SAN FRANCISCO - California Gov. Arnold Schwarzenegger last week signed a bill designed to make it easier to refinance power revenue bonds issued in the wake of California's electricity crisis early in the decade.

The bill was written to allow the California Department of Water Resources to continue restructuring outstanding power revenue bonds impaired by the 2008 credit and financial crisis. It passed both chambers of the Legislature unanimously.

The original $11.3 billion bond issue was sold in three parts in 2002 to repay loans from private banks and the state general fund incurred to buy electricity, after surging wholesale electricity prices in 2000 and 2001 outstripped the ability of the state's investor-owned utilities to pay them. The original structure included about $6.3 billion of tax-exempt fixed-rate debt, $4.25 billion of tax-exempt variable- and auction-rate bonds, and $700 million of taxable fixed-rate bonds.

Those power revenue bonds are secured with surcharges on the electric bills of customers of the state's three major investor-owned utilities.

The bill the governor signed was written to allow the DWR to continue restructuring variable-rate debt in that outstanding debt portfolio.

DWR and the state treasurer's office have restructured about $2 billion of variable-rate debt from that portfolio, impacted by the downgrades of many bond insurers as well as rising liquidity costs.

Under the original legislation authorizing the power bonds, however, the restructuring of variable-rate debt counted against a $13.4 billion cap specified in that legislation, according to a staff analysis prepared by the Senate Rules Committee.

The only way a restructuring would not count against the cap was if it could be shown "with certainty" to produce debt-service savings, which is not possible with variable-rate debt because its future rates cannot be known with certainty, the analysis said.

To get around that problem, the treasurer's office and the DWR have issued new fixed-rate debt and used the proceeds to pay off variable-rate debt, according to the staff analysis. But after the last bond sale in mid-January, less than $50 million in authorization remained.

The new legislation will allow the treasurer's office to use a current refunding transaction to replace old variable-rate bonds with new fixed-rate debt, giving the office what it describes as flexibility similar to that of other state bond programs.

"It was important to get this in place because of its protections for ratepayers," said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

If the bill had not been approved, the treasurer's office would have had to conduct a conversion of existing bonds from variable- to fixed-rate, which would have cost more, according to the Senate staff analysis.

According to the Senate analysis, the treasurer's office pointed to a deal from last year as an example of the problems created by the old cap.

In November, the DWR tried to enter the market to convert $523 million of variable-rate bonds to fixed-rate bonds.

"Because investors wanted a bond structure that required features which could not be fully accommodated with a conversion, DWR was only able to obtain acceptable interest rates for $173 million of the $523 million," the staff analysis said.

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