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NEWS ANALYSIS Californians Will Be Paying Energy Crisis Bill for Years

Electricity: Billions in bonds issued to pay debts and make purchases will have massive ripple effect.

By JAMES FLANIGAN, Senior Economics Editor

The proposed electricity rate hike that will hit many customers of the state's two largest utilities will not be the end of the costs that all Californians will pay for years, even decades, because of the energy crisis.

Nobody in California will escape the high risks or burden. One reason is the rate hike will go, not only toward purchasing electricity directly, but also toward paying for the extraordinary borrowing that the state must take on.

By now, the outlines of the crisis that grew out of the state's flawed deregulation are well-known, but the dimensions of the rescue plan enacted by Gov. Gray Davis and the Legislature have raised the potential long-term costs to unprecedented levels. The bonded indebtedness of the state will grow by at least 80% to deal with a problem that did not exist even a year ago and would not exist now, were it not for the early political decision against rate increases, energy experts and economists say. The state "has a serious financial crisis as well as an electricity crisis," said a group of economists and energy experts in a manifesto issued at UC Berkeley in January. The experts recommended a rate increase for electricity consumers to relieve the state from paying more than $50 million a day out of general tax revenue to buy wholesale power for the utility companies Southern California Edison and Pacific Gas & Electric. The companies could no longer buy power themselves because they had run up huge debts and wrecked their credit last year by purchasing electricity at high wholesale prices and selling it at regulated low prices to consumers.

The proposed rate hike, approved Tuesday by the California Public Utilities Commission, is a first step toward restoring the state's finances and the utilities' ability to operate as normal businesses.

"It's overdue," said economist David Teece of UC Berkeley. If rates had been allowed to rise last year, "the state's credit rating would not have been hurt; it would not be borrowing billions to buy electricity or transmission lines."

Energy Solution Will Be Costly California's energy solution will be expensive. The state plans to sell $10 billion in bonds to finance future power purchases and to restore to its general fund billions of dollars already laid out for electricity. The PUC on Tuesday approved bond sales of as much as $12 billion, but state Treasurer Philip Angelides believes $10 billion will be sufficient. In addition, California may sell $7 billion in bonds to finance the state's proposed purchase of electric power transmission lines from the utility companies. Proceeds from sales of their transmission lines will help pay off debts the utilities incurred in providing electricity to customers at less than market prices last year. The new bonds are all revenue bonds, meaning they will be repaid by charges on electric bills, not by taxes. But their sheer volume has unsettled markets, bond experts report. The prospect of such large issues is already depressing prices for California municipal bonds, which is forcing up by millions of dollars the interest costs for cities, municipal agencies, hospitals and sewer districts, among other suppliers of public services.

Credit rating agencies have put the state on "negative credit watch" because its general fund is not yet being reimbursed for roughly $3 billion in electricity purchases the state has made since January. For the $17-billion tidal wave of energy-related bonds scheduled to come to market beginning in late May, the state will have to pay premiums to institutional investors in order to sell the bonds. Experts estimate those premiums could total $25 million a year, on top of about $1.2 billion in annual interest electricity customers will pay on the bonds.

Beyond financing costs, the price of California electricity will continue to be high. The state has entered into $42 billion in long-term contracts--up to 20 years in duration--to purchase power at an average price over the next decade of $69 a megawatt-hour--which is enough to power 750 average homes for an hour. That compares with about $30 a megawatt-hour in years before the energy crisis. Experts are divided on whether that long-term price will turn out to be a bargain or a burden. One risk is that major users will be saddled with overpriced power. The contract price won't really matter this summer, because almost no electricity will be available under the contracts. If the state or utilities are forced to go to the spot market in times of peak demand, the costs will be closer to $400 a megawatt-hour. Economists and energy experts hope that the rate hike will spur consumers to use less electricity. Lawrence Makovich, electricity expert for Cambridge Energy Research Associates, said rate increases can yield dramatic gains in conservation. "We calculate that [a 40%] rate hike will spur consumers to save 2,000 to 3,000 megawatts of power," Makovich said. Such conservation, equal to roughly 5% of peak summer demand, could be enough to keep the state from blackouts. However, Newport Beach energy economist Philip Verleger Jr. believes conservation gains come more slowly, because it takes time for consumers to spend on better insulation and for industry to invest in more efficient machinery and processes. "Initial energy savings may be modest," Verleger said.

Political debate over the state's handling of the energy crisis is heating up. A Republican state assemblyman, Keith Richman (R-Northridge), said Tuesday, "If there had been a rate increase back in the fall . . . if long-term contracts had been put in place by the PUC at that time--we would have been looking at a rate increase in the range of 20% rather than between 40% and 50%. "I think the governor's [responses] in this whole crisis dating back to last year have been based on political expediency," Richman said.

State Needs to Reimburse Itself Angelides, not surprisingly, disagrees. "We didn't want to reward the utilities for their mistake in judgment," Angelides said. He is referring to the complex deregulation plan under which utilities were given a deal to pay off old contracts and the costs of nuclear power plants. Consumers received a temporary rate cut. To finance that deal, the state issued more than $6 billion in bonds in 1997.

Now the state needs to reimburse its own general fund. By the time Angelides brings bonds to market, in late May, "we might have run up a bill of $5 billion," Angelides said. "So half the bond issue will go directly into the general fund and the rest will be available to buy power this summer." Repaying the general fund will ease the concerns of the rating agencies, said Robin Rappaport, expert in municipal credit at Payden & Rygel, a Los Angeles investment firm. "They will probably remove the negative credit watch," Rappaport said. If the state buys the utility's transmission lines, it must invest in upgrades and expansion. But Angelides sees that as a benefit. "[The state] can upgrade cheaper than utilities because we can borrow money at 6%, while the utilities require a 13% return on their investment," Angelides said. When operated by private industry, however, transmission lines pay taxes of roughly 4% of their revenue to federal, state and local governments. That tax revenue "will now be lost to the cities and towns through which the transmission lines pass," Verleger said. Loose ends remain. "Credit markets have yet to receive information on the structure and details of the proposed bonds, and traders are apprehensive," said Marilyn Cohen, president of Envision Capital, a Los Angeles investment firm. But with the approval of rate increases, a first step has been taken toward a solution to the energy crisis, said energy economist Paul Joskow, of Massachusetts Institute of Technology. "Three years from now, when new power plants are built, electric power availability and prices will be stabilized," Joskow said. But the costs of this year's borrowings and the long-term contracts concluded at the height of the crisis will go on for decades.

--- Times staff writer Miguel Bustillo in Sacramento contributed to this report.

-- Martin Thompson (, March 30, 2001

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