In the News: Recent Developments

March 23 2001, 2:00am EST

California’s Power Crisis Puts General Fund Moves on Hold

SAN FRANCISCO – California Controller Kathleen Connell said Wednesday that power purchases have drained much of the state’s budget surplus and future draws may put the general fund at risk.

She said the state’s general fund surplus has dropped to about $3.2 billion, down from $8.5 billion in January.

Connell announced she had denied the state Department of Finance’s annual request for a transfer of cash from the general fund into a special fund for economic uncertainties, saying the transfer request for $5.6 billion would wipe out the general fund surplus and require the state to borrow $2.4 billion from other sources.

“I am deeply concerned about putting the state’s general fund in a deficit situation in light of the energy crisis,u Connell said. nwe started this year with a generous budget surplus. The energy crisis has taken much of that away, and this transfer on top of the electricity purchases would put the fund at risk.”

She also requested more information about future energy purchases and contracts.

It was unclear late yesterday, if Connell’s objections, were sufficient to prevent the fund transfer. Connell, a Democrat, is also a candidate for mayor of Los Angeles.

Standard & Poor’s, which put the state’s AA rating on Credit Watch Negative in late January, remains anxious about California’s prospects and awaits a bridge financing or state bond sale to finance power purchases, with the debt secured by rate payer charges.

“We’ve said all along the state doesn’t have the luxury to continue to spend indefinitely,” said Standard & Poor’s managing director Steve Zimmermann. “While they have a healthy surplus, that won’t last forever. We’re very anxious for the state to take itself out of the position of having to buy power.”

A greater concern would be if the state’s reserves, comprised of surplus funds, dropped below $1.8 billion.

Moody’s Investors Service says spending to date is not that alarming because the state still has good levels of liquidity. The state began the fiscal year with $18 billion in cash available to the general fund.

“The state’s liquidity position is very strong,” said vice president Timothy Blake. “The cash in and available to the general fund had a projected low point this year of about $9.5 billion. So we haven’t been nervous about two or three billion.”

Moody’s maintains its Aa2 rating with a stable outlook. Fitch rates the state AA.

“We are somewhat concerned about what the outlook is on the total cost of buying power and how that will be split between the state and consumers,” Blake said. Permanent solutions to the state’s power crisis rely on negotiations Gov. Gray Davis continues with the investor-owned utilities and on the Public Utilities Commission establishing a rate structure that will allow the Department of Water Resources to issue about $10 billion in revenue bonds to pay for future power purchases and reimburse general fund for power expenditures to date.

The Department of Finance requested another $500 million general fund allocation to buy power on Monday, which if approved, would bring the total authorization to $4.2 billion since January, according to Sandy Harrison, assistant director. DWR has spent about $3 billion so far, he said.

The amount of bonds that can be issued depends depends largely on the Public Utilities Commission, which is scheduled to meet Tuesday to discuss setting customer rates that will pay off the bonds.

The commission postponed a similar discussion at last week’s meeting, because the draft legislation the commission needed to vote on was incomplete at the time, a spokesman said.

The commission is scheduled to consider various agreements to allow DWR to begin financing power purchases with bonds and an interim loan, which was originally scheduled to be completed by the end of March. The bond sale is not expected until May.

Before any bonds are sold, the commission must establish how much the state’s debt-ridden investor-owned utilities can charge their customers through a formula known as the California Procurement Adjustment. The formula basically breaks down to the difference between the rate a utility charges customers and the cost of power procured from its own generators or existing contracts. This amount would go to outside sources — such as the state — to buy power on the open market or through state negotiated contracts. Assembly Biii1X, which authorized a bond sale, says the aggregate amount of bonds issued can not be more than four times what the procurement adjustment generates annually.

Davis is sticking to his early affirmation that customer rates will not increase, according to one of his advisors.

“The governor is not convinced yet that a rate increase is necessary.” said Joseph Fichera, senior managing partner of Saber Partners. ” Davis still wants to fit everything within the rate structure.”

Davis’ negotiations with Southern California Edison, Pacific Gas & Electric and Sempra, the San Diego utility, “are accelerating and intense.” Fichera said.

The negotiations include discussions about the possible purchase by the state of the utilities’ transmission line.

“It’s a separate transaction completely” from power purchases, he said. “But there is no line in the sand or take-it-or-leave-it” attitudes.

“Whatever the governor does will be picked apart by Wall Street” Fichera said. “We’re not going to be rushed on these negotiations.”

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