Potential Buyers Eye California’s Energy Bonds for Decent Income

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The San Diego Union-Tribune

The California electricity crisis may have cost state consumers billions of dollars, but it becomes an investment opportunity today at least for some.

The opportunity arises because the state begins a $12 billion bond sale to cover costs resulting from the crisis. The proceeds of the offering will pay back $6.5 billion to the state itself, along with bank loans needed because of soaring power prices in 2001 and 2002.

As the state’s electric deregulation plan descended into debacle, the California Department of Water Resources was forced to replace utilities as the state’s major electric purchaser and incurred the debt now set for repayment.

The bonds are being hailed by potential buyers as a good source of income during a period of falling interest rates. But consumer advocates say the bonds will burden state residents with what amounts to a long-term mortgage and will continue a transfer of wealth to the more affluent.

The tax-free bonds will cost $5,000 each, have maturities of up to 20 years and be sold by most major brokerages, at least one of which Charles Schwab will require a minimum purchase of $10,000. Interest rates will vary with maturity dates but are expected to range from about 2.7 percent for three-year bonds to about 5.5 percent for 20-year issues.

Final interest rates will be determined at the close of the three-day offering period, which ends Tuesday. Investors will then have the opportunity to cancel their orders should rates vary from expected levels.

Investor interest in the bonds should be high, according to the California Municipal Bond Advisor, a newsletter for investors based in Palm Springs. Zane Mann, editor of the newsletter, predicts investors will be particularly hungry for bonds yielding above 5 percent.

Mann further noted that investors should be assured by the nearly $1.8 billion reserve fund that will also be created from the sale. The reserve will be used to insure the timeliness of the twice yearly interest payments to investors. Some of the bonds will also be insured, an additional security feature for investors.

JPMorgan Chase expects from 5 to 15 percent of the bonds will be sold to smaller investors, with the bulk of the huge offering bought by institutions.

Electricity customers of San Diego Gas & Electric, Pacific Gas & Electric and Southern California Edison, meanwhile, will be making payments on the bonds through their monthly utility bills.

Next year, the bond charges will cost SDG&E customers about $ 100 million, a sum that will rise in subsequent years. It remains unclear if the bond costs can be met by current SDG&E rates or will require a rate hike. That question is linked to the fate of hundreds of millions of dollars in disputed profits SDG&E earned from power sales during the crisis.

The California Public Utilities Commission has ordered those profits returned to customers, but SDG&E is challenging the ruling.

The commission is obligated to ensure that customers of California’s three major utilities will pay about $850 million in bond charges next year and higher amounts in years to come.

“Everybody in California has a new mortgage that we will be forced to pay off for two decades and that is most unfortunate,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, a long-time opponent of the electricity deregulation that spawned the power crisis.

The group estimates the crisis has cost state residents more than $70 billion. Rosenfield said the power crisis costs dwarf the damage done to investors of Enron Corp. or any of the other high-profile corporate meltdowns.

“From beginning to end, deregulation has been a synonym for making a few people wealthy at the expense of most Californians,” he added.

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