California may issue crisis bonds

California thinks bonds may rescue its power industry

California is considering using the bond market to raise money, as one of several proposals to resolve its energy crisis.

Tapping the bond market would be part of a more complex proposal to secure long-term electricity for the state.

The proposal, which has been outlined by Robert Hertzberg, the speaker of the state Assembly, centres upon California entering into long-term contracts to buy electricity in the wholesale market.

In this way, the state would make up the difference between what the utilities can provide and what the state needs, according to a written statement by Mr Hertzberg and his colleagues in the Assembly.

Hertzberg's proposal would use bonds as stop-gap finance

Long-term contracts are usually a cheaper way of purchasing wholesale electricity.

Bond finance

The bonds would be used to finance any gap between the cost of the power and the rates charged to consumers.

Effectively, the bonds would allow the state to borrow money from third-party investors.

The repayment of the bonds would be secured by electricity revenues.

This measure protects the state because it does not put its own credit worthiness at stake.

Under Mr Hertzberg's proposal, the two utilities, Pacific Gas and Electric Company and Southern California Edison, would donate to the state full or partial ownership of their hydroelectric assets.

Credit Suisse First Boston is helping to advise the state. But it is also a creditor to the two utilities and would have to withdraw from its advisory role if they go into bankruptcy.

S&P downgrade?

California's attempt to resolve the crisis, however, has raised alarm bells at the ratings agency, Standard & Poor's.

The agency has placed the state's general obligation bonds on CreditWatch with negative implications, meaning that the state's credit rating of 'AA' could be downgraded.

The agency is more concerned about the uncertainty surrounding the state's ability to fashion a long-term solution to the power supply crisis, rather than the possible new bond.

"There is a fear that the problem could drain on their budget," says Mike Wilkins, a director at S&P in London.

The state has already appropriated $400m of its budget to purchase power, as part of its emergency procedure.

Power outages

California has suffered intermittent power blackouts for almost a week now.

Demand for power is outstripping production in the state.

Pacific Gas and Electric and Southern California Edison have incurred massive debts following the deregulation of the state energy market in 1996.

According to Standard & Poor's, the two utilities have lost approximately $2bn per month since last summer.

Wholesale electricity prices have increased, but the utilities have been barred from passing the costs onto customers.

A long-term solution?

The state is considering various other proposals to end its energy crisis, but details tend to be sketchy.

The state doesn't have enough resources to subsidise people's electric bills

David Hitchcock
S&P

Governor Gray Davis is said to favour a method of blind bidding, where the state will accept sealed bids from electrical suppliers for long-term contracts.

There could be such an auction as early as Tuesday morning, Californian time.

But David Hitchcock, a director in S&P's state and local government group, said there is only one solution: "raising people's electric bills."

"The state doesn't have enough resources to subsidise people's electric bills," he added.

Naturally, the state is keen to avoid such an unpopular move as raising rates.

The state has spent $113.2m on the crisis by Monday.