct access divided PUC commissioners.

“We need to talk about the proper level of surcharges that will have to be placed on customers of direct access to ensure DWR gets paid and there is basic fairness and equity with the customers of the IOUs,” said Michael Peevey, the commission’s newest member.

A former executive at Southern California Edison and other energy businesses, Peevey was appointed by Gov. Gray Davis earlier this month.

Commissioners Henry Duque and Geoffrey Brown also voted in favor of the Sept. 20 date, saying the state needed to maintain regulatory consistency. Commission president Loretta Lynch and commissioner Carl Wood supported the retroactive July 1 cutoff date because it would have shifted more costs to large customers who left the system and away from residential customers still buying power from the utilities.

Consumer advocates also wanted the commission to suspend direct access as of July 1.

“This decision allows the state’s biggest businesses to escape the high costs of last year’s energy crisis and forces residential ratepayers and small businesses to pay the bill,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights. “Small consumers will have to pay billions of dollars for the extra power that the state bought for the businesses that have been allowed to fly the coop.”

In addition to allowing the DWR to move closer to a bond sale, final confirmation of the rate agreement would allow the department to cease paying an extra 2% in interest on $4.3 billion of bridge loans borrowed from private banks in June of last year to have cash on hand to buy power. The penalty was added after the loans weren’t paid off when originally due last October.