Posted on 08/21/2002 5:16:25 PM PDT by snopercod
In yet another expensive example of the California electricity crisis, Wall Street firms are pressuring the state into borrowing far more in an upcoming bond sale than it needs to cover past or future power costs.
The additional borrowing - nearly $2 billion of the $12 billion offering - will be diverted to so-called reserve funds, which rating agencies and energy suppliers demand if payments for interest and for long-term electricity contracts are to be guaranteed.
The reserve funds from the bonds will be bolstered by payments from state electricity customers until the reserves total at least $3.4 billion.
In fact, the state learned last week that its set-aside requirement grew by $800 million above earlier estimates when the Department of Water Resources, or DWR, made its latest detailed filing for the offering with the state.
On a percentage basis, the total represents an extraordinarily high level of reserves, experts said. Some of them also noted that the planned state bond offering is the largest municipal one in history.
One expert said the reserve requirements are additional costs for state electricity ratepayers, who already are on the hook for tens of billions in electricity crisis costs.
Bill Marcus of JBS Energy, a consultant to consumer groups and others, said the reserves required to repay energy suppliers, who stand accused by the state of causing the crisis, are particularly galling.
"It's ironic that the companies on the verge of bankruptcy like Dynegy are holding California to these incredibly high credit standards," Marcus said.
DWR, which will sell the bonds, said that the state would benefit from the large reserves by obtaining a better credit rating for the sale and thereby lower rates.
Along with energy companies, rating companies required the bigger reserve partly because of "significant skepticism" that the DWR will be able to comply with a year-end deadline to transfer power-buying to the investor-owned utilities, Douglas Montague, a consultant to the department, wrote in a regulatory filing.
Ratepayers, meanwhile, will be strapped with interest payments for the borrowing to fund the reserves. However, the reserves themselves can be invested to produce interest income, which should offset some of the cost of borrowing for them.
The bond sale will let DWR repay the state's general fund for a $6.6 billion loan for last year's energy costs, plus pay off a $3.5 billion balance remaining on bank loans and other power-related expenses. The department, in a report Friday, said told the California Public Utilities Commission that the bonds are expected to be sold by October.
The filings provided the most detailed picture to date of the sale once planned for late September.
DWR began buying energy in January 2001 after the state's two largest utilities, Pacific Gas & Electric, a unit of PG&E, and Southern California Edison, a unit of Edison International, became insolvent after paying more for electricity than they could charge customers under state law.
Later, DWR began buying electricity for San Diego Gas & Electric as well.
A portion of the revenue collected by the utilities will back the bonds and reimburse the department for its energy-related spending.
DWR hopes to terminate its power buying by early next year and return that role to the utilities. A failure to meet the deadline might expose the department to future energy cost increases, unless it can negotiate new contracts, Montague said.
In demanding reserves, rating analysts also cited concern about delays if utility rates rise to cover costs, he added.
"Then the question becomes, how effective will they be in getting those increases approved and implemented in a reasonable amount of time," said David Blair, a senior analyst for Nuveen Investments.
The utilities commission last week approved letting DWR raise as much as $11.95 billion from the bond sale to meet the requests for more reserves.
The additional borrowing – nearly $2 billion of the $12 billion offering – will be diverted to so-called reserve funds, which rating agencies and energy suppliers demand if payments for interest and for long-term electricity contracts are to be guaranteed.
God, I love it when we FReepers pick up on something several days (or weeks) before the lazy "mainstream" media. See this post.
I forwarded this scoop to the WSJ several days ago, but got no response. Bigger fish to fry, I guess...
Be sure and see this one , it will be better on an empty stomach:
California: Davis rules out '04 Presidential run
Calpowercrisis:
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....which rating agencies and energy suppliers demand if payments for interest and for long-term electricity contracts are to be guaranteed.
On a percentage basis, the total represents an extraordinarily high level of reserves, experts said. Some of them also noted that the planned state bond offering is the largest municipal one in history.
...rating companies required the bigger reserve partly because of "significant skepticism" that the DWR will be able to comply with a year-end deadline to transfer power-buying to the investor-owned utilities, Douglas Montague, a consultant to the department, wrote in a regulatory filing
WHAT!!! The rating agencies don't trust Gov Davis hand picked energy experts at DWR to be able to act efficiently in undoing their own government empire and sliding gracefully into a smaller organizational role? How unthinkable! Why Earth to Gov. Davis, just point to your record and set Wall Street straight! (/Sarcasm)
The California Constitution, ARTICLE 16, PUBLIC FINANCE, SECTION 1 requires that:
The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars ($300,000), except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work...blahblah...but no such law shall take effect unless it has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election; and all moneys raised by authority of such law shall be applied only to the specific object therein stated or to the payment of the debt thereby created.
Not only has the bond not been submitted to a vote of the people, but the governor, in his latest "emergency order", has changed the "specific object" to which the debt is being proposed.
Why nobody in California has sued is beyond me. Where is the Howard Jarvis Taxpayer Organization on this?
Not to puff up our pride, but many Freepers (esp. you, snopercod) have pointed out for months that these bonds would be an incredible rip-off to the citizens of CA.
Can't wait to hear Gray-Out shout from the rooftops what a good deal these bonds are--almost as good a deal as he said the $43 billion of contracts were (that he's now trying to wiggle out of). Bill Simon--here's another (rotten) egg laid right under your nose.
My main concern right now is why, WHY!?!, there is not a peep out of anybody, anywhere, over this egregious violation of the California Constitution.
It demands approval of the people for the State to borrow more than $300,000, and everyone is just ignoring that little so-called "restraint". The governor, the legislature, the press, and sad to say, there has not been much concern among FReepers that I can tell.
It must have been thus in Germany during the rise of the Nazi Party. When Hitler assumed dictatorial powers after passage of "The Enabling Act", the "good people" were afraid to speak out, or just didn't care. Desperate times demanded a strong leader, right?
If California had a military force, I would worried.
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