The lights may be on in California but the state is about to be zapped again by the fallout from its deregulation-induced energy crisis: the worst budget crisis since the recession-wracked days of the early 1990s.
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For months, Gov. Gray Davis painstakingly crafted a complicated plan to keep the juice flowing, while reducing the near-term drain on state coffers and minimizing rate shock for customers of the state's investor-owned utilities.
One lynchpin of the plan was the negotiation of long-term contracts to buy electricity in order to reduce the state's reliance on a superheated spot market for power.
Another lynchpin was the sale of up to $13.4 billion in municipal bonds in order to reimburse the state for what it spent buying power at the height of the crisis, pay off a bridge loan from Wall Street, and have cash on hand to buy more power if needed.
Under the plan, put together by state Treasurer Philip Angelides in consultation with Wall Street, the state's previously low-profile Department of Water Resources would play a central role, as negotiator of the power contracts and issuer of the bonds.
To pull off the plan, Davis needed the support of the state Legislature and the California Public Utilities Commission. Under pressure to do something to resolve the escalating energy crisis, the Legislature signed off on the plan earlier this year -- but without enough votes to allow for a quick bond sale. Nevertheless, it was hoped the bonds could be sold by August. The plan then went on to the PUC, where it was expected to be approved with minimal debate because three of the five commissioners are Davis appointees.
The centerpiece of the plan was a rate-setting agreement that would assure funds would flow from the state's ratepayers to make good on the long-term power contracts and provide a solid revenue stream for repayment of the bonds. But there was one hitch: the plan required that the PUC delegate its rate-setting authority over the utilities collecting the cash to the DWR.
For months the PUC stalled. Sale of the bonds was postponed. Meanwhile, the power contracts negotiated by the state were credited with stabilizing the energy market. As the urgency to implement the plan appeared to wane, the second-guessing began in earnest. Critics said that the prices the state had agreed to pay power producers were too high and the power contracts should be renegotiated. They railed that the PUC was being asked to relinquish too much power to state bureaucrats who did not have the best interests of consumers at heart.
Then the state Senate passed an alternative plan that would set aside funds to repay the bonds but would not relinquish PUC control over the power contract rates and other operational costs to the DWR. Davis has vowed to veto the Senate plan and it is not clear whether supporters have the votes to override a veto.
Finally, after dragging out the process for months, the PUC voted against the original rate agreement and endorsed the Senate plan. But investment bankers say they can't do a bond deal under the alternative plan because investors fear it could open up a Pandora's box of litigation as power generators who signed deals with the state cry breach of contract.
So the state is back to square one after nearly a year of planning.
The unraveling of the governor's carefully crafted plan comes as the already dismal economic outlook has taken a dramatic turn for the worse following the atrocities of Sept. 11.
Moody's has warned that it may downgrade California's Aa3 general obligation bond rating and has put ratings for the state's counties on its negative watch list. Analysts note that the state's current budget assumed that the power bonds would be sold, if not by now certainly be the end of the fiscal year in June, and the general fund would be fully repaid the $6.2 billion it is owed for past emergency power purchases.
Given the situation in California during the past year, it wouldn't be surprising to open up a future edition of Webster's and under the definition for the word fiasco find a reference to California's disastrous energy deregulation plan. Yet just when it seemed the Golden State was about to close this unhappy chapter in its history, several disturbing footnotes are being added to the sad saga.
It is understandable that commission president Loretta Lynch and her cohorts at the PUC don't want to hand a blank check to the DWR, especially now that the price for electricity has fallen to levels far below what the state agreed to pay under some of the contracts negotiated at the height of the sellers' market for energy.
It is also understandable that many in the state Legislature are unhappy with a state bailout of Southern California Edison that will allow the beleaguered utility to pay off its crushing debt by charging higher prices to some customers. And yes, it is ironic that if lawmakers had allowed SCE and Pacific Gas & Electric to raise their rates to cover their costs in the first place the entire crisis likely could have been averted.
But state officials now risk compounding previous mistakes by further meddling with a plan that, for all its flaws, is likely the best option the state has for avoiding a spiraling fiscal crisis.
Angelides' statement in late September that the state faces a fiscal train wreck without the bond proceeds may have seemed like hyperbole then looks less so now as the projected budget shortfall is ratcheted higher and higher, threatening to reach levels not seen since the early 1990s.
The treasurer is without a doubt correct that by further delaying the bond sale California risks missing the opportunity to sell the debt at very attractive interest rates. At the same time, investors looking for a safe haven from tumbling equities are anxious to buy municipal bonds.
But the events of Sept. 11 show that the state cannot take for granted that a favorable market will always be there for such a massive bond issue -- the largest municipal bond offering ever.
It would certainly be helpful if power generators agreed to renegotiate some of the windfall profits they expect under the existing power contracts. Or if Wall Street bankers showed some flexibility with the interest penalties they are entitled to under terms of the interim loan.
But the state cannot undo these agreements -- or all the mistakes that have been made before -- now that the lights have stopped flickering. It's time to follow through on a strategy that assures the bonds will be sold sooner rather than later, not veer off course when there is little room for error and apparently no viable back-up plan.
Gavin Murphy is the national editor of The Bond Buyer
