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Tennessee pays for power crisis in California

January 25, 2001

By Rebecca Ferrar, News-Sentinel Nashville bureau

NASHVILLE -- The state of Tennessee stands to lose $100 million because of the California energy crisis. State Treasurer Steve Adams outlined the problem to legislators Wednesday and compared the situation to a financial equivalent of "The Perfect Storm," a book about a storm of the century that was created over the Atlantic Ocean when three weather systems collided.

"The taxpayers of Tennessee will be subsidizing the ratepayers in California," Adams told the House Finance Committee. "That is not really fair."

The state has two funds with commercial paper investments in Pacific Gas & Electric, which Tuesday defaulted on a $30 million payment to Tennessee. PG&E is expected to default on two more huge payments on Jan. 29 and March 30.

PG&E is a California investor-owned utility on the brink of bankruptcy largely because of skyrocketing energy prices. California has been experiencing rolling blackouts to conserve power.

The state funds that bought commercial paper from PG&E: the State Pooled Investment Fund (SPIF), which invests $2.2 billion in state funds and $1.8 billion in local government funds, and the Tennessee Consolidated Retirement System (TCRS), which also makes investments. The PG&E commercial paper (short-term loans with a 6.65 percent expected interest return) was purchased last November and December. The paper had the highest ratings assigned by New York bond houses for commercial paper at that time.

The state's SPIF fund holds $51.7 million in commercial paper with PG&E, and the TCRS holds another $40.9 million. In addition, Adams said the state faces an $8 million loss from PG&E stock holdings held by TCRS.

Adams said the "worst-case" effect on the state budget this year would be a $25 million loss.

"We will have to make recognition of a potential loss this year," he said.

Although the potential loss is $100 million, the loss to the general fund would be only $25 million. partly because any loss to the retirement system (a maximum $40.9 million) would not affect the state's general fund, said Dale Sims, executive assistant to the treasurer.

The return for the retirement system could drop from 7.16 percent to 7 percent, and state contributions could be diminished.

In addition, only half of the $51 million held by the state investment pool is invested on behalf of the general fund. The reminder is invested for some 60 other state funds.

Similar to the three storms that converged to create "The Perfect Storm," Adams said California faced an "extraordinary set of events" that led to the power crisis. That included the downgrading of PG&E's commercial paper by the New York bond houses Moody's and Standard and Poor's, the California drought and unusually cold weather, higher natural gas prices and a "ten-fold" increase since last year in the cost of power.

"This is almost a perfect financial disaster," Adams said. "This was a train wreck waiting to happen."

Because PG&E cannot produce enough power to meet demands, it buys power from independent power producers. As the cost of that power increased, California regulators would not permit PG&E and the state's other investor-owned utility to raise customer rates. That meant that PG&E was paying more for power than it could sell it for, Adams said.

Normally, utilities and commercial paper investments are very safe, Adams said.

"We have been investing in commercial paper for 20 years and have never lost a penny," he said. "I don't think we made a bad decision in judgment. I think we were in the wrong place at the wrong time. We've had better days in the treasurer's department, and hopefully, we will have better days again."

Still, Adams said he believes the state "will recover a portion" of the potential loss.

"This is a result of a failed system of providing power in California," he said.

The Local Government Investment Pool, for which the SPIF makes investments, will not face any losses because of the defaults by PG&E, Adams said. The state attorney general has advised the treasurer's office that LGIP participants may not be assessed losses associated with a default.

Adams said his office has tried to contract PG&E but has not received a response. The treasurer has only identified a few other PG&E investors, including the states of Massachusetts and Texas and Orange County, California.

House Finance Committee Chairman Matt Kisber, D-Jackson, said ultimately, the federal government may have to rectify the crisis.

A federal directive by former President Clinton requiring energy wholesalers to sell power to California utilities will stay in place two more weeks and will not be extended again, Bush administration officials said Wednesday.

Rebecca Ferrar may be reached at 615-242-7783 or rferrar@mindspring.com.

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-- Martin Thompson (mthom1927@aol.com), January 25, 2001