Davis, PUC come to agreement to let state go into bond market

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Contra Costa Times

WALNUT CREEK, Calif. _ A high stakes poker game was drawing to a close this week when Gov. Gray Davis and utility regulators reached a tentative agreement that would allow the state to fill a gaping, $6 billion hole in the budget.

Under the terms of a proposed agreement announced Thursday, utility regulators would gain a measure of authority over the electricity purchasing program run by the Department of Water Resources.

The agreement, which still must be approved by the Public Utilities Commission and the DWR but appears to have the blessing of both, would resolve a major power struggle that for months has held up the issuance of bonds needed to repay more than $6 billion borrowed from taxpayers for electricity last year.

“This is a significant step in the right direction to get energy bonds sold,” the governor said.

The proposed agreement guarantees that utility customers will repay the state’s electricity expenses. In reaching the agreement, though, the administration made several concessions to regulators in order to speed the issuance of bonds and avoid adding to a budget deficit that already is estimated at $12.5 billion.

The agreement does little to improve the terms of California’s $43 billion portfolio of long-term electricity contracts, the main reason state regulators cited for rejecting earlier proposals.

Although it does call on the state to continue trying to renegotiate those contracts, those talks have been underway for months with little so far to show for them.

“There’s been a significant change in attitude,” said Loretta Lynch, the PUC president. “We have a genuine, unified effort to renegotiate these contracts. We didn’t have that last October.”

Lynch, a Davis appointee, shocked the governor last fall when she swung the commission against a carefully crafted draft proposal from the administration and forced four months of high pressure negotiations over what role regulators would retain over electricity purchasing by the state.

At issue is a regulatory agreement that is needed to spell out terms to guarantee investors that they will be repaid in a bond issue that could run as high as $12.5 billion, a figure that would make it the largest municipal bond in U.S. history.

The proposed agreement released on Thursday would give the PUC more authority than it would have under the agreement proposed last fall.

Under the new agreement, DWR officials would have to consult PUC officials before entering into new long-term electricity contracts, submit detailed monthly reports to regulators on their purchases and allow the PUC to have a say in the terms of the bonds to be issued.

Most significantly, perhaps, is the departure from the earlier plan to lump into one pot the money that would be used to pay bond investors and power companies who sell electricity to the state.

Under the proposed agreement, there would be two new lines on utility customers’ electricity bills _ one for a fund that would pay for DWR’s program, and a second that would repay investors.

The significance of that split is in dispute, but Lynch insists that without it the state government would have to continue buying and selling electricity for the life of the bonds, or about 15 years. That is because in earlier plans, the repayment of bonds relied on the sales of DWR power.

“DWR has had an evolution about what its role should be,” Lynch said.

Jeff Brown, another Davis appointee to the PUC who has been the governor’s closest ally on the commission, said there was no practical difference whether investors and generators were paid out of one pot or two.

“The importance to me is theoretic,” he said.

Brown said there was “no doubt” the agreement would be approved, and Commissioner Richard Bilas said the pressure to approve an agreement was building.

“We’re beginning to run out of time,” Bilas said. “These bonds have to be floated or the state is in severe trouble.”

Consumer advocate Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights, said that the agreement nevertheless hands over too much independence to state power buyers.

“The PUC has proposed to hand over scrutiny of electricity rates to an unaccountable agency,” Heller said.

But legislative leaders sounded mostly upbeat about the agreement.

“We hear that this agreement can be implemented without a rate increase, which is a positive and it helps get DWR out of the power buying business,” said Senate President Pro Tem John Burton, D-San Francisco.

And Patricia Soto, spokeswoman for Assemblyman Herb Wesson, a Los Angeles area Democrat who will take over as Assembly speaker next week, said, “Anything that speeds up the sale of bonds so that taxpayers can get the money back they spent on electricity is a step in the right direction.”

The commission is scheduled to vote on the new rate agreement Feb. 21.

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