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Utilities Try to Rewrite Costly Power Deal

Energy: Contract could doom deregulated DWP, others. But restructuring could jeopardize $4 billion in bonds.


Saddled with expensive electricity from a Utah power agency that could doom them in California's deregulated energy market, the Los Angeles Department of Water & Power and five other Southern California utilities are trying to renegotiate their deal, including a possible purchase of the agency's 1,660-megawatt power plant.

The news that the DWP and other power companies are in talks with the Intermountain Power Agency provoked Standard & Poor's bond-rating firm to say it was "concerned" that a deal might jeopardize approximately $4 billion in bonds connected to the project.

"We are expressing some concern," said S&P bond analyst William Cox, who in October downgraded $10 billion in bonds issued by the DWP and other Southland utilities because of fears that the municipal utilities will have trouble competing in the state's free-power market that starts in January.

Elden Cotton, the DWP's assistant general manager, said purchase of the IPA's power plant is only one of the options being discussed. The agency's other assets include a 500-mile transmission line from Utah to the Antelope Valley, where it ties into the California power grid.

The DWP and the municipal utilities in Burbank, Glendale, Pasadena, Anaheim and Riverside are locked into contracts to buy power from the IPA through 2027 at prices double the current market rates. The rates are high not because of inefficiencies at the coal-burning plant, but because of the 100% debt-financing terms of the utilities' contracts.

The ironclad "take or pay" contracts are the security for the bonds sold to finance construction of the plant and transmission line.

The utilities signed the contracts in 1978 to buy energy from the facility after it began operating in 1986, even if the utilities didn't need the energy or could get it cheaper elsewhere. In the DWP's case, the contracts amount to about $2.6 billion in liabilities.

"This project burns coal as efficiently as any, but the debt structure is inappropriate," the DWP's Cotton said.

S&P's Cox said he is concerned that any restructuring of the DWP's arrangement with the IPA would take a long time to be approved by the City Council, putting the bonds under a cloud of uncertainty.

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