State plans $12 billion bond issue(Market not thrilled!)

Rating agencies were lukewarm about the offering, assigning them tepid grades that indicate a relative degree of risk. While several notches above junk status, the bonds were nonetheless rated below California's usual debt grade.

The debt issue will be the largest in municipal bond history, in part repaying $6.5 billion in state funds and $3.5 billion in remaining bank loans that the state took out to buy power on behalf of California utilities, which were no longer able to do so because their credit had been destroyed. The rest will be used for reserves, costs and other issues.

Thank you.

I won't take responsiblity or credit for this article, but I think all of us FRprs need to try to influence public opinion as much as we spend some time chewing the fat and educating each other.

As snopercod and I have been saying for quite a while the bond issue information should be interesting reading. When it came out, I wanted to make sure we all got a look at it. I really suggest that folks read the Moody's, S&P and Fitch opinions on these bonds. The different approaches are real interesting.

Finally on Oct 2, there will be an investment telephone conference call for major investors and members of the interested public that S&P is sponsoring to explain their BBB+ evaluation of the bonds. They did their homework so well, I think it will be a chance for them to brag. However, Davis and maybe his stalking horse (J.P. Morgan) will likely participate and try to ask questions that make the bonds sound better than they really are. That should be a heck of a cat-fight to listen in on.

My experience with municipal bond issues, is that the investment banking team drums up business in advance for about a month with major institutions and with brokerage houses that sound out some of their individual clients. As they get close to the issuance time, they count noses and when they figure they have about 90% sold, they then finalize the bond price & their discount. That means the interest rate is finalized at a rate that they feel comfortable will sell all the bonds. The investment banking team then pays the issuer a discounted price, say 1 to 1.5 percent below the face value. That is the issuers incentive and risk factor to make things work.

Basically, they will change the interest rate/yield to make sure they all sell. The only problem I would see would be if the state would choke on an interest rate above a certain point. However, I think that California is too desparate for cash to hold out.

It is possible for the next week to go to the S&P website and click on events and hear the replay of today's conference call on the California DWR Power Bonds. An interesting discussion, if you want to get all the details. I had thought that there were be a few controversial questions, but the financial community and the State of California restrained themselves. I listened to the replay of the S&P conference call. It was interesting.

S&P really spelled out the risks of the bond issue. S&P categorically disagreed with DWR and the Bond Issue official statement over the assumption that DWR will transfer the need to buy spot power for the investor owned utilities (IOUs) by January 1, 2003. S&P states that it will take probably a year or two more for the transfer to happen. S&P feels that the current speculative grade of PG&E and SCE will slow down their ability to purchase large amounts of power from others. DWR had to step in to buy for these IOUs because no one would sell to such un-credit worthy utilities and the utilities are still not credit-worthy and are not likely to have good credit ratings by January of 2003. One investor asked if such a difference doesn't call to question the validity of the fundamental plan outlined in the Official Statement. It was acknowledged as a good question.

A question that stopped the discussion was what would happen if San Francisco took over a significant part of PG&E's service territory. The gist of the question was that if a municipal utility would be formed, it would not be subject to CPUC oversight and the customers of the municipal utility would not need to be charged in the payback for past purchases as administered by the CPUC. The S&P folks immediately saw where this was going and indicated that this was another risk and they would research it and get back to folks.

There were a lot of polite, but negative baggage, left on the door of the State and Gov Davis. They did praise Davis (with a left handed complement) for recently signing Assembly Bill 57, which was passed in July of this past year. They pointed to this and other things, as a lack of Political will on the part of California to do what is required to pay the bondholders.

Thanks for the recap of the conference call.

...if a municipal utility would be formed, it would not be subject to CPUC oversight and the customers of the municipal utility would not need to be charged in the payback for past purchases as administered by the CPUC.

I love the hypocricy of these people. They want to retroactively charge businesses and government agencies like the university system - who had the good sense to choose direct access - for "opting out" of their little socialist nirvana. But if Willie Brown wants to do it...No problemo!

What is to keep the CPUC from charging San Francisco the same "severance fees" as they intend to charge the University of California?

What is to keep the CPUC from charging San Francisco the same "severance fees" as they intend to charge the University of California?

CPUC would need to figure out a legal way of doing that.

Basically, the CPUC is only allowed by law to regulate privately or investor owned utilities. Public utilities are not regulated by the CPUC. A severance fee is levied upon IOU customers that are "allowed" by the CPUC permission to leave and that have their rates regulated by the CPUC when the customers finds another regulated utility to serve it.

Most state laws allow for a city to condemn IOU property and force a sale. In such a situation, the question is....does the CPUC have standing in the condemnation court proceeding and can the CPUC ask that charges be imposed to protect the "general public" when the condemnation laws don't speak to this kind of thing.

That makes sense, but keep in mind that Davis still has his emergency powers. So "legal" is whatever he says it is. I wonder if the bond rating agencies considered that.

I believe that the battle over "exit fees" is still going on behind the scenes. From six months ago at the Califorina Manufacturers & Technology Association website:

CMTA is pleased the CPUC respects the legitimacy of direct access contracts entered into last summer. Large users entered into direct access contracts to avoid the outrageously high rate increases imposed by the CPUC. The rate hike for large customers ranged between 50 and 150 percent.
The direct access decision by the CPUC now sets the stage for an even more contentious issue: the debate over exit fees. A recent Department of Water Resources memo estimates the cost responsibility of direct access customers for DWR’s revenue requirements at $23.95/MWh over 15 years. The key goal now for direct access customers is to ensure that exit fees are not prohibitively high so as to make direct access uneconomical. Thursday’s vote was a step in the right direction, but the battle has just begun.

Well lookie here, a September 6, 2002 update on "exit fees", with a new twist: California is going to charge people and businesses who generate their own electricity! [link]:

Aggregation Bills Put Customer Generation at Risk

Two bills authorizing community aggregation, both awaiting consideration by the governor, pose a significant threat to customer generation. AB 117 (Migden D-San Francisco) and AB 80 (Havice D-Cerritos) contain identical intent language regarding the imposition of exit fees on customers not receiving service from an investor-owned utility:

The intent language calls for all customers to pay their “fair share” of DWR power costs, both historical costs and forward contract obligations. The language does not exclude customer generation. Opponents will argue that the Legislature wants customer generation customers on the hook for at least a portion of these costs. The intent language reads as follows:

"It is the intent of the Legislature that each retail end-use customer that has purchased power from an electrical corporation on or after February 1, 2001, should bear a fair share of the Department of Water Resources' electricity purchase costs, as well as electricity purchase contract obligations incurred as of the effective date of the act adding this section, that are recoverable from electrical corporation customers in commission-approved rates. It is further the intent of the Legislature to prevent any shifting of recoverable costs between customers."

The intent language is broad and subject to interpretation. Rather than clarifying the issue, it adds more uncertainty to an extremely complex issue, and pre-judges the outcome of the CPUC’s exit fee proceeding (R. 02-01-011). The issue of customer generation and departing load charges will be the subject of evidentiary hearings in October. The uncertainty created by AB 117 and AB 80 could severely hamper new customer generation and distributed generation, and adversely impact a valuable hedging tool for California businesses. Customer generation helps many large commercial and industrial customers manage and stabilize their energy costs, and provides businesses with a “hedge” against utility and market prices. Additionally, customer generation provides much needed new generation resources and enhances the reliability of the state’s electric grid.

Prior to the legislative passage of AB 117 and AB 80, CMTA took an "oppose unless amended" position on both bills, and pushed for amendment language that doesn't pre-judge the issue of cost responsibility of customer generation and distributed generation.

With the passage of both bills, CMTA, citing the adverse impact these bills would have on customer generation, is urging the governor to veto both measures. At a minimum, however, if the governor opts to sign either bill, he should at least indicate that it is not his intent to pre-judge the CPUC’s exit fee and departing load proceeding or adversely impact customer generation. Failure to do so would reverse California’s long-established commitment to encouraging customer generation and threaten the economic viability of customer generators.

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