California DWR proposes $12.5 billion bond issue to pay for power

Californians will paying for electricity used today for the next 14 years, newly released documents show.

Despite recent rate increases approved by state regulators, electricity rates are still insufficient to cover all the expenditures the California Department of Water Resources will make for power to serve utility customers, the records show.

DWR proposed the state issue bonds totaling $12.5 billion to make up for the revenue shortfall. The bonds mature in 2016.

DWR has been buying power on behalf of Pacific Gas & Electric Co. and Southern California Edison Co. since mid-January when the debt-burdened utilities could no longer access the capital markets for funds to buy power. Retail rates were not commensurate with purchased power costs for about 18 months.

Earlier this year, both utilities lost investment grade credit status and Pacific Gas & Electric later filed for bankruptcy protection. Southern California Edison is teetering on the verge of bankruptcy now.

The DWR’s electricity purchases make up the difference between customer demand and the amount of power generated by plants the utilities still own, the so-called “net short.” DWR estimated it will spend $21.6 billion for the next 2 years for power.

If the California Public Utilities Commission approves the DWR’s revenue requirement, consumers will pick up the tab for $13.07 billion of DWR’s purchases, leaving a deficit of $8.5 billion to be paid with bond proceeds.

Despite the gap, Gov. Gray Davis’s consultants say rates won’t have to go up again. “We don’t believe that there will be a need for rate increases in the future,” Joe Fichera, a Davis-hired consultant and financial advisor, said on a conference call.

Some of the bond proceeds will be used to establish a $707 million debt service reserve fund which will be used to pay 50% of the interest on the bonds beginning in September 2002. The proceeds will also be used to pay for the administrative costs of the DWR’s power purchasing activities.

Bond fund proceeds also will be used to pay $11.5 million a year for labor and expenses; $2.9 million for capital expenditures; $9.9 million for professional service fees; and $1.2 million for other. The total administrative and general costs the DWR will incur for power procurement activities are $24.7 million over 2 years.

Initially, interest on the bonds will be “capitalized”– or tacked on to the bond principal until September 2002– when the department will be required to set aside funds for debt service payments. The bond money will also be used to pay back the state treasury for power purchased by DWR in the first quarter.

The size of the bond issue is smaller than previously forecast because of the dramatic decline in the cost of power, said Fichera. “We are looking at prices below that previously forecast,” he said. “For the third quarter we are projecting $129/Mw-hr compared to an earlier forecast of $195/Mw-hr.”

The governor’s consultants attributed the drop in power prices to the long-term contracts negotiated by the DWR which led to more stability in the market. However, they conceded unseasonably cool weather, an increase in available generation capacity, and falling gas prices also contributed.

The model used by the state agency to forecast power prices assumed the weather would be normal in August with no impact on peak demand from conservation.

“We tried not to take the fear from the first and second quarter nor the euphoria of the third and forecast it forward,” said Fichera. “We were very conservative.”

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