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| Gray Days Are Ahead Predictably, Gray Davis’ $12.5B plan to bail out the utility companies at the expense of the tax payers has taken yet another turn for the worse, and Kalifornia may see tremendous problems as a result. With lawsuits and delays holding things in check, the sale of bonds just isn’t turning out the way the good governot planned it. On Oct 2, the state PUC rejected the proposal which ensures repayment of the bonds, raising doubts among investors and analysts that the deal would ever be completed. Anxious to maintain a good image, PUC President Loretta Lynch and others familiar with the deal said the bond sale isn't dead, that the PUC, Gov. Gray Davis and the Legislature have months to come up with a consensus on how to structure the bond repayment, they said. Experts however, said the political uncertainties could make bond buyers demand higher interest rates. That would raise the burden on customers of Pacific Gas and Electric Co., Southern California Edison and San Diego Gas & Electric Co., although state officials say a hike is unlikely. If the bonds don't sell, the state will face a "freight train of fiscal chaos" in the form of a multibillion-dollar budget deficit, said state Treasurer Phil Angelides, who's in charge of selling the bonds. And if the bonds do come to market -- next year at the earliest -- the cost to utility ratepayers could be significantly higher than if the bonds were sold as scheduled this fall, market analysts said. Interest rates go up "anytime an investor is doubtful; there's something in the background that's doubtful," said Zane Mann, publisher of 'California Municipal Bond Advisor' newsletter. "It will take a real selling job." Potential bond buyers are likewise worried. "It's definitely more and more of a concern whether they can actually do the deal," said Daniel Solender, a municipal bond portfolio manager at Vanguard Funds in Pennsylvania. Angelides, though, said that the political differences will all be resolved when -- and if -- the bonds go to market. Then investors will find the bonds attractive, he says. The main question is, will the state be able to get its act together to get this issue to market? Then of course, there’s the simple issue of timing. With the state of the financial market right now, interest rates are at an all-time low. By next year, that could all change, and we’ll see long-term interest rates back up and investors flocking back to the stock market. Angelides said the state could face a $9.3 billion deficit if the bonds aren't sold, or are delayed past the start of the next fiscal year, beginning July 1. "The state could be plunged into a dramatic fiscal crisis..." Angelides said. He warned of substantial cutbacks in government services and added, "We'll have deficits akin to the early 1990s." Back then, the state made deep budget cuts and imposed substantial tax increases. (More taxes? Now THERE'S a stunner!) The bond sale was originally scheduled for July. It was postponed because Republican lawmakers wouldn't give Davis the two-thirds majority needed to make the bond authorization law take effect right away. To ride out the interim, the state took out a $4.3 billion "bridge loan", which is due Oct. 31. Unfortunately, that loan is supposed to be repaid with cash from the bond sale. If the bonds aren't sold by then, the interest rate on the bridge loan will jump from 4 percent to 5.5 percent, adding several million dollars a month to the state's costs. Next April, if the bonds are still unsold, the bridge loan rate would rise again and the state would have to start making principal payments, Angelides said. Angelides was pressing the PUC to adopt an agreement that commits the PUC to approve the water department's purchases and to raise customer rates, if necessary, whenever the department needs additional money for electricity. Analysts said the agreement was necessary to assure bond buyers of repayment. But on Tuesday, after nearly two months of delay, the PUC rejected the accord on a 4-1 vote. Lynch and other commissioners said the agreement would have locked ratepayers into high electric bills for years because customers would have been committed to paying off $43 billion worth of long-term energy contracts authorized by the water department. The contracts -- signed when wholesale power markets were out of control -- have been criticized by Lynch and others as too costly. Lynch said she preferred an alternative bond structure embodied in Senate President Pro Tem John Burton's bill, SB 18xx, which passed the Legislature. That bill would carve out separate revenue sources to pay bond holders before power generators. Lynch says these features would make the bonds easier to sell. Unfortunately, Wall Street doesn't see it that way. By paying bond holders first, the bill could violate some of the long-term power contracts, triggering lawsuits by power generators, according to a letter to Davis from J.P. Morgan Chase, which is underwriting the bonds. Morgan, who is urging Davis to veto the bill, said the potential generator lawsuits could imperil or delay the bond sale. That in turn could delay repayment of the bridge loan, whose lenders include a Morgan subsidiary, the letter says. If that happens, the state could breach the bridge loan agreement and lenders could tack another 2 percent on the loan's interest rate. Another complication, Morgan officials said, is that the bill places a new ceiling on customer rates, possibly inviting fresh litigation from the utilities. Davis -- who appointed the inexperienced and unqualified Lynch to the presidency of the PUC -- vowed to veto the Burton bill and blasted the PUC vote as an "irresponsible act." Amazingly, things don’t even end there... PG&E has sued the water department, saying its power purchases must be subject to a public hearing. Otherwise, PG&E's customers would be issuing the agency "a blank check for literally billions of dollars," the utility said. Also, PG&E is preparing to fight the PUC's proposed formula for charging the utilities for the water department's power purchases. The PUC proposes that PG&E customers pay about 40 percent more than Edison and San Diego. Although the plan wouldn't raise PG&E rates, it would make it less likely that PG&E rates would fall if the cost of electricity stays low. The PUC said the difference is justified because it costs more to deliver electricity to PG&E's territory. But wait a minute… does it truly cost FORTY percent more to deliver power to PG&E’s customers? Who has determined these figures? Where’s the data, and why didn’t PG&E bill its own customers 40% more in the first place? Somewhere, something isn’t adding up… But then again, it's the Governot we're talking about... More? Click HERE |