S&P move signals investors in state bonds to be cautious

Sacramento Bee

As California tried to flex its financial might to put the brakes on the electricity emergency Friday, a credit-rating agency questioned whether the crisis will sap that very strength.

Standard & Poor’s put the state on its CreditWatch list because of “uncertainties surrounding the ability of the state to fashion a long-term solution to its power supply crisis and ensuing financial effect.”

Although the move by S&P had no immediate effect on state finances and officials played down its importance, the action was a signal to investors in state bonds to remain cautious and another blow to California’s psyche as the electricity crisis rages on.

The action by S&P does not affect the state’s positive credit rating, but if that rating were eventually downgraded, the state’s costs of borrowing money would increase.

“We’re in a tough spot here … ,” said state Treasurer Phil Angelides. “It’s just another dose of reality.”

The S&P announcement came during another fevered day at the Capitol. Debate focused on a bill approved Thursday night by the Legislature and signed by Gov. Gray Davis on Friday appropriating $400 million for the state Department of Water Resources to buy electricity for 12 days until lawmakers can work out a permanent solution.

Some argued that the state will be able to recoup its costs, and that putting the state’s good credit on the table will drive down prices.

But others said the state was entering a fiscal black hole, much like the one that sucked in the state’s two investor-owned utilities now facing bankruptcy. The utilities, Pacific Gas and Electric Co. and Southern California Edison Co., were unable to pass on the soaring cost of power to ratepayers because of a rate freeze, causing them to lose about $2 billion a month since last summer.

Standard & Poor’s said state officials’ determination to avoid rate increases as they continue to buy power could eventually drain reserves.

“We’re really looking at what the long-term solution is going to be, and what is going to be the cost,” said Steven Zimmermann, managing director at S&P’s San Francisco office.

While the state has said it won’t use taxpayer funds to subsidize electricity costs, Standard & Poor’s is concerned that just such a scenario could occur, Zimmermann said.

All told, the state treasury isn’t facing an immediate cash crisis over the electricity situation, but that could change quickly, he said.

“They have fairly hefty reserves,” Zimmermann said, “but you can blow through quite a bit of money (quickly).”

State officials insisted again Friday, however, that any solution should not be on the shoulders of ratepayers.

At a news conference Friday, flanked by legislative leaders, Davis made the pledge again: “Every single human being on the planet Earth wants me to raise rates, except me – except me and the people standing behind me. And I believe that no citizen of this state came up to me and demanded that his or her electricity be deregulated.”

Davis said the Legislature’s decision to spend $400 million to buy electricity already has brought stability to the spot market and is driving down prices. The average cost for a megawatt-hour dropped from $580 Wednesday to an estimated $181 today, he said.

“The trend lines are very positive,” he said. “We expect those trends to continue next week.”

Action is expected as early as midweek on a bill that would allow the state to sign long-term contracts with generators that would drive down the cost of power even more.

Debates continued, meanwhile, over how long the state’s money will last and how much of it can be recovered.

Gary Ackerman of the Western Power Trading Forum, an association of wholesalers, said it appears the water department will exhaust that fund in five to eight days.

Ackerman said the water department will start using up the money at an accelerated pace because fewer and fewer wholesalers will be willing to sell to PG&E, Edison and the state’s Independent System Operator, which runs the grid but depends on payments from the utilities to stay current on its bills. With the utilities on the verge of bankruptcy, wholesalers are leery of selling to the ISO now.

The state, like the utilities, will not be able to cover all the costs of electricity with current rates. But officials hold out hope that the money can be recouped.

If the utilities go bankrupt, Angelides said, “we become creditors, and there are significant assets” that the utilities can sell to pay off debts.

On the other hand, if the utilities stabilize and their stock prices go up, the state can seek repayment, at least in part, from utility shareholders.

“It is absolutely appropriate for the state to want to be repaid, not just from the taxpayers but from the shareholder value,” Angelides said.

But at least one part of that scenario is coming under question.

Richard Levin, a veteran utility bankruptcy lawyer, said a bankruptcy filing might leave the state at the back of the line – along with the wholesale electricity suppliers – as it attempts to get repaid. At the front of the line would be various commercial lenders to whom PG&E and Edison have pledged their assets as collateral, he said.

Davis said Friday that the $400 million appropriation bill could help prevent the utilities from going bankrupt. Instead of selling electricity to the utilities, he said, the state could sell directly to ratepayers, keeping the utilities from accumulating more debt.

Consumer groups declared that the $400 million will go down the drain.

“I don’t think there’s anything in this bill that requires these energy companies to give back this money,” said Doug Heller, an advocate with the Foundation for Taxpayer and Consumer Rights.

The foundation says the utilities should be forced to use cash reserves in their other operations and sell assets to cover their debts. And power plants that refuse to sign reasonable long-term power contracts should be seized by the state.

Davis said he has directed the Department of Water Resources to hold a blind auction for power in anticipation of a bill allowing long-term contracts, and that he expects many power generators to submit bids.

“I do believe, my critics notwithstanding, that we will get many offers in the 5- to 5 1/2-cent range, per kilowatt-hour,” he said.

But wholesalers continue to express skepticism.

“You can’t depend on fairy tale economics to get through this serious problem,” Ackerman said.

On Thursday, Davis signed two other bills to deal with the crisis, including one measure to reformulate the boards governing the Independent System Operator and the Power Exchange, which handles electricity trading.

Currently, both boards are made up of stakeholders in the energy marketplace. In particular, the bill reduced the ISO from 18 members to five gubernatorial appointees, and Davis quickly named four members: Michael Kahn of the Electricity Oversight Board; Maria Contreras-Sweet, Davis’ secretary of business, transportation and housing; Michael Florio, senior attorney for The Utility Reform Network; and Carl Guardino, president and chief executive officer of the Silicon Valley Manufacturing Group.