May 23, 2001

California Treasury Won’t Be Repaid Until 2004, Controller Says

(Sacramento, California) California’s treasury may not be repaid for billions of dollars used to purchase power until sometime in 2004, the state’s controller said, a concern disputed by Governor Gray Davis’s office.

Language in long-term power contracts reviewed by the controller’s office give the state’s general fund the lowest priority in disbursement of revenue from the sale of $12.5 billion in energy bonds, Controller Kathleen Connell said.

“If the general fund is not repaid in a timely fashion, it puts a tremendous burden on Californians, first as taxpayers and second as ratepayers,” Connell said in a statement.

California has spent $7.2 billion from the state treasury buying power on behalf of its investor-owned utilities. The state’s two largest utilities, PG&E Corp.’s Pacific Gas & Electric and Edison International’s Southern California Edison, are nearly insolvent because they aren’t allowed under state law to pass on soaring wholesale power prices to customers.

Representatives for the governor said Connell, a Democrat like Davis, is misguided in her concerns. The state’s general fund will be made whole once the bond sale is completed in August, they said.

“The money we’re borrowing will pay back the treasury with interest,” said David Freeman, an energy adviser to Davis and the former general manager of the Los Angeles Department of Water and Power. “The treasury is not at risk.”

Connell said language of 16 long-term energy contracts forwarded to her office led to her concerns, adding that the Davis administration has agreed to terms that would pay future electricity costs before repaying the state’s general fund.

Joseph Fichera, Davis’s lead financial adviser on energy issues and chief executive of Saber Partners LLC, said the measures approved by the state Legislature letting California issue the bonds require the state’s general fund to be repaid first. Connell “doesn’t understand the flow of funds,” he said.

Connell ran for mayor of Los Angeles earlier this year. Davis endorsed one of her opponents in the race, former Assemblyman Antonio Villaraigosa. Connell was eliminated from the race in last month’s primary election.

The bonds are scheduled to be issued in August. The state has the authority to issue up to $13.4 billion in bonds. Davis believes only $12.5 billion will need to be issued in view of prices expected for future power purchases, Fichera said.

–Daniel Taub in Los Angeles, (310) 770-1292 or dtaub@bloomberg.net through the San Francisco newsroom (415) 912-2980 sent through the Tokyo newsroom /rwb